Should Buyers Wait to Buy?
Interest rates have started their much anticipated rise and many economists are predicting rates will continue to rise further. It’s unrealistic to assume that buyers will assume that entire burden, so two important questions arise:
Question 1: How much do prices need to adjust in order to keep the buyer’s monthly payment the same as they would have been without a 1% increase in interest rates?
From the numbers we've run (see below), prices and loan amounts would have to drop by approximately 12% to break even on a 1% increase in interest rates.
- For a loan of $500,000, the loan amount would have to drop by roughly $60,000 (assuming a 20% down payment, the purchase price would have to drop by $72,000)
- For a loan of $1 million, the loan amount would have to drop by roughly $120,000 (assuming a 20% down payment, the purchase price would have to drop by $144,000)
- For a loan of $2 million, the loan amount would have to drop by $240,000 (assuming a 20% down payment, the purchase price would have to drop by $288,000)
Question 2: Is it better for a buyer to wait to buy in case prices come down as a result of rates going up?
In my opinion, 12% is a pretty sharp decrease in prices and I’m not sure if the market would react that strongly to a 1% increase in mortgage rates (especially when you factor in other aspects such as a strong overall economy, lower taxes for most taxpayers, etc.). Based on these findings, one could claim that higher rates over the next year or so will end up costing you more than you’d save by waiting for a price decrease of 12%.
CONCLUSION: People who wait for prices to drop before buying may be costing themselves more than they are saving!
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