Buyer Considerations – The Incredible Shrinking Home
Warren Buffet is called “The Oracle of Omaha” because of his incredible track record as one of the best investors in the world. Last year, Buffet stated that he would buy a couple hundred thousand single-family homes if it were practical. His statement was based on the fact that housing affordability was the cheapest it had been in over 25 years. But, things have changed quickly. Since making that statement, the real estate market nationwide has seen double-digit appreciation. Most housing economists are predicting more of the same for the coming year. Although this is good for buyers who purchased last year, it signals trouble for people that have waited to buy for two reasons:
1. Rapid appreciation is making housing much less affordable – Consider the following example; At present, the average national home price is about $240,000. Last year, the same home would have cost only $215,000, but now with 12% appreciation, it has increased in cost to $240,000. In other words, a buyer qualifying for the same mortgage, has to settle for 12% less of a home because he or she waited until this year to buy.
2. Rising mortgage rates are also reducing housing affordability – Mortgage rates have increased over 1% since the beginning of this year. For every 1% increase in mortgage rates, housing prices must fall by about 10% for the mortgage payment to be the same.
In the past year alone, a home buyer obtaining a mortgage has seen their purchasing power drop by over 20% because of double-digit appreciation and rising interest rates. And, it’s getting worse. Most experts are predicting housing prices will increase again by double-digits, and interests rates will continue to rise during the coming year. The conclusion: People wishing to get maximum benefits from purchasing real estate are encouraged to purchase as quickly as possible, or suffer the consequences of buying less of a home.