When is the Best Time to Buy a Home?

Buying a home is never a small decision.mortgage changes to occur between now and 6
While there may be upgrades and more30/2010.
expensive homes in the future, that first homeScenario 1: Home Prices Down 2%, Mortgage
purchase seems bigger. It is a major rite ofRates Increase 1.0%
passage to move from renting to owning yourThis scenario is counterintuitive. Even if home
own home. It is a moderately confusing process,prices dip and you accidentally buy "too early," the
but there is one massive risk that faces first timereality is that mortgage rates are rising.
buyers: Your friends, family, and co-workers.- Purchasing In______________12/01
Mention that you are buying your first home and09___02/01/10___04/01/10__06/01/10
anyone within earshot will immediately have an- Initial Equity (Gain/Lost)______ $ -
opinion. Like anything in life, sorting out the good________$ 1,664____$ 3,317___$ 4,959
advice from the bad advice is difficult. We have- Incremental Interest Saved____$ 7,285____$
had unprecedented change in the housing and4,827____$ 2,399____$ -
lending markets in the past few years. Most, if- Total Amount Saved_________ $
not all, of the advice from a co-worker who7,285____$ 6,491____$ 5,716____$ 4,959
bought three years ago is outdated. It is simply aUnder this model, over five years, it still makes
different market. A common question these dayssense to buy sooner rather than later because
is "When is the best time to buy?" This is not anthe cumulative interest cost outweighs the
opinion question, although opinions arecorresponding temporary loss of equity.
unfortunately what you'll hear. There are a lot ofScenario 2: Home Prices Down 1%, Mortgage
variables that go into deciding when to buy yourRates Increase 0.75%
home. Let's presume for a minute that you are- Purchasing In______________12/01
going to use the $8,000 first time home buyer09___02/01/10___04/01/10___06/01/10
tax credit on a purchase.- Initial Equity (Gain/Lost)_______$ -
This then means that you are going to agree to_______$ 833_____$ 1,663_____$ 2,490
the price of a contract between now and April- Incremental Interest Saved_____$ 7,795___$
30, 2010. It also means that you will be closing5,185____$ 2,586_____$ -
and getting your mortgage rate between now- Total Amount Saved__________ $
and June 30, 2010.7,795___$ 6,017____$ 4,249_____$ 2,490
Let's assume that you will buy sometimeAgain, the small dip in home prices as compared
between now and June of 2010 and see when isto the large jump in cumulative interest makes
the best time to buy a home.buying now better than buying later.
For the purposes of this comparison, I am onlyScenario 3: Home Prices Unchanged, Mortgage
going to look at the biggest pieces of this decision:Rates Increase 0.5%
- Changes in home values- Purchasing In_______________12/01
- Changes in mortgage rates09___02/01/10___04/01/10___06/01/10
Home Value Predictions: Nearly everyone believes- Initial Equity (Gain/Lost)_________ $ -
that home values will change. The data points_______$ - ________$ - ________$ -
towards home prices that have increased during- Incremental Interest Saved_______$
2009 and a supply shortage that should support4,149____$ 2,767____$ 1,384_____$ -
higher prices through next year. There are some- Total Amount Saved____________$
that say they could fall. We will test both4,149____$ 2,767_____$ 1,384____$ -
examples.This isolates the cost of a mortgage rate that
Mortgage Rate Predictions: The main reason thatincreases.5%. On a $200,000 loan over five years,
mortgage rates are so low right now is that theyit costs a little more than $4,000 to buy later
are being subsidized by a $1.25T program fromeven if the home prices are identical.
the Federal Reserve. This will end in March 2010Scenario 4: Home Prices Up 2%, Mortgage Rates
and all indications are that rates should generallyIncrease 0.5%
be higher than they are today at roughly 5%.- Purchasing In_______________12/01
We will look at four scenarios, all compared over09___02/01/10___04/01/10___06/01/10
5 years:- Initial Equity (Gain/Lost)________$
- Home Prices Down 2%, Mortgage Rates5,042____$ 3,372____$ 1,692______$ -
Increase 1.0%- Incremental Interest Saved______$
- Home Prices Down 1%, Mortgage Rates5,108____$ 3,428____$ 1,725______$ -
Increase 0.75%- Total Amount Saved___________$
- Home Prices Unchanged, Mortgage Rates10,150____$ 6,800___$ 3,417______ $ -
Increase 0.5%This is the compelling "buy now" equation. Clearly,
- Home Prices Up 2%, Mortgage Rates Increaseif both home prices and mortgage rates head
0.5%higher, it is significantly cheaper to buy today.
We will look at the best time to buy as a productWe can learn very little from Scenarios 3 and 4.
of any equity gained/lost based on the time thatThose are the reasons presented by the people
someone purchases. We also add in the total costwho have the opinion that you should buy now. It
of the mortgage by using the cumulative interestis for that other group that we look at Scenarios
as a measure of how expensive the loan is.1 and 2.
These numbers will all assume a $250,000 homeThe possible decay in home values is the main
and $200,000 mortgage. We ignore mortgagereason that people can buy would choose not to
insurance and property taxes because they don'tbuy today. When you look at the numbers, you
vary based on the date of closing. We assumeget a clearer picture that mortgage rates
that any changes to property values occuroutweigh home values in discussions of when is
between now and 4/30/2010 as that would bethe best time to buy a home.
the last date of a contract. We assume any