The Cost of Waiting to Buy a Home in fall of 2013 vs. Now

With all of the recent strength in the Twin Cities housing market and Minnesota’s relatively low unemployment rate one might be confused about why we’re experiencing all-time lows (ours are even lower) in mortgage rates since typically the beginning of a recovery is followed by higher interest rates. But the truth is that the Minnesota story is not the national or global story. Events on the national and international stage have caused the Federal Reserve and global bond markets to drive US mortgage rates down. This too will end and will carry a cost to those contemplating a mortgage.

First, some context:

Internationally, the story is Europe. There are problems in Greece, Spain, Portugal, Italy, Ireland and some would say in France. As the Euro Zone falls into disarray, fewer investors are interested in Euro denominated assets. They have been selling them and buying up assets perceived to be safer. These have primarily been US Treasuries and US mortgage backed securities. As these assets are bought up, their investment yield drops and as their investment yield drops, so too do mortgage interest rates. Of course as Europe heals, the opposite is true and mortgage rates will undoubtedly rise.

This international problem is disconcerting to the Federal Reserve. Nationally the housing recovery is more anemic than Minnesota, growth is slow but steady and unemployment remains high. Depending on one’s perspective, this is either a positive or negative sign but it is indisputably precarious. To that end, the Federal Reserve is even contemplating an extension of Operation Twist (also known as Quantitative Easing) to extend their efforts of keeping rates low (this has played the largest role in keeping mortgage rates low over the last few years). Even despite this, Ben Bernanke, by stating to congress that “monetary policy is not a panacea” has implied that there’s only so much that can be done without congress’ help. Yeah, like that’s going to happen! Extending Operation Twist could extend this period of low interest rates but it’s only a postponement of the inevitable rise in interest rates.

The Mortgage Bankers Association (the MBA) predicts that rates will end 2012 at 4.2% and 2013 at 4.7% (that’s a full percent over today’s rate). One can only assume that the MBA foresees continued anemic housing growth (but growth nonetheless), steady GDP growth and continued modest improvements with unemployment (overall). They may also be suggesting that Europe will slowly sort their mess out. Who can say? In any event, this begs the question, “What is the cost of waiting until fall of 2013 to buy a home strictly from a mortgage perspective?

Now, the cost-benefit analysis:

Let’s take an example of a 5% down purchase on a median priced home in the Twin Cities 13 county metro area. Since the current median price stands at $163,000, the loan amount would be $154,850. Using the interest rate from this week’s Weekly Primary Mortgage Market Survey® from Freddie Mac of 3.71% on a 30 year fixed rate mortgage, we’ll compare it to the Mortgage Bankers Associations Projected 4th quarter rate of 2013 of 4.7%. We’ll compare the combined monthly payment and amortization savings over periods of 5, 7, 10, and 15 years in the following chart:

cost-of-waiting-to-buy-a-home

The lower the interest rate, the faster the principal balance gets paid down on the front end of an amortization schedule so it’s important to take this savings into consideration. Of course if one’s loan amount is higher or lower the savings would be greater or less respectively. Lastly, these aren’t assumptions and numbers that I’ve come up with in my mom’s basement. These are highly cited, credible and relied upon sources and assumptions.

Finally, a word for homebuyers:

This has been meant to put the market for current mortgage rates into context, evaluate projections and calculate possible
costs of waiting. Always remember that while these are important considerations, buying a home is only partially an investment but is largely personal. While it is not unwise to take these calculations into your decision making process, always remember that you live once and should always endeavor to buy what you want, when you want it and for your personal reasons.

Happy house hunting!

Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI

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