Are You a Frustrated Buyer?

I frequently hear from frustrated Realtors® about their frustrated buyers and how difficult it is to win a bid in this VERY, VERY HOT Sellers Market due to extremely low inventory and very low mortgage rates.  Every decent home, no matter where in the Bay Area is getting 10 to 20, sometimes 30 (or more) offers.  This is driving up the prices at an unbelievable pace.  I’ve researched the average sale price in March 2012 and compared it with March 2013 in 5 East Bay towns (Concord, Pleasant Hill, Walnut Creek, Lafayette/Moraga/Orinda and Danville).  The increase in average sales prices ranges from 17% to 35% when comparing March year to year.

Optimistic Buyers keep thinking these bidding wars will ease when more inventory hits the market this summer.  Don’t bet on it.  With every sale, there are 9 to 19 to 29 (or more) Buyers (they’re not losers), who didn’t win the bid and are waiting to pounce on the next home that comes to market.  Because of this pent up demand, it is virtually impossible for enough new housing inventory to ease this problem, this year, possibly even through the end of next year.

What is likely to ease the increase in prices is an increase in mortgage rates, WHICH WILL HAPPEN at some point.  Here are some numbers that should convince Buyers to “stick with it” and not wait until next year.  When mortgage rates go up by just 1 % the differences in dollars are significant.  And at some point in the next few years, mortgage rates will be back to their normal 6 to 7%.  However, don’t expect that to cause prices to start falling. That will likely only ease the bidding wars.

I’ll use an example of the purchase of a $600K home (4 bedroom, 2 bath, and 2,100sf in Concord).  Then I’ll compare it to purchasing the same home, potentially next year with a 1% increase in the mortgage rate.  (Note: that same house in Walnut Creek costs $795K, in Danville close to $1MM and in Lamorinda about $1.2MM, and the numbers become more dramatic.)

Purchase Amount – $600K

Loan Amount – $480K (assumes 20% down – FHA buyers – good luck)

 

Interest Rate in 2013 – 3.75%

Monthly Payment Principle/Interest – $2,222.91 ($2,947 P/I/T/I)

Annual Taxes and Insurance approximately – $8,700

Annual Principle/Interest Payments – $26,675

5 years total Principle/Interest payments – $133,377

5 year total payment towards the Principle – $47,627 (35% of your payments)

Qualifying Gross Income – $90,705

 

If Interest Rates rise in 2014 – 4.75%

Monthly Payment Principle/Interest – $2,503.91 ($3,228 P/I/T/I)

Annual Taxes and Insurance approximately – $8,700

Annual Principle/Interest Payments – $30,047

5 years total Principle/Interest payments – $150,234

5 year total payment towards the Principle – $40,807 (27% of your payments)

Qualifying Gross Income – $99,351

 

The Differences:

$8,646 more in Qualifying Annual Income is needed

$16,857 more in payments over 5 years

$6,820 LESS towards principle reduction

That 1% Increase in the Mortgage Interest Rate equals a $23,677 sway when you combine the cost of the higher mortgage payments and lower amount of principle reduction.  Said differently, that’s 23,000 reasons to stick with it until write the winning bid.  Oh, and if you can think of any way to write a Cash Offer (e.g. temporarily borrow against a 401K, borrow from a Family Member, rob a bank – no just kidding), you increase your chances dramatically of writing the WINNING BID.

Note; the numbers depicted were run past my preferred lender, Chuck Scoma of RPM Mortgage for accuracy.  You should talk with a lender to get specific numbers for your situation.

 

 

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