Bank of America has made short sales a priority in handling distressed properties. In a memo to the Distressed Property Institute, the bank let us know that they’re pushing heavily for agents to be “proactive” and notify the bank as soon as possible when they interact with a homeowner to list a potential short sale. Let’s get out there and help these homeowers.
A frequent scenario that I seem to be hearing lately from potential buyers is that they will wait until the market hits bottom before they purchase. How they will determine when the market hits bottom is somewhat beyond me as the only way to know for sure is by observing that prices are rising. At any rate, I did a bit of financial analysis to see what the cost of waiting would be if interest rates were to rise from their current historically low level of 4.5% to a higher but still historically low level of 6%.
Humor me if you will and let’s just do a little math to see what the outcome would be. Let’s assume that John Doe sees a home priced in today’s market at $300,000.00. Said home is really something and priced at the best price in years. If John were to purchase this beauty today with zero dollars down at a current 30 year interest rate of 4.5%, his payment for principal and interest would be $1,520.00 per month. Yes, I know that zero down is not realistic but let’s just assume it is for illustrative purposes. Let’s further assume that John thinks the market will drop another 10% by next year so he decides to wait it out.
Well, next year rolls around and the market has been stable to slightly down, but more importantly, interests rates have risen to 6%. Among other reasons, the primary reason for the interest rate increase is because the recession has eased and real estate in many parts of the country has improved. Now John wants a home but his dream home is gone. Nonetheless, John finds another home which he really likes and can buy for $300,000.00, so he makes the commitment.
Next, John sits down with his mortgage advisor and finds out that his new payment at 6% will be $1,798.65 per month for principal and interest. John is surprised that his new payment is $278.65 per month more than it would have been last year for the same priced home. He is even more surprised when his mortgage advisor tells him that to get the same payment as he could have last year, the home he is purchasing today would have to be $46,000.00 lower in price. John does another calculation and sees that his new home will cost him $3,343.80 more per year for each year that he keeps the home. And John is conservative so he believes that he will be in his new home for at least five years, and in all probability, much longer. In sum, John notes that waiting has cost him at additional $46,000.00 in loss of purchasing power plus at least five years of higher payments for a total cost of $62,719.00. Happily, John tells his wife that they will get the new home but the “Dream Cruise” is on hold.
Is this scenario a real possibility? You decide and let me know. Many people that I have talked with recently think this scenario is more likely than the possibility of lower interest rates and/or lower prices. Thanks for reading. As always, your comments are welcome.
Gregg Munson
