By Dave Parrish
I’m reminded of the classic Alka-Seltzer commercial from the 1960s: “Oh, what a relief it is.” The market is getting better. As I speak with friends, clients and those in the cash register line, I often hear folks delighted to hear the news, which I always couch in the caution, “But every market is different. Where do you live?”
For almost all markets, we have seen a dramatic turnaround from the bottom of the market in late 2010 and early 2011. For those that haven’t shown improvement, there should be major concern; real improvement may never occur for some markets. It’s my sincere hope that this doesn’t describe your market. Some people do own real estate in such markets. There’s more than one such market in readership distance of this column.
As the public becomes a bit more excited about or at least at ease with the return of the real estate market, I often hear the complaint that so much value was lost between 2006 and today that they will wait a while longer to recover that loss in value before acting to sell their homes and move on with their lives. While that response is understandable, it may not be well informed.
I can’t think of any better way to communicate an accurate picture of the market and what all the experts see as the factors that define the market and what homeowners need to know as they make the decision to act now or wait.
The consensus opinion is that we are returning to a normal level of appreciation of real estate. Due to a shortage of homes for sale, the recent appreciation rate has been a bit more than the average appreciation rate of 3 percent to 4 percent per year. However, the norm and expected appreciation rate based on current trends and mid-to-long-term projections is about the same.
Using a fictional value of 0,000, you can see from the above chart that there is likely to be a considerable appreciation in home values. Remember, not every market will behave exactly like this, but it’s a good starting point for looking at the likely outcomes. I know you’ve heard about double-digit appreciation rates, but those aren’t occurring in our markets. They are occurring in California, Arizona, Florida and other places that were the hardest hit by the economic crisis.
With that projected increase in value, it’s understandable that many are shifting into a wait-to-act mode. But the value of your current home isn’t the only factor to be considered if your plans include buying a home.
If buying another home, there are two other critical factors to consider: What’s happening or likely to happen in your target market for the home you will eventually buy, and what is happening with interest rates. To evaluate those factors, take a look at the following charts.
First, let’s look at interest rates. As the market has improved the historically low rates of 3.125 percent are gone, unless you’re looking at an ARM. The interest rate table provided shows a conservative projection at where interest rates for 30-year fixed-rate mortgages will go over the course of the next few years. The normal rate for 30-year mortgages has been between 7 and 8 percent.
That means the cost of borrowing money is on the way up. If you don’t plan on having a mortgage, you can ignore this factor. You might want to wait, or maybe not, depending on whether you are moving up or downsizing. If you have to borrow money to purchase that new home, this is a more significant factor than you may imagine.
To illustrate my point, I provide the following chart, based on the value of your new home being static, that isn’t enjoying the 4 percent average appreciation rate you will expect on your existing home. Illogical, yes, but bear with me. Notice what happens to your payment over time based solely on the change in interest rates.
When you move, you’ll probably want to move to a better neighborhood. Not only will that target neighborhood experience appreciation, it’s possible it may experience an appreciation rate higher than the 4 percent we’ve used for your current home. Let’s not stretch numbers to make the point. Assuming an average appreciation rate of 4 percent and that you won’t buy more home than you have now, take a look at what happens to price and payments over time.
Does it look likely that you will be better off to wait? Does what you will gain put you in a better position? Do you want to put off the move to the neighborhood you want to live in? Your choice. Act now or wait? Either way, you can now make that choice in a more informed manner.
May the market be with you.