We covered a little bit of what we do a few weeks ago, and you may remember that we’ve expanded to real estate, too. Today we are continuing our new series on viewing and buying a home where we’ll be sharing a few snippets to help! We want to share our experience and knowledge from handling home renovations as designers, and as a licensed Real Estate agent with Benchmark realty here in Nashville. If you’re moving to Nashville, or in and around Nashville/Franklin reach out to Jamin (jamin @ thehandmadehome.net), we’re happy to help you find that perfect home!
The home buying process is a wonderful experience if you have the right knowledge and game plan. So whether you’re buying something now or in the future {or just want to look extra smart at that next friend gathering} follow along as we cover some things you’ll want to know! And of course, if you have a burning question you’d like answered, shoot it our way and we’ll do our best to help. We’d love to hear from you. Let’s dive in!
Here are a few topics we’ve dealt with and are coming up… this is just the beginning.
- The Sight Test (click here)
- The Feel Test (click here)
- Is it the right time to buy?
- Adding Value
- The Electrical Panel
- The Crawlspace
- Drainage
We’re taking a bit of a side topic today with this latest question: When Is the Right Time to Buy?
The coffee is hot.
See: Obligatory Disclaimer. So let’s get this out of the way first and make the lawyers happy: please don’t drink the coffee when the barista first hands it to you. Test it first. Second, we are not your financial advisor or REALTOR® but if you’re in Nashville we’d be honored to work with you. We just love homes and talking about them. Our goal with this series is to provoke thought, educate, and encourage you to research more. Please be wise in your own local market and if you are unsure seek the help of a local Realtor®.
Is it the right time to buy?
With interest rates climbing, the economy facing a coming recession, if not already in one, and with FUD abounding (fear, uncertainty, and doubt) the question on many people’s minds revolves around if it’s a good time to buy or not. So we thought we’d tackle this topic today and see if we can provide clarity and ease some fears.
Is it the right time to buy: the math
Let’s just start with the numbers. Boring I know, right? So let me to make it easy. Let’s take a hypothetical home of $300,000.
Let’s say you bought the home at the beginning of the year. Real Estate was booming people were buying at a frenzied pace, there was no FUD, at least among the vast majority. And generally, people thought it a great time to buy.
Buying a $300,000 home in January at a 3.5% interest with $50,000 down would give you a principal and interest payment of $1,123.
Buying a $300,000 home now, {Sept. 2022} at a current interest rate of 6.91% with $50,000 down would give you a principal and interest payment of $1,648.
Right off the bat, this looks terrible. You’re paying $525 / month or $6,300 / year more for the same $250k borrowed. Ouch.
Is it the right time to buy: BUT there’s more to it.
Let’s establish something: the only thing principal and interest payments are absolute for, is how much house you can afford. Outside of this, they are only one piece of the puzzle.
Looking at the big picture, the first thing we need to note is that home prices have fallen by at least 10% in most places, if not more. Assuming they have fallen only 10%, that $300,000 dollar house that was purchased in January has lost $30,000 in value.
Do you see where I’m going with this? Sure, the house with the higher interest rate pays $6,300 more per year, but it will take almost six years to pay the principal down $30,000 on the lower interest house purchased in January! So, until 6 years from loan origination, the home with the higher interest rate yields less of a capital investment on your part.
Is it the right time to buy: Market price
Back in January, when buying was hot and inventory was super short, homes didn’t always make it to market, and if they did they only stayed a weekend. Most offers were above asking and there were multiple offers.
Just because the home was listed for $300,000 didn’t mean the home sold for $300,000. That was simply what is known as the “listing price”, or in other words, the starting point. For this argument we will assume “listing price” and “appraisal price” are the same.
Often the “selling price” was above the listing price and it’s not a stretch to say by at least $20,000.
So that $300,000 home was actually purchased for $320,000 when it might only be appraised for $300,000 which means the buyer had to bring an extra $20,000 to closing.
So now you’re down $50,000 on that January purchase and it’s going to take you 9 years and about 9 months to pay the principal down enough to break even against the home with the higher interest rate.
Is it the right time to buy: Negotiation power
Let’s keep playing this out because just like people were overpaying for homes in January, guess what is happening now? People are making offers below asking. This is happening because of FUD and a lot of buyers sitting on the sidelines.
This allows for two buyer benefits.
First, there is less competition because homes are sitting on the market longer, which allows you to take your time and find the right house for you without feeling rushed.
Second, you are able to make offers below asking, because the demand is lower and sellers are more eager / desperate.
So let’s be conservative again and say people are making offers that are accepted $10,000 below listing on the $300,000 home.
They are buying the same $300,000 home for $290,000 instead of $320,000
Combined with the $30,000 value that was lost, the $20,000 that was overpaid in January, and the $10,000 the higher interest buyer saved on the selling price, you are now at a $60,000 difference on the “selling price”. Or looking at over 10.5+ years before the home bought with the lower interest rate in January pays enough of the principal down to be equal to the capital investment of the home bought now with the higher interest rate.
Is it the right time to buy: Bigger
If that isn’t enough to peak your home buying interest, how about the idea that bigger is better?
Assuming the house we bought in January was 2000 sqft. You would have paid $160/sqft (at a $320,000 selling price), however, that same 2000 sqft home today, taking into account the $60,000 drop in price we discussed would only be $130/sqft. This means today for the same $300,000 listing price the home size you could buy would roughly be about 2307 sqft or 307 sqft bigger.
So same listing price, but a bigger house. That bigger house could be an extra bedroom or an extra bathroom. So when you go to sell the house adds even more value.
Is it the right time to buy: Or the same?
Or if you just want the same house size, then you guessed it: your principal payment just dropped but $40,000. Or to only $1,384 or $261 more than if you bought it in January for $3,132/year more.
So while it would still take you over 10.5 years to break even on the principal for the house with the lower interest rate, you would have made $36,000+ in principal on the home with the higher interest rate in the same amount of time.
So at year 10.5+- you are ahead $36k+- if you by the house now with higher interest, as opposed to being even if you bought the house with the lower interest.
Even further for the same house, it will take somewhere around 17+- years for the lower interest rate house bought last January to be a better investment than the higher interest rate house purchased today.
Mind blown.
Is it the right time to buy: mortgage programs
Oh, and one more thing that is happening in the market right now: Mortgage companies are becoming creative. There are companies that are offering mortgages to be locked in at today’s rates and if they fall in the next “X” number of years they will let you refinance at no cost. So potentially that 6.91% interest rate is like an ARM without the risk of going up. More winning for that higher interest rate house purchased today.
Is it the right time to buy: conclusion
Smart money is still buying, because they can see past the FUD. They don’t call it a “buyers market” just for a catchy phrase. If you’re sitting on the sideline waiting to get in the game, rest assured it is not as grim as the news paints it.
In fact, it’s a great time to make an investment or at the least ignore the FUD.
Next, we’ll talk about the idea of future vision {something we were really feeling that day we bought our own home!} and where to add value to the home.
Don’t forget if you have any questions drop us a comment below, or if you want to keep it private, shoot us an email! If you want to search homes in Nashville with a fun tool click here. And if we can help you renovate a home, we’d be honored to work with you.
Have an inspired day!
Andrea says
Thanks for the tips! I feel like even though I’m in the business (I’m an designer myself) sometimes I feel overwhelmed by all the steps involved in purchasing a home… Hopefully I’ll implement some of these tips!
Love from Portugal!