The article below, I called “The Paralysis of Analysis” was originally prepared by me in 2014. I came across that on my desk top and thought it was especially appropriate for this year again. The information is the same but let me give you updated numbers to work with. The average LIST price for a townhome in 2015 was 340,587 and in 2016 it was 351,375. Year over year that was a 10,788 difference and a difference of 44,141 since when this article was first written! The townhome market reached its bottom in 2009 and has seen appreciation EVERY year since then. It is still not back to the high of 2005 so there is still plenty of room and this time the market is built on solid foundation and not on creative and liberal financing. Rates have now gone up and I think it is pretty safe to say they are going to again this year. If you have been sitting on the fence and scared to buy you are costing yourself money and more importantly your purchase power is being eroded greatly. That is just my opinion of course but look at the numbers for yourself and see if you do not agree. If you do then give us a call and come on in and let’s talk about how to proceed. We can educate you in the process and give you a level of confidence in your knowledge on how to make a sound decision. Visit our website to see this data, as well as a rent vs. buy comparison and other helpful information.
What the “Paralysis of Analysis” Cost You over 1 Year!!
If you started looking to buy your first home in January of 2013 but did not buy for what ever reason here is what it cost you. ( I will use real numbers for Centreville Virginia in this example) The average list price of a townhome for sale in Centreville was $307,234 in January 2013 and that increased to $334,109 by December 2013, so right off the bat you are down $26, 875. By that I mean the home you could have bought in January will cost you $26,875 more! If you were going to put 20% down that means you will now be required to put down $5,375 more or else switch to a more expensive but lower money down loan such as FHA. We started the year with rates hovering around 3.75% and now they are a solid 4.5%. (conventional 30 year fixed).
So using simple math a $100,000 mortgage would cost you $45 a month more or a $300,000 mortgage would cost you $135 a month more!! Now you can look at that a couple different ways. The first way is that if you divide the $135 by the factor of 5.07 (4.5%IR) for each $1000 of loan, you will have lost $29,220 of purchase power! So if your budget allowed you to spend X number of dollars a month on mortgage and you were looking at a $300,000 mortgage then you can now only purchase a home that is $29,222 less than what you looked at in January or in this case $270,778! Since that home is now priced $334,109 you will be precluded from buying anything anywhere near what you were looking at a year ago unless you pay a substantial amount more a month or over the life of the loan.
The other way to look at it, assuming you can come up with the additional cash to put down and assuming the newer more stringent lending regulations allow you to keep the same loan is to say that it will just cost you another $135 a month. In other words $1620 a year or over 30 years, the life of the loan, another $48,600. BUT you still have to factor in the additional cost of the $26, 875 which is an additional $135.87 a month (26.8 x 5.07, 4.5% rate factor) so you can virtually double those numbers!! That is huge!! Now, this is a simplistic scenario but the numbers are real. It does not factor in the savings that come from deducting the additional interest but it is a great illustration of the cost of waiting for a first time buyer.
If you are a move up buyer we can look at those costs as well because you may be thinking that what you lose on one hand you make up on your own home going up in value. So, for this example, let’s say you own a townhome at the average list value of $307, 234 in January that is now worth $334,109. You gained 8.75% or $26,875 in appreciation for the year. The single family homes for sale in January that you were looking at were priced at 600,000 and they increased by 6.4% over the year and now are selling for $638,400 or $38,400 higher. In other words even though you increased at a higher percentage the more expensive home went up more in value so it will now cost you 11,525 more. You lost $11,525 worth of ground. That will cost you about $58.30 a month additional if you finance that difference at todays rate.
In addition, you will have to look at the difference the interest rate makes. Lets say you were going to put down 20% on a 600,000 sale price so your loan amount would be $480,000. That comes to a PI of $2217 a month. For the sake of argument, lets keep the exact same loan amount changing only the interest rate (we already told you what the cost of the difference in appreciation would be). At 4.5% interest a $480,000 loan would be $2433 PI a month or $216 a month higher. Apply the same math from above on the town home buyer and you have lost an additional $42,600 in purchase power PLUS the $11,525 for a total $54,125 of purchase power. If you chose to just pay the additional cost per month it would translate to increase of $3,291 per year or $98,743 over the 30 year life of the loan. Big numbers and enough to make a big difference in what you are able to buy in todays market!
If buying is in your future you need to look long and hard at what the cost of waiting truly is. The above examples are real life and yes, there are many considerations or options out there, BUT, if you are putting off buying while trying to save additional down payment you are losing ground. You could get shut out of the market. If you are fearful that the turn around will not sustain itself then you need to look at the track record since the turnaround in 2009. We are not back to where we were in 2005 but we are headed there. The big difference is that the market is building on solid foundation this time not speculation and sales to those that should not have bought in the first place. We will continue to see rates rise both because the FED will do so and because loan guidelines will dictate it independently of the FED. We will see loan guidelines continue to constrict making homeownership more difficult while making the market safer. We will see appreciation as the economy continues to lurch to it’s feet. If home buying is in your future for one reason or another do not let the paralysis of analysis cause you lose further ground or worse, shut you out of the market. Give us a call today and we can give you further insight into todays market!
The Math: Paralysis of Analysis in Buying
AVG List price of a townhome in Centreville in 2012: 307,234
AVG List Price of a townhome in Centreville in 2013: 334,109
$26,875 Additional cost to buy the same house a year later
Percent of appreciation: 8.75%
AVG List Price of a single family home in Centreville 2012: 522.996
AVG List Price of a single family home in Centreville 2013: 556,494
Percent of appreciation: 6.45%
Rate Factor for 4.5% Interest Rate: 5.07
Rate Factor for 3.75% Interest Rate: 4.62
100,000 mortgage at 3.75% equals a PI (Principal & Interest) 362 3.62 per 1000
100,000 mortgage at 4.5% equals a PI (Principal & Interest) 507 5.07 per 1000
300,000 mortgage difference equals 45 X 3 135
135 / 5.07 = 26.627 X 1000 = 26,627 LOST PURCHASING POWER
The Math: Paralysis of Analysis in buying and selling
600,000 home on Jan 1, 2013
6.45% (2013 Appreciation Factor for Centreville Single Family Homes) See above
600,000 X 6.45% = 638,700 ( Decembers 2013 Pricing for the same house)
638,700 – 600,000 = 38,700 Lost Purchasing Power
26,875 is the amount a 307,234 town home appreciated in 2013
38,700 – 26,875 = 11,825 NET purchasing power lost to paralysis of analysis
11,825 X 5.07 = 59.95 a month in additional payment or buy 11,825 less house
600,000 – 20% = 480,000 loan amount
480,000 X 462 rate factor = 2217 PI
480,000 X 507 rate factor = 2433 PI
Difference $216 a month
216 / 5.07 = 42,600 lost purchasing power
42,600 + 11,825 = $54,425 TOTAL LOST PURCHASING POWER