Here's the latest installment of Bates By the Numbers, a weekly feature by broker David Bates that drills down into the Hub's housing market to uncover those trends you would not otherwise see.
One of the most oft-asked questions in real estate is, "Is now a good time to buy?" A better question about today's market might be, "Can you afford to wait?"
Did you get the bulletins? Interest rates probably can't get any lower. Home prices are on their way up. Plus, there's still a mortgage interest tax deduction and a real estate tax deduction. Sure, buying a home can be a risk, but not buying can be risky too—risky in the sense that by waiting, you may be paying a whole lot more for your real estate for the next 30 years.
If you buy now and home prices increase 10 percent in the next year, you might save comparatively $20,000, $30,000 or even more versus next year's prices. So clearly now is the time to get off the first-time homebuyer fence and buy. Now is the time to put into action your plans to move up or down the property ladder.
As well, if interest rates move up, waiting to buy ultimately will not only result in higher acquisition costs, but higher monthly mortgage payments, too. For example, the median price of Boston 1-BR condominiums sold in April 2007 and April 2013 were roughly the same, around $345K. Yet, even though the acquisition price was the same, the mortgage payment was much different. In April 2007, the average mortgage interest rate buyers paid was 6.18 percent, but, in April 2013, the average mortgage interest rate was 3.45 percent. Assuming an 80 percent loan-to-value, the higher interest rate payments are about $455 more a month than the lower interest payments ($1,686 versus $1,231). Over a 10-year period the lower payment amounts to a comparative savings of over $50,000.
Another seemingly seldom mentioned fact is that when interest rates are lower, more of each payment goes towards building principal. In the hypothetical purchase of the above referenced Boston 1-BR, 10 years of payments at 6.18 percent interest only built around $43K in equity, but 10 years of payments at 3.45 percent built nearly $63K in equity. Guess what? That's another 20,000 comparative dollars.
In this simple example of a modestly priced Boston property, there might be more than $100K in comparative savings. Incredible! Granted, these projected savings are only hypothetical and comparative, but can there be any doubt that interest rates will move up? Check out the Freddie Mac chart that goes all the way back to 1971 to see how incredibly low 3.45 percent compares. Will real estate prices go up? No one can guarantee it, but in the long term, the appreciation of U.S. home prices in major markets like Boston feels about as inevitable as death and taxes.
I know it's a challenging market to buy in, but take my advice and at the next jam-packed open house, box out the competition and bid as much over-ask as you can. Fulfill your real estate destiny now and maybe 30 years from now you'll become a comparative savings millionaire!
· Our Bates By the Numbers archive [Curbed Boston]