What is the cost of waiting to buy a home?

Posted on Jan 3, 2017 | New Home Loans

I’ve been getting a good amount of questions from clients asking about what’s going to happen with interest rates in the future, where are home values going in the future and what does that do to my buying power. So, I’ve put together this Total Cost Analysis as a case study to look at what the potential cost of waiting would look like. Please click here to watch this short presentation.

First, let’s dive into some facts. if you look at historic mortgage rates going back to the 1970s, in the seventies the average 30 yr. fixed mortgage rate was 8.86%. In the eighties it was 12.7% and in the nineties we were back in the 8.12%. In the two thousands, average range was 6.29%. So you can tell we are in an extremely low interest rate. At some point it would make sense that we’re going to revert to the mean. As an average over all of those time periods, the average 30 yr fixed mortgage rate is about 8.43%. Today we’re around 4.25% depending on credit score and a few other things, but nearly half of what interest rates have been historically over the last thirty years.

Historic Mortgage Rates

And so I think that’s an important starting point to realize that we are at a very low point. Even though we’ve seen rates move quite a bit over the last couple of months since the election.

I went a little deeper, I said let’s dive into the numbers and see what happens to home appreciation rates during periods of rapid interest rate increases. And what I found was there were four periods where interest rates – 30 yr fixed mortgage rates – increased greater than two percent in twelve months or less. Those periods were May 1983, March 1987, October 1993 and April 1999.

Many clients that I’ve been talking to are hypothesizing that with an interest rate increase in rates, prices must go down. But, guess what I found? The research shows that on average the cumulative appreciation over those four periods was 5.975%. And if you think about it, as the economy starts to heat up, as unemployment goes down, as wages start to go up, people can pay more for houses. As rates start to go up to kind of cool the economy or reach what the market will bear, you can anticipate that home prices will continue to increase.

Ave Home Appreciation

And the reason that’s so important, is to realize if we’re going into a period with higher interest rates and what history tells us is higher prices, what does that do to your buying power? I’ve put together these three comparisons to what you can expect now.

Today on a $400,000 house (with interest at 4.25%) you’re looking at a payment of about $1857. If rates go up to 5.25% over the next year and let’s just say home prices stay the same ($400,000 home), that’s going to raise that payment to $2050. If rates go up and home values go up – and I just went up by 5%, far below the 5.97% average of increasing rate periods. But, what happens to the payment? Wow, we’ve got a $700 payment increase ($2152) if our purchase price goes up 5% and our interest rate goes up 1%. So, you’re either going to pay more, or you’re going to buy less.

But what if you’re on a budget and you need to keep that payment at about $1900 a month? If interest rates go up to 5.25%, that means your buying power goes down to $365,000 and if we have homes appreciating during that period, that’s really going to push down the quality of home that you are able to purchase.

What will this cost you over ten years? It’s going to cost you $69,240 more in interest for the same house if home prices go up by 5% and interest rates go up by 1%.

Total Cost Analysis savings

I’m not pointing this out to scare you or push you into action if it’s not right for you, but it is good for us to look at history and allow it to teach us what might happen in the future and then put a dollar cost to that potential. If you have any questions, I’d be more than happy to answer them or we can break this down for you on a specific scenario or price range, we’d be honored to help you. Please call at or by reaching out on our page.