Why Everyone Who Can, Should Purchase a Home Right Now
By Tyler Judd, Loan Officer, SunTrust Mortgage
“Look, look at this. We got Hurricane Grace moving north off the Atlantic seaboard. Huge... getting massive. Two, this low south of Sable Island, ready to explode. Look at this. Three, a fresh cold front swooping down from Canada. But it's caught a ride on the jet stream... and is motoring bent towards the Atlantic. What if Hurricane Grace runs smack into it? Add to the scenario this baby off Sable Island, scrounging for energy. She'll start feeding off both the Canadian cold front... and Hurricane Grace. You could be a meteorologist all your life... and never see something like this. It would be a disaster of epic proportions. It would be... the perfect storm.”
Todd Gross, TV Meteorologist, From the movie “The Perfect Storm”
2011 promises to be an interesting year for the world economy and especially for the US housing industry. We aren’t fortunate enough to have history to gauge what lies ahead because of the massive regulatory changes that we are faced with, the current shift from a national to a global economy and a volatile economic recovery that is slowly gaining momentum. What is happening in our marketplace at this very moment however is known and I believe we are dealing with a “perfect storm” of sorts.
The savviest buyers and admittedly some lucky ones too, are going to reap the rewards of braving the current real estate market. Not only are we dealing with record low interest rates but we also have bargain housing prices. In addition, regardless of what is being said, financing for most people is still relatively easy to obtain.
Mortgage interest rates have slightly risen since they bottomed out in November 2010 however rates are still extremely low. A borrower that is purchasing a home that they intend to use for their primary residence and has a credit score of 720 or higher can likely still obtain a 30 year fixed interest rate in the 4.5% to 5% range. If we consider that fixed rates are considered normal and ideal in the 6% to 7% range, it becomes apparent how much buying power can increase because of these low rates.
For a $300,000 loan the increase in monthly payment for a loan with a 4.75% interest rate and one with a 6.75% rate is $380 per month. Over the life of that 30 year loan that equates to more than $137,000 more in interest that is paid. To put it another way, if a borrower plans to dedicate $1500 per month to the principal and interest for their house payment each month, with a 4.75% interest rate their maximum loan amount would be $287,550. At the same time, if the interest rate rose to 6.75% the borrower would have a maximum loan amount of $231,200.
Because home values in a normal market generally appreciate as a percentage of the purchase price, the gains that come from a higher purchase price will yield a much greater return over the years that the home is occupied. For example if a buyer purchases a $230,000 home that appreciates at 1% a year it will be worth $241,732 after the fifth year for a gain of $11,732 in equity over that period. A $280,000 home that appreciates at 1% will be worth $294,282 over that same period for a gain in equity of $14,282.
Current home prices are much lower than they were just a few years ago. A home that sold for $200,000 in 2006 may be selling for $165,000 today. These prices make that purchase a bargain and it is highly likely that the same home can be purchased for less than it would take to build in today’s market. Although it could be argued that the prices could continue to fall, I believe we are at or at the very least, near the bottom of the market. I base this on the appraisals that I see today and the prices of the homes that my clients are purchasing right now. I noticed a large drop from 2007 to mid 2010, but that seems to have stabilized at this point.
Finally, loan programs are still providing accessible credit to potential buyers. Loans with down payments as small as 3% of the purchase price for borrowers with credit scores as low as 620 are readily available. Loans are being scrutinized a little bit more than they once were, but the majority of clients that I speak to still qualify for some type of financing.
Low rates, discounted housing and access to credit provide the perfect storm for today’s homebuyer. If we are indeed at the bottom of the market as far as sales price and interest rates go, then there is only one way to go and that is up. Buyers will likely never see this unique blend of circumstances and will never enjoy this much purchasing power again. Because a home is likely to be the largest purchase of most people’s lives, and because in most situations a home is an appreciating asset, I advise my clients to consider their homes to be the center of their financial plan. There is no time better than now to maximize that asset, and the value that a buyer can create through the purchase of real estate. It is indeed the perfect storm and one that I predict I will not see again in my lifetime.