The COVID-19 economy reshaped the housing market. Mortgage rates hit record lows in January 2021 before moving to today’s post-2008 highs, which are now approaching 7%. Home prices rose by nearly 17% in 2021, the fastest appreciation rate in history, as bidding wars and above-list sale prices sent values soaring across the country.
Today, however, the market is cooling so quickly that canceled contracts topped 15% two months in a row. Remote work uprooted millions of people who competed for sparse inventory as countless first-time investors took the plunge into buying property to rent or flip.
With so many variables changing so quickly, even seasoned real estate professionals had difficulty keeping up. It was all but inevitable that when the dust settled, many buyers would be left wondering if they made the right decision.
Tim Trainum, a real estate agent in Northern Virginia and owner of Tim Trainum Properties, has a client who was second-guessing his 2021 purchase of a townhouse. Like so many people who bought when the market was at its red-hot peak, he came to regret his timing after the market cooled and his home’s value started falling.
“He was concerned about the shifting market, having possibly purchased at a relative price high, and his home value being less now than when he purchased,” Trainum said. “I reminded him that his financial reasons for purchasing are just as durable today as they were months ago, and will very likely continue.”
That’s because the seemingly bad timing of his purchase allowed him to lock in long-term interest rates that were low enough to mitigate any short-term depreciation.
“First, he purchased at a 3.75% rate just before the climb to current rates, saving him over $10,000 per year in mortgage costs,” Trainum said. “Secondly, the loan amortization schedule at his 3.75% rate is markedly better than at the current 6.75%. At 3.75%, approximately 33% of his mortgage payment is principal, paying down his loan faster. This compares to today’s 6.75% rate of just 13% being paid toward principal.”
Others Regret Waiting Until Rates Rose, but at Least They Didn’t Wait Too Long
On the opposite side of the dilemma faced by Trainum’s client are the many buyers who waited out the high prices of the hot market only to be forced into buying after the Federal Reserve began raising rates in 2022.
They, too, should avoid beating themselves up. Although rates could fall in the near future, they also could keep rising or hold steady for months or years. As a result, potential sellers will likely put off listing their homes to avoid becoming buyers in such a challenging climate. That would reduce supply and send prices up even further while interest rates are still prohibitively high. That’s a double-whammy that anyone should be grateful to avoid.
“We are seeing sentiment to sell decline, which likely will keep the inventory low,” said Brandon Boudreau, CEO of the Birmingham real estate firm Rail District Ventures. “Sellers — as we see in the most recent Fannie Mae index — are less likely to list their homes, keeping supply tight. Values will stay level and purchasing will also remain difficult. If rates continue to rise, which is also a very real possibility, the cost to buy will continue to rise, and likely price people out of their desired market or buying a home altogether.”
Like so many people who joined the pandemic-era buying frenzy, Trainum’s client graduated from a lease to a mortgage. Even if he didn’t get the best upfront price, owning pays long-term dividends that are just as valuable as the lower interest rates he locked in.
“Previously as a renter, he lost a significant portion of his rent building his landlord’s equity rather than his own,” Trainum said. “This amounted to about $12,000 per year lost. Lastly, there’s the tax benefit of owning, which in his case is about $5,000 per year. Overall, that’s why I said that even considering current lower values and possibly even more price softening, his specific financial situation is overwhelmingly beneficial. Not to mention, he absolutely loves his home, which produces a utility benefit that cannot be quantified. Most consumer psychology is geared toward opportunity cost instead of opportunity benefit, even at the time one is receiving the benefits. Even for buyers now, there is always an opportunity benefit case to be considered.”
Most Buyers Can Take Steps To Improve Their Situations
Those who waited too long and got saddled with high interest rates always have the option of refinancing when rates eventually drop and money becomes cheaper to borrow. Instead of wallowing, they should spend the time between now and then boosting their credit to get the best rate when the time comes.
Those who regret buying when prices were at their peak, like Trainum’s client, have the power to build extra equity by paying more than their lender requires until the home’s value rises again.
“Every extra dollar that you can throw at that principal each month saves thousands of dollars of compound interest over 30 years,” said Tomas Satas, founder and CEO of Windy City HomeBuyer. “A popular trick is paying half of the payment every two weeks instead of monthly. This results in an extra payment each year.”
Either way, all buyers should look on the bright side. For most homeowners, the value of their properties will continue to rise no matter their interest rate or purchase price.
“Appreciation is still expected,” said Arzelia Williams of Ally Financial. “Though the current housing market is starting to cool, today’s homebuyers — and recent purchasers — can still expect some incremental appreciation on their purchase over a longer duration of time.”
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