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Home Prices Pressured by Rising Rates

Don't Miss the Boat - Home Prices Continue to Rise

Don’t Miss the Boat – Home Prices Continue to Rise

Orange County, CA – The National Association of Realtors believes that rising interest rates are finally forcing hesitant buyers into the market. In May their Pending Home Sales Index (PHSI — based on home purchase contracts) reached the highest point since 2006. This might not seem newsworthy, except that the PHSI is an indicator that has proven predictive of future home sales. Transactions that are under contract generally close within 60 days, so if the May PHSI is higher than it has been in a long time, we can expect that the sales numbers for July will also be higher than we’ve seen in a long time. And the increased demand will push home prices higher.

According to the NAR’s chief economist, Lawrence Yun, “It appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before mortgage interest rates move higher.” In other words, people don’t want to pay more for a home than they have to, so they’re taking whatever they can get. Yun estimates that median home prices nationwide will rise 10% in 2013. Hotter markets, like Orange County, are rising at an even faster pace.

Home Prices Will Keep Rising

Of course, the natural response of a surge of buyers into the market is inevitable: home prices will go up even higher, and any price/rate sensitive buyers who do stay on the fence are likely to be shut out of the market.

Once new construction catches up the market will stabilize and so will home prices. But home prices will stabilize at a significantly higher average cost per home and potentially with a higher market for mortgage interest rates. That’s a double-whammy for people trying to buy a home. Let’s look at an example:

If you got a mortgage rate right now at 4.50% on a home loan amount of $400,000, you can expect to spend, over 30 years, about $729,600.  Wait a month, and you may well find yourself looking at a 4.75% rate on a $415,000 home. That means the same mortgage is going to cost you around $779,300. The decision to wait cost another $50,000 over the course of the loan.

How to Avoid The Spike in Home Prices

There are two ways that you can lock in today’s rates and not pay substantially more than you need to. The first way is to lock in your mortgage right now. Rates are rising, and may not be coming down anytime in the foreseeable future.  The other way is to pay cash. Even then, you’re still going to pay a bit more if you wait than if you don’t due to the lost opportunity cost

The lesson: move fast, and be happy you did. Anyone who doesn’t will be slapping themselves in a week or four.

Contact us to learn more about home price trends in your neck of the woods.

Scott Storace

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