Today let’s talk about people who want to sell their homes with the intentions of then purchasing more expensive ones–move-up sellers.
Recently we saw that many people are emerging from a state of negative equity and now finally have positive equity in their homes. In fact, over the last year, 3.2 million people have been freed from negative equity with an anticipated 1.9 million more over the course of this next year.
Now that people are feeling more secure, many are thinking of selling their homes and moving up to more expensive ones. However, because housing prices have gone up, there often is the mindset of sellers that they should wait longer in hopes that the prices will continue to rise.
The flaw in that plan is that they fail to recognize the difference between cost and price.
If they are strictly looking at price as a factor, they are not seeing the whole picture–and a very important picture at that.
First let’s refresh ourselves on where interest rates have been and are now:
Interest rates have risen over a full percentage point above where they were in January of this year. We did just recently see a little dip because of the Fed’s announcement about their bond-purchasing program, however, this is not expected to continue and rates should rise again.
Various experts such as Fannie Mae, Freddie Mac, the National Association of Realtors, and the Mortgage Bankers Association all have projected that we will see interest rates rise to around the 5% mark by this time next year. As well, in a recent Home Price Expectation survey, over 100 housing analysts believe that we will see a 5% increase in home values over the next year.
The chart highlights someone who is planning to sell his home right now for $240,000 and purchase a more expensive one for $360,000. If that person waits a year to do this (and home values rise 5% as is anticipated), the person will now be able to sell his home for $252,000 (a $12,000 gain from the last year), but the purchase price of the more expensive home will be $378,000 (a difference of $18,000 compared to last year).
So, what this seller may not realize is that by waiting a year, he did get to sell his house for $12,000 more, however the new home he wants to buy is now going to cost $18,000 more. So technically, if he were to buy now, he would essentially be making an additional $6,000 (the difference of $18,000 – $12,000).
This chart shows you that if this move-up seller purchased his more expensive home today for $360,000 at an interest rate of 4.5%, his monthly payment and insurance would be $1,824.07. If he waits a year and purchases for $378,000, his monthly payment will now be $2,029.19–a difference of $205.12 a month.
So, if he purchases now, he is ultimately saving over $2,400 a year, and over the life of the loan, he will save a total of… are you ready? $70,000. That’s some serious money.
Food for thought!