I remember when I was a kid, I couldn’t wait for Saturday to roll around so that I could collect my weekly allowance. I would immediately take the cash, go to my room and divvy it up into various envelopes: Spending, Savings, Church, and Sony Discman. For those of you too young to recall, a Sony Discman is a portable CD player; the great-grandfather of the iPod, if you will. And I wanted one desperately.
The retail price of a Discman at the time was around $200. I don’t recall the exact amount of my allowance, but let’s say that it was $2.00 a week. If I do some quick math, I would have had to save up for almost two YEARS before I could afford a Discman. And by that time, there were “new and improved” Discman models released that would cost even more money.
I was in quite the predicament.
Poor little me trying to save for a Discman when I was on a $2/week fixed income is not unlike today’s potential homebuyers trying to save for a house.
Today’s Housing Market is LIT
I think we can all agree that the housing market has been on a tear in recent years.
In the last 12 months, average property values in the United States rose by 19.17%.
But many would-be buyers are theorizing that we must be near the top of the market. And if we’re near the top, that means that home prices will drop in the upcoming months.
I hate to be the bearer of bad news, but even IF we see lower prices, homes could still end up costing you more given the rate increases expected in the coming months.
Let’s review two familiar options that today’s prospective buyers are facing.
Scenario 1: Buy Now, Even if Prices are Strong
Motivated Mary has her eyes on a home that is listed for $350,000. She has saved up a 10% down payment and is able to get an interest rate of 2.75% fixed for 30 years. Her mortgage payment will be $2,326 per month.
Scenario 2: Wait for a Market Correction and Buy Later
Waiting Wilbur has his eye on the same home that Mary does. But Wilbur decides to wait until next year to buy it, in hopes that the price drops. Lucky for Wilbur, the price does drop to $325,500. However, interest rates have since risen to 4.25%. His mortgage payment will be $2,375 per month.
So even though the purchase price was less that it was a year ago, his payments each month are actually MORE than he would have paid because of the increasing interest rate environment.
So, Did Young Crystal Buy a Discman Immediately?
Thankfully, my parents decided to loan me the money I needed to buy that Discman right away, and I paid them back over the course of the next year with allowance, birthday money, and other cash earned.
Even though my discman analogy isn’t exactly the same as the homebuying scenarios I mentioned, I think you get my gist. (Thanks Mom for not charging interest to a 10 year-old!)
The overarching idea that I want you to takeaway is that when you are looking to make a large purchase, you must consider the cost of the item (today and in the future), and the interest rate (today versus in the future). These two items can have a serious impact on how much you pay in the end. Many times, it is more advantageous to buy when rates are low, not just when prices are low.
An educated buyer makes a better buyer. “The More You Know” – Tom Brokaw