The Clash wrote a song decades ago that is still relevant today, and not just about our relationships.
Should I stay or should I go now
If I go it could be trouble, if I stay it could be double,
Come on and let me know, should I stay or should I go.
So substitute hold for stay, and buy for go, and let me tell you how holding for lower interest rates next year can cost you more money, maybe even double.
The decision to buy or sell a house can be just as complex as deciding on the future of a relationship. But if it’s just one thing holding you back, high interest rates, it’s probably time to go.
Why? Because home prices tend to increase when interest rates drop, and here in Northwest Michigan prices are already up 6% for the first half of 2023, and 8% in Grand Traverse County, home of Traverse City -- and that is with interest rates at the highest point in more than 20 years.
The National Association of Realtors predicted that interest rates on 30-year fixed mortgages, swill fall to around 6% in 2024, and subsequently home sales will increase by 15%. Other predictions range from 5.6% to 6.5%. A drop in interest rates has historically brought more buyers, and coupled with not enough homes to go around, means prices will continue to rise.
The important thing to know is that several lenders, starving for business, are offering free or low cost refinancing in the future. So you can buy now at today’s prices, and refinance later at a lower rate. In effect you get to have your cake and eat it too.
If you are ready to dive into the math and the assumptions, put on the Clash, and read on, because this is going to be a heavy lift. But first, a caveat: I’ve rewritten this article several times, as interest rates and predictions keep changing, so my numbers may be out of date by the time you read this. If I was a computer wizard, I would insert a formula that would allow you to run your own calculations, but I’m not. However, the concepts remains the same.
Home affordability is determined by lenders based on how much you can afford to pay each month as a percentage of your overall income. So a lower interest rate means you can afford a higher priced house. But the flip side is that property, especially in the Traverse City region, consistently appreciates. So odds are that next year that same house is going to cost you more money.
Forbes “Mortgage Rate Forecast for 2023” quotes five experts, of which four still predict rates to start to fall at the end of the year and decline even more in 2024. One predicts interest rates to hover or increase slightly into early 2024.
The more important consensus, is that most expect home prices to follow the historical trend and rise when interest rates fall. That will also boost sales and competition and bring more homes on the market. The National Association of Realtors predicts home sales to increase 15% in 2024.
If you are among the people who plan to wait for prices to fall, be prepared to be priced out of the market. Since 2018, that average-priced home in Grand Traverse County has increased 78%, or an average of 13 % a year. I don’t expect that blistering rate to continue, but I don’t expect it drop below more normal increases in the 4-5% range either. Likely somewhere between 6-10%.
Here are some things to consider:
- Historically home appreciation in the Grand Traverse region outpaces state and national trends. Expect that continue as the region’s culture, fresh water, agriculture and protection from major weather events continues to attract new residents, second-home buyers, and investors.
- The Wall Street Journal reported recently that “The Fall in Home Prices May Be Over,” noting that nationally. despite a drop earlier in the year, average home prices were once again rising because of a shortage of inventory.
- Locally there was no drop. Average prices are up 6% in the five county region for the first half of 2023. Prices jumped again in August and early September, but they tend to tail off a bit at the end of fall as no one wants to hang onto a house through winter.
- In 2019, average home sale prices in Grand Traverse County increased 6.6% over 2018. That was followed by increases of 12.5% in 2020; 19% in 2021; 15.3% in 2022, and 8% for the first half of 2023.
- So the average home that you purchased in Grand Traverse for $280,600 in 2018 would cost you $499,700 today.
*Home price averages taken from MLS data excluding time shares and fractional ownership.
Bottom Line: The population and demand for housing in the region continues to grow while the actual housing stock continues to lag. This basic law of supply and demand means prices will continue to rise.
So let’s make some assumptions, do the math, and see why waiting may be more trouble for John and Mary, our fictional couple, than moving now.
Mary has been scanning Realtor.com, and found a nice house listed for $395,000, which just happens to be the median price of a home sold in Grand Traverse County for 2023 (up $30,000 compared to 2022).
She was quoted an interest rate of 7% for a 30-year fixed when she closes in 45 days (her lender’s an optimist). She wants to buy now.
But John, having read NAR’s prediction of 6% interest rates in 2024, wants to wait.
Mary points out that Core Logic predicts home prices to increase 4.5% nationally over the next year. Then she reads a local Realtor’s website that tells her Grand Traverse County prices are already up 8% this year and he expects them to continue to appreciate at 6% or more, barring an economic meltdown.
John reluctantly agrees and they buy the $395,000 house today and make a 10% down payment ($39,500). Their monthly interest and principal payment will be $2,365. (We are not including taxes, PMI, or insurance)
Had they waited until next year and sales prices jumped 5%, that same house would cost $414,750. Their down payment just jumped $1,975 to $41,475. Monthly interest and principal at 6% dropped to $2,238. So they would save $127 a month. But lose $19,750 in equity.
If prices rise even more in 2024, say by 7 %, the cost of that same home is now $422,650. That means more money down, a loss of $27,650 in equity, and a monthly payment of $2,280. So they are still saving $80 a month by waiting. (that savings disappears at 8% price increase)
But John and Mary discovered they could have their cake and eat it too. They took advantage of one of lenders who are currently offering loans with the option to refinance it with zero or little cost in the future. Now their monthly payment has dropped to $2,131 at 6% interest. Plus they have still gained almost $20,000 in equity. Or more.
Of course they could wait another year and hope rates drop even further, closer to 5 %. If their home appreciates by 10 % over two years, they can now also get rid of the mortgage insurance when they refinance.
When investing in the stock market, there is always the disclaimer that past performance is no guarantee of future returns. This is no different. And you have to currently be ready and able to afford a purchase. There may be a lot of reasons not to make a move now, but in our opinion, interest rates are not it.
Bottom line: Don’t let high interest rates hold you back. Our advice, if you are ready and able, talk to your financial advisors and lenders about future refinance options, and consider buying the house you want and can afford now.
And as always, if you want to talk, or have me run some numbers for you, just reach out by phone, text, or email or leave a comment on this website.
