For buyers still on the fence thinking about buying a home or move-up buyers still waiting to sell, they should take into consideration the following 4 reasons below why they should look into making a decision soon. For example, interest rates have increased for four straight months and have increased almost .5% during this time, home prices are rising everywhere as multiple buyers are bidding on properties due to limited inventory, and on June 3rd the FHA is requiring that FHA buyers will pay mortgage insurance for the life of their loan. The cost of purchasing a home is now increasing every month!
1. Interest Rates Have Increased for 4 Straight Months
As the housing market continues to improve and the economy continues to grow and add jobs, interest rates will continue to rise! The 30-Year fixed rate mortgage rate has increased to 3.63% and just posted its biggest 1-Week increase in 51 weeks (see chart above)! Mortgage rates have climbed steadily now since November 2012 and have increased from 3.25% to 3.63% during this period, which is almost .5%!
In fact mortgage rates have now started 2013 worse than any year since 1996. Many experts are predicting that mortgage rates are on their way over 4% soon, as the Mortgage Bankers Association predicted that rates will be at 4.4% by the end of the year.
As you can see in this chart below, rising rates really affect a buyers affordability! It just takes a 1% increase in rates for a buyer to lose 10% in purchasing power/affordability. See how the payment on a $400k loan at a rate of 3.5% is roughly the same as the payment on a $360k loan at 4.5%, a loss of 10% in purchasing power for a buyer.
2. Home Prices are Rising Everywhere
Home Prices are on the rise everywhere as limited inventory is driving prices up. It is the old law of supply and demand, as supply falls demand will rise, and this is why we are seeing bidding wars for properties going on in most local markets, and this in turn is driving prices up.
For example, here are the year-over-year home price appreciation gains below for the cities Case-Shiller tracks in its reports on housing values!
As you can see in this chart, San Diego, LA and San Francisco all had annual appreciation gains of over 9%, 10% and 14% respectively over the past 12 months!
I think it is fair to say that the housing market as a whole has bottomed across the country! And it looks like we may be close to the same gains in Southern California again this year, as home prices continue to rise in most of the markets.
Of course as home prices continue to rise, this means it gets even more expensive for buyers to be able to afford and purchase a home.
3. FHA Buyers Will Pay Mortgage Insurance for Life of Loan as of 6/3/2013
On 6/3/2013 the FHA will implement a change that will dramatically increase the cost of FHA loans for consumers. The FHA will require FHA buyers (who put down 10% or less, which is most FHA buyers) to pay mortgage insurance "MIP" for the life of the loan. It basically doubles the amount of total MIP if the loan is paid to term.
Below is an example with a purchase price of $175k with 3.5% down payment at 4% mortgage rate on 30 year term. Currently, the MIP is required on FHA loans for approximately 9 years 9 months with normal amortization. The new program would require the MIP for the life of the loan.
In this example, the initial monthly MIP is $196.88, after 6/13 the total mortgage insurance payments that a buyer will pay back will double from $20,838 to $42,447!
For buyers to avoid these increases, they will need to get into contract on a property on or prior to 6/3/2013. So it would be a good idea for any buyers who plan on using FHA financing to try and get into contract soon. See HERE for additional information from the FHA on these new upcoming changes that all buyers should be aware of.
4. Your Dream Home May Not Be Affordable Soon
Move Up Buyers and Sellers! With interest rates on the rise, now is a great time for move-up sellers to sell and buy a new home, as their home will probably sell fast due to limited inventory!
But a question some sellers may have right now is, is it better to wait to sell and see if their home appreciates another 3-4% over the next 12 months to net some more profit, or is it better to sell now and buy your dream "Move Up Home" while rates and borrowing costs are still very affordable?
For example, in this scenario below we have a seller who can purchase a home today for $360k with a rate of 3.4%, but in a year the same home costs $371,160 (which is price appreciation of roughly 3%) and rates have increased to 4.4%! The difference in the monthly payment is $262 a month. By waiting a year to buy, the seller may pay an extra $262 a month, and over 30 years that is an additional "Cost" of $94,320 to buy the same home ($262 x 360 months = $94, 320).
So in summary, by waiting a year to sell you may gain an additional $11k due to appreciation, but if interest rates and home prices continue to rise, you may actually end up paying an additional $93,320 over time for the "Cost" of your dream Move-Up home.
Now is a Great Time to Buy or Sell a Home
I believe that now is a great time to buy a home. This information above supports that belief. With interest rates now on the rise, and home prices also on the rise, and with the FHA soon making it even more expensive for buyers to purchase a home, these are reasons alone to get into the market soon while current home prices are still affordable, so you can try and find the home of your dreams. The evidence suggests that in one years time our market will have higher interest rates and higher home prices.
If you have any questions about any of this information or charts above, or you would like to get approved for financing, please do not hesitate to contact me directly at 858-442-2686.
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