Why Waiting May End Up Costing You
The six-year era of the Fed keeping interest rates as low as possible is predicted to end sometime this year, and prospective homeowners should take notice. The Mortgage Bankers Association, Freddie Mac and Fannie Mae are all projecting interest rates, which recently topped 4 percent, to continue rising up to 4.4 percent by the end of the year, and hit 5.3 percent by the end of 2016.
Although the change seems minor, interest rate increases will have a significant impact on buying power and increase monthly mortgage payments for families looking to own a new home. These changes can occur in a matter of days, affecting homeowners in the short term.
Home prices will also rise in the long term, and new homeowners should be cognizant of both and factor them into their planning and buying decisions.
Historically, interest rates have no affect on home prices. According to the data compiled by Locations, home prices have steadily increased since 1978 as the interest rate fluctuated between 4 percent and 16 percent. Competition drives prices when it comes to homes
on Oahu. It has been the main driver of consistent increases over the past 30-plus years, but rising interest rates mean monthly mortgage payments will start increasing as well.
What’s affordable now may be out of reach before the end of the year. First-time homeowners, or those looking to move up, should strike while the iron is hot and take advantage of these historically low rates.
THE PERFECT STORM
When all of these factors are combined — increasing interest rates, rising prices and more competition — your purchasing power decreases rapidly. Data from Locations shows these trends continuing through 2016 with no signs of slowing down.
Keeping that in mind, it’s easy to see why taking advantage of the lowest interest rates possible is a good plan.
“For the buyers, when interest rates move up, this could knock them out of a four-bedroom home to a three-bedroom home, or from their top neigh-borhood of choice to the second or third neighborhood on their list,” said Bryan Balisacan, RE-ALTOR® Partner at Locations.
New homeowners should take notice and make sure to factor this information into their decision. The window to capitalize on opportunities is much smaller on Oahu than on the mainland. In the world of Hawaii real estate, timing is everything.
CALCULATING THE IMPACT
Using $689,950, the current median price for a single-family home on Oahu, the monthly payment for a 30-year, fixed rate mortgage at 3.92 percent is $3,262. Estimating the appreciation in a single-family home based on the historic average of
6.3 percent, the same house next year would cost $735,000, and a 30-year, fixed rate mortgage at
the projected new rate of 5.3 percent would have a monthly payment of $4,081.49.
That’s a difference of $820 in your monthly payment for the same property.
Since the Oahu market has been fairly predictable with constant increases over the past 10 years, it’s fair to assume it will continue into next year. One year doesn’t seem like a long time, but with Oahu real estate it can mean the difference between owning your dream home or getting priced out of the market.
WHAT’S A NEW HOMEOWNER TO DO?
If you’re waiting for the perfect time to buy a home, this is it. The clock is ticking on these historically low interest rates and once they start increasing,
it’s almost guaranteed they won’t come back down.
“My advice to homebuyers who are on the fence is to get into something now — anything! — considering that we’re in a period of artificially low interest rates that may never come around again,” Balisacan said. “When I say buy anything, buy something that you are qualified for, even if it’s not the house of your dreams. Remember that a typical homebuyer’s first house is not the house they will be retiring in. Homeowners usually live in their first house for a few years, and then with their appreciation, move up into a bigger home or a better neighbor-hood.”
Rates and prices are one part of the equation, but you also have to qualify for your home loan. “I always tell my clients if you can qualify for a loan now, it fits your budget, and it’s a house you could call home, you should do it,” warned Tom Presler, REALTOR® Partner at Locations. “There is no guarantee you may qualify for a home three to six months from now.”
Locations LLC offers free, no-obligation Future Homeowner seminars that walk you through the homebuying process. Call (808) 377-4646 for more information.