Pat Riley, President and Chief Operating Officer of Allen Tate Realtors, wrote a very informative blog on the difference between cost and price when buying a home. I thought I would pass along it along to you, enjoy!
It makes sense to try to buy a home when you believe it has hit the rock bottom price. I totally get that. In some areas where there is additional depreciation to be played out, waiting can be the right move to make. But overall, I believe that waiting is not a good financial decision. As a buyer, unless you are paying cash, you need to be looking at Cost not Price.
What is the difference between cost and price? The cost of a home is made up of the interest rate that is paid as well as price.
The 4th quarter housing research report of last year stated that sales in America rose 15.4 percent over the 3rd quarter. With each passing day, the stability of housing prices is taking shape. As soon as Realtors, appraisers, bankers, buyers and sellers all understand the new value system then normalcy can begin take hold. Someone who delayed buying a house because of the price might find that prices have actually not decreased. They’ve simply re-adjusted to the new normal. But as Paul Harvey always said, “Now … the rest of the story.”
And the rest of the story is centered around interest rates. Freddie Mac reported that 5.05 percent 30 year fixed is the highest level since April 2010. The equation then is that prices are stabilizing and interest rates have gone up steadily during the past 90 days.
What that means is that, even though prices are staying the same or being compacted more, it still costs more. As the parade marched by the past 90 days this is what happened:
Today, on a $340,000 mortgage the monthly payment would be $ 1,835.60. In November 2010 that same mortgage would have required a $ 1,656.72 monthly payment. That gives us a difference in payments per month of $178.88 and a yearly difference of $2,146.56. The difference in over the 30 year life of the mortgage $64,396.80
That’s a lot of numbers. So what exactly is it that I’m saying?
I am saying that, even if prices fall another 10 to 12 percent, if you desire a move up, down or over and have equity and credit THE COST OF A HOME WILL INCREASE if interest rates go up another 1 percent.
Costs later this year are more of a concern than price. Price and Cost are part of this parade!
By Pat Riley