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I get the question alot, “When’s a good time to buy real estate?” and frankly, my answer always is whenever you’re ready! This answer is usually met with a smirk which reads more like, “I was expecting you to say that since you make a living through purchase and sale!”
There is no way anyone can predict when the market has hit rock bottom. We see this evident from the news when the anchor comes on and says that the market is starting to rebound back and two days later we hit another low. Instead of paying so much attention to trying to time the market, best is to look at what variables you can control when purchasing a property. Let’s take a moment and review some of the variables.
Purchase/Sale Price Justification
Let’s say you’re a seller who is looking to move from their current home which is worth $200,000 but because of the market turn is going to sell for 180,000 which is a 10% drop. So instead of receiving $200,000 you received $180,000 minus closing costs and commissions. The $20,000 looks like a big loss but when you put it in perspective of your purchase, it looks like a better bet.
If you were purchasing a property that was within the same demographic/geographic location, the market conditions would prevail there too. It might prevail at a greater extent if it’s listed at a higher price point since slower markets usually hit higher price points much harder. Let’s use an example of purchase price $300,000. You had experienced a drop of 10% which would result in this property selling for $270,000 which means that you were able to save $30,000.
Now comparing this to $20,000 you lost in your own sale, you’re actually $10,000 ahead of it!
Now add a declining market into the equation, you could sell with a long closing, move into a rental unit for a short term lease and might even expand the margin you were expecting as your real gain ($10,000) to even more.
Cost of borrowing
As real estate prices start dropping, we usually see an increase in the interest rates. We recently saw the central bank drop interest rates by 0.50% but the banks came in and increased their interest rates basically eliminating the discounts that were being offered off prime.
On good credit, banks such as TD were offering their customers 0.6% discount off prime which was at 4.75%. So customers were getting an interest rate of 4.15%. The central banks dropped their interest rates and TD was the first to announce that it will be eliminating the interest rate discount instead adding a premium to it.
The prime rate currently being offered is 4.5% with a premium of +1% attached. So the best rate one can get in the current market is 5.5%.
What does this mean? Every 0.5% change in interest rate results in about $25,000 in affordability of mortgage. How can this be? Let’s do the math based on the following purchase prices and interest rates:
- $400,000 of purchase price, at 4.00% interest, Monthly payment of $2,199
- $375,000 of purchase price, at 4.50% interest, Monthly payment of $2,152
- $350,000 of purchase price, at 5.00% interest, Monthly payment of $2,095
- $325,000 of purchase price, at 5.50% interest, Monthly payment of $2,028
- $300,000 of purchase price, at 6.00% interest, Monthly payment of $1,951
These numbers are based upon purchasing the property with 20% down payment and amortization of 30 years. As you can see, the monthly payment is virtually the same but the difference between purchasing a property at 4% interest rate versus at 6% is $100,000 and difference of $250 per month.
All in all, it’s up to you as a buyer which option you would like to practice when purchasing a property. Should you sell your property now or should you wait? Should you buy now or wait?
The answer can only come from you!
If you’d like some assistance in review what your specifics are, please feel free to contact me directly.
The contributing factor,
Addy Saeed
Real Estate Sales Representative
Re/max Active Realty Inc., Brokerage
Website: www.HeyAddy.com
