Pay the points to secure a much better rate. Two points makes a difference.
For would-be homebuyers, last week was a 1–2 punch of record home prices (Case-
Shiller index) and a 23-year high for mortgage rates (average 7.65% on a 30-yr
mortgage). In this environment, your clients know the cost of acting, but do they fully
understand the cost of waiting?
Average 30-yr mortgage rates just set another new, two-decade high: 7.65%. Yields
have been rising across the globe in response to ‘higher for longer’ commentary from
central bankers. In addition, the Brent crude oil price is approaching $100/barrel, causing
concerns about a rebound in inflation. [Mortgage News Daily]
August new home sales fell 8.7% MoM to an annualized pace of 675,000 units. That’s
the lowest figure we’ve seen since March 2023. Even with the rate buydowns and other
incentives that builders are offering, spiking mortgage rates are clearly dampening
demand. [Census Bureau]
The pending home sales index for August dropped 7.1% MoM to 71.8. That was
much worse than expectations, and suggests that existing home sales for September will
come out between 3.7–3.9 million units. [NAR]
Ok, how about some good news (for homeowners anyway)? The Case-Shiller national
home price index for July rose 0.6% MoM and hit a new all-time high. The modest
decrease in prices that we saw in 2H 2022 has already been erased. 10 out of 20 big city
indexes are also at new highs, and some of the hardest-hit west coast cities are seeing
prices rebound quickly. [S&P Global]
A similar story from the FHFA index, which rose 0.8% MoM in July (the 6th-straight
increase). Price growth for full-year 2023 is now annualizing at 7%! Prices in the Mid-
Atlantic and Midwest continue to rise rapidly. [FHFA]
The nationwide office vacancy rate just hit an all-time high of 13.3%. (And it’s much
higher in cities like San Francisco). With new space still being delivered, workers still
loving WFH, and refinancings looming, office landlords are under pressure. [NAR]
Acting vs. Waiting
I’ve been seeing more news stories about ‘renting being cheaper than buying’. And also
several surveys showing that a large percentage of would-be buyers are just waiting for
prices or mortgage rates to come down. I understand their pain: affordability has been
crushed by record home prices and mortgage rates spiking to two-decade highs.
But here’s the problem with waiting to buy (continuing to rent) when home prices
are rising:
1. According to Case-Shiller, national home prices rose nearly 6% in 2022. And
based on the price growth we’ve seen during the first 7 months of 2023, we’re
on pace for another 5% appreciation this year.
2. If you had bought a home for $400,000 at the beginning of 2022, that home
would now be worth approximately $445,000 (6% + 5% = 11% increase).
3. In other words, you would have created $45,000 in equity value in just two
years. This is a really big number.
4. Let’s say you had put 10% down ($40,000). Your return on equity would already
be >100% because you borrowed most of the purchase price, but the upside is
all yours!
5. On the other hand, let’s say that at the beginning of 2022 you decided to wait.
But frustrated with watching home prices keep rising, you finally bit the bullet
and bought a similar home at the end of 2023.
6. You’re now paying $445,000 for the home, and putting $44,500 down (10%).
And you’ve missed all that equity upside. And your landlord probably raised the
rent at some point.
Take a look at any long-term (40+ years) chart of home prices. They have a strong
tendency to rise. Not every year, of course. But if you hold onto a property for 5–10
years, the probability that you lose money over that period is very low.
One more thing I want to point out. Most rent vs. buy analysis is very simple,
comparing monthly mortgage payments to monthly rent. That’s too simple to be
useful. Buying a home has significant entry and ongoing costs that renters won’t face.
But homebuyers get appreciation (see example above), amortization (the principal
payment they make monthly lifts their equity value), and tax benefits (mortgage interest
tax deductibility, large capital gains tax exclusions).
Give me a call and we can go over your current situation to see what is the correct next
action for you.
Mary Cockburn
505-639-2090
MaryCockburn.Realtor@gmail.com
