I was sitting with an agent last evening at a walk-through and she began talking about whether or not she should help her son buy a house right now or have him wait. They are having a difficult time finding a property that is affordable.
This is a very common refrain in today’s market where prices have seen a dramatic increase over the last three years. We have also seen a large influx of investors in the marketplace. I encouraged her to think about buying now, specifically an interim property, that would be a great investment in the future. Here was my rationale.
The predominant school of thought is that over the next few years the interest rates are likely to rise 1.5%-2%+. It’s also expected that property values will rise but not at the feverish pace of the last two years (increases in residential property values have been in the 25-35% range in the best Westside neighborhoods). I think it is also safe to assume that values will likely increase 25% over the next three to four years. I used these as benchmarks for the following comparative analysis of whether her son should buy now or wait three to four years. For this buyer, and the majority of buyers, the number one concern is interest rates and their impact on their monthly payments.
Let’s compute the real differential between buying in 2013 and buying in 2016. Based on a purchase price of $1,000,000, the principal and interest payment on an $800,000 loan would be approximately $30,400 annually. The property tax bill would be approximately $12,500. The total of the two payments would be $42,900 annually, with a monthly payment of $3,575. If the mortgage rates were to increase only 1.75% and the property appreciated only 25%, over the next three years, the principal and interest payment would increase to approximately $60,000 a year. The new property tax bill would increase to approximately $15,625. The total of these two payments would be $75,625 annually, with a monthly payment of $6,302. The approximate increase in the monthly payment alone would be 76.2%! This would not include any additional costs associated with the increased purchase price and terms, such as closing costs, insurance, etc. I think it’s safe to say, waiting three years, her son would incur a 75% to 80% increase in his monthly burden.
Another option for her son would be to purchase a duplex or triplex where he could live in one unit and rent the other units out, offsetting an increase in the purchase price. With this scenario he would have the potential to gain some future depreciation thereby decreasing his income tax burden over the next three years. As you can see, it really isn’t just a simple matter, “I’ll just wait three years to buy when I have saved more money for the down payment”.
A seemly simple question can have a very expensive and complex answer.