Market Indicators across the country ( to varying degrees) seem to be improving in the HAI, Housing Affordability Index. With all the price corrections, has the market hit a plateau?. When you factor in the increasing interest rates, housing costs may actually be increasing in many areas.
Here in the San Diego market, we are reminded almost daily of all the declining home values. While that should be enticing to the buyers, something else is going on and it may soon be negating the Buyers advantage,
Many home buyers have been sitting on the sidelines awaiting the press to tell them when it is OK to start buying again. ( I hope they aren't holding their breath as we will soon have a lot of lifeless bodies out there).
Take a look at this and see if this is what they mean by hitting the bottom of the market?
In April of 2008 the median price for a typical home in San Diego was $430,000. In May it dropped again to $420,000. However in April the average interest rate was 6.1 % and now it is at 6.8%. As others say, "Do the math". Well, I'll do the math and you draw your own conclusions.
Median Sales Price April 2008 in San Diego County
$430,000
10% Down 43,000
Financing at 6.1 APR
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Mortgage Summary
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$2,869.26 Monthly Payment |
$1,032,934.44 Total of 360 Payments |
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$457,271.94 Total Interest Paid |
May, 2038 Pay-off Date |
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$130,612.50 Total Tax Paid |
$58,050.00 Total PMI Paid
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Now let's do one for todays median price and the mortgage rate of 6.8%
Median Home Price May 2008 in San Diego County
$420,000
10% Down
Financing at 6.8 % APR
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Mortgage Summary
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$2,976.15 Monthly Payment |
$1,071,414.80 Total of 360 Payments |
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$509,139.80 Total Interest Paid |
May, 2038 Pay-off Date |
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$127,575.00 Total Tax Paid |
$56,700.00 Total PMI Paid |
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* For this example of the variable costs, the monthly payment reflects Principle, Interest Taxes and 1/2 %for PMI. The Property Tax rate used in the calculation was 1.1245% of the sales price ( our average property tax rate). This illustration does not account for points or other applicable loan costs. It uses an average housing cost number and a calculation of an average interest rate.
One begins to see that we are now coming upon a threshold of diminishing return in postponing buying decisions. It is costing more to own even the lower priced home than it did a month ago at a higher price because the rates are increasing. It would seem to me that with this scenario, it would require a faster drop in home values than the steady increase in interest costs. And I don't see that happening right now. If Buyers don't soon seize the opportunity , as the market begins its rebound, with even just a small amount of annual appreciation, and the higher rates, many buyers will once again be priced out of the market.
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Courtesy of William Johnson GRI CRS e-PRO author of The Real Estate Text Book and The Voice of San Diego Real Estate
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I consider San Diego an excellent place to live and would love to share with you my enthusiasm for the many communities that encompass it. Looking forward to assisting you with your Real Estate needs.
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Hi William;
I think buyers should take advantage of the opportunity they have now.
Anthony
Hi Anthony, that would be my belief as well. Looks like things are changing fast, instead of home values it the interest rates now.
Billy,
That is always a possibility or it just sets the whole of the process on its ear. The pressure to reduce the prices is always there. It is also as you observed , perspective and we can't know if the sellers will sell but we know what the lenders will charge if they do. All things being equal and we are both realistic enough to know that isn't always possible, it still affords buyers to get in under the wire of price vrs cost scenario.
Wlliam,
this information is a must for all customers looking great information about the market trends, etc :P keep that good work.
Ray saenz
I am running into this now with some of my buyers. The longer they wait, the less they can buy.
Thanks Ray, it made such great sense and when I ran the numbers it just seemed that we would all have a good tool to help those that don't which way they want to respond to market beyond stay on the sidelines.
Carol, I have a little mortgage calculator on my site and it is fun to have the buyer go there and help them run their own numbers. They then can make their own best decision about this and makes so much aware and not so subject to the emotions of newspaper headlines or other influential things out there.
Hard to know what to think these days. I read some pretty dismal info yesterday which hopefully will prove to be wrong. Just another day of pushing that train up the track.. don't see the top in sight yet for the coast down the mountain. But I LOVE what I am doing!!
We're starting to see some stabilization in the Las Vegas median selling price, along with decreasing inventory and increasing homes under contract -- all positive signs for a market recovery. Your post is an excellent reminder to agents that we need to monitor both activity and affordability.
William, I have been saying that the last few days to three people. When their home goes back up, they will not be able to afford the new one they want or need. Better to build up equity again in what they really need then keep paying off a mortgage on a home that no longer meets their needs.
I like the illustration....
Well said, William. Many buyers seem to forget about the financing side of things, focussing only on the hope of prices dropping dropping to save a few bucks. It doesn't take much of an interest bump to negate any lowered prices, as you demonstrate. Folks need to do the math.
Jeff
William--Good point! And interest rates are starting to slowly climb again so affordability with the rates will continue to affect the payment. Just like with the stock market, if buyers continue to wait until the media says the "crisis" is over it will be too late. If you hear it on the news, prices will be on the rise again.
Hi Susie, Really sorry to hear that things have not improved ,like they should . It is wonderful you have the passion and trust me , we have all been here before and that passion will carry you through. it is discouraging but nothing stays the same. As my assistant says, Yeah, it gets worse,lol
PS, pushing a train up a track vrs a rope has its advantage, at least the train has wheels,:-)
Hi John, If one really thinks about it, that is how we got Buyers to look at it the last time as well. When prices were spiraling, the rates were low and it made them more affordable. Prices went down to where they should have been , prior to the run up but now the rates are increasing. Still less than before but overall things are creeping up. Before, the Sellers won. This time the cost of money wins. If Buyers get their home, eventually they win. If they don't, no one wins.
Boy Missy, if only people would listen. In the financial world, there often is not as much of an opportunity once the media gives the green light. And they don't give the green light until the opportunity is almost over. Lay people relay on the wrong people for their most important decisions. Guess for most, they lose out. Buyers as still mosyly waiting.
And we give it. But do they listen,most of time, they wait. Jeff, I wanted to become a certified real estate counselor and then give up listings and sales. I was told that in California, I would ultimately lose because people will not pay for advise. They won't even take it for free,lol.
Good Morning Teri, The rates may climb faster than slowly from what I hearing. They are now predicting in the low 7's by fall. That will also curb sales and put more pressure on prices again. Sellers that don't have to sell would well advised to stay out of the market. If they did, it would help to firm things a bit. I am only in favor of a reasonable annual appreciation. We don't desire the giant swings in prices or costs , one way or the other. We would favor of a consistent market and gradual appreciation. Back to normalcy would feel so good.
Hi William. Based on this blog, I just emailed one of my buyers that is in counters on a property, and about to walk for $10K. I pointed her to the mortgage calculator on my website, and then ran a couple of quick scenarios for her, One at $765K at 6.5%, and one at $750K at 7%. Guess what, The payment on the higher priced property is $123 less than the lower priced one at the slightly higher interest rate. And given the low tax rate here is California, the difference in taxes is so minimal it isn't even worth talking about. I am interested to see what they decide to do!!
Carol, This is how we professional answer the question and what more REALTORS approach should be. We don't have to cajole, what we always should do is give them the numbers and hopefully they will make their own Best Decisions. Well done and I am so delighted that this little post was so timely.
Carol, if this helps the buyer, what ever decision is made, write about it and your process. Should make great reading!
Wiiliam- Just to complicate things a bit, the listing agents father-in-law passed away this last weekend, so she is now on a plane to Arkansas to be with her husband and his family. And it is a relo. And the seller says if they don't get their price, the husband can commute from Camarillo to the Bay area Monday through Friday. (That will get old quick, but who am I to judge??)
Anyway, I just got off the phone with the buyer, and they will let it sit for awhile, and see if the seller changes their mind. If they lose this, this will be the second home they have lost in counter offers. I don't need practice writing offers, but they will figure it out!!
It doesn't work because sellers don't sell at median price ranges.
Hi Carol, Been there and done that. I have buyers that want it all plus the first born. I am beginning to believe that my interview process is not tough enough anymore, I feel like I am spinning my wheels big time and frankly , I would rather take a trip and come back next year,lol. A doctor that I have been working with lost out even after I got an appraiser friend to go and gave us an informal appraisal ( free ) just to substantiate what fair market value was. She said it was list + 5K .He wanted to offer at 10,000 less-wrote it up and declined. No counter because he has 2 other offers. It is closing tomorrow for $7000 above list because it was priced right from the beginning. Some agents actually do know what they are doing,:-) So he decides to put an offer in on second choice and it sold (pending close but the agent confirmed it went a fraction over list). Same listing agent. I send e-mails and phone calls and the buyer is silent.
So hang there , all this crap will eventually settle out.
Hello Lenn, Most of them here are not selling at their own price either, lol. They maybe should try the median price,lol .
Anyway,just an illustration to always run the math and verify that what we are saying is substantiated. I am trying to dutifully post as you suggested. I am trying to be creative.
So how goes it in your neck of the woods, it is 97 out and air on the fritz and I feel exhausted. My little yorkies are panting. Power outages periodically. My computer loves it,lol It is a table so it actually stays on but the wireless goes out.
So we're there right? The bottom? We're really there?? Oh wait...the evening news didn't say so yet...
Hi joan, Yes, we are at or near the bottom of the bowl and if no one flushes , we could float to the top, eventually, anyway. LOL