Brought to you by Scott P. Rogers, Funkhouser Real Estate Group, 540-578-0102, scott@HarrisonburgHousingToday.com
Brought to you by Scott P. Rogers, Funkhouser Real Estate Group, 540-578-0102, scott@HarrisonburgHousingToday.com
Wednesday, July 28, 2021
Let's say you just sold your house -- and you're wondering -- should you go ahead and buy the next house now? Or wait a year? After all, home values seem quite high right now -- maybe you'd be better off waiting a year?
Let's check -- from one very narrow scenario...
Buying Today for $300K and Financing 80% of the Purchase Price
Mortgage Payment = $1,259 per month (2.78% mortgage)
$427 per month in principal reduction
$832 per month in interest, taxes and insurance
A year later you will have paid $15,108 for housing -- but $5,124 of that will have gone towards principal reduction. Thus, you will have "paid" a net of $9,984 during the year.
Renting For A Year and Then Buying The Same House
We will (generously) assume that interest rates will be the same a year from now. They'll probably actually be higher.
We're going to assume you'll pay around $1,200 per month in rent for a year, which won't get you as nice of digs as your $300K purchase, but perhaps you keep the rental budget low to minimize your rental costs.
A year later you will have paid $14,400 in rent as compared to $9,984 if you went ahead and bought now.
Thus, your housing costs would be $4,416 higher for the coming year if you rented now instead of buying now.
Now, let's fold that into how home values might change over the next year...
Same Increase In Home Values As The Past Year (+10.9%)
The $300K home you did not purchase will now cost you $332,700. As such, you will have paid an extra $4,416 in rent and you'll now pay an extra $32,700 in a purchase price. Ouch. That makes it $37,116 more expensive to wait a year,.
This scenario is not necessarily very likely to occur as the 10.9% increase in our local median sales price was well above any long-term norm.
Same Increase In Home Values As The Average Of The Past Five Years (+5.8%)
The $300K home you did not purchase will now cost you $317,400. As such, you will have paid an extra $4,416 in rent and you'll now pay an extra $17,400 in a purchase price. Still relatively painful. That makes it $21,816 more expensive to wait a year.
Same Increase In Home Values As The Average Of The Past Ten Years (+3.2%)
The $300K home you did not purchase will now cost you $309,600. As such, you will have paid an extra $4,416 in rent and you'll now pay an extra $9,600 in a purchase price. That makes it $14,016 more expensive to wait a year.
No Change In Home Values
You pay the same ($300K) price for the same home a year from now and you just lose the $4,416 in extra housing costs that you paid by renting for a year.
Home Values Drop 1.5%
If home values drop 1.5% over the next year -- then you'd basically break even. You would pay $4,500 less in a purchase price after having paid $4,416 more in rent during the intervening year.
Home Values Drop 3% or 5% of 10%
If you get above a 1.5% decline in home values over the next year -- then, yes -- it would have made more sense to have waited a year after selling to buy your next house.
So, What Do You Conclude?
In the end, you'll need to decide which of these scenarios seems the most likely to occur in the next year...
- Home Values Increase 10.9% (buy now!)
- Home Values Increase 5.8% (buy now!)
- Home Values Increase 3.2% (buy now!)
- Home Values Do Not Change (buy now!)
- Home Values Decline 1.5% (buy or rent)
- Home Values Decline > 1.5% (rent)
But... don't forget... I'm leaving out a few factors that would probably cause most people to buy now (after selling) rather than waiting a year...
- mortgage interest rates are likely to go up, meaning it would cost more to finance your purchase price a year from now
- there are costs to moving twice
- it's no fun to move twice
- living in your rental won't be as enjoyable as living in a home you buy
Yes, this analysis had a lot of detail -- but there is plenty of nuance in any scenario where you are thinking about buying or renting.
Feel free to touch base with me if you want to think through or talk through your scenario and options.
