By Jane Bigelow and Fred Hibbert
A homebuyer asked recently whether now might be a good time to delay looking for a house. He reasoned that the red-hot real estate market is showing signs of cooling off a bit, so maybe he should wait it out for a while and see if prices level off or even drop in the months ahead.
It’s a reasonable question. But while the markets may shift, the answer to his question remains the same: Sitting on the sidelines until next year may cost rather than save you money in your search for a new home.
Waiting is a calculated risk because few, if any, pundits expect home prices to fall in the near term. The demand for housing continues to outstrip supply in Santa Clara County.
Equally important to potential homebuyers trying to predict the market is the fact that interest rates continue to rise and higher mortgage costs could offset any savings one might see if prices were to dip. Higher rates mean buyers run the risk of getting less home for their money or even being priced out of the market altogether.
Despite national job losses caused by hurricanes Katrina and Rita, the nation’s employment reports have been better than expected. Freddie Mac’s chief economist, Frank Nothaft, said economic growth is likely to accelerate in 2006. “That acceleration of growth, coupled with the specter of higher energy costs, will translate into higher long-term mortgage rates in the coming months,” he said.
A simple example can illustrate the effects of higher rates on your home mortgage. Say you’re looking for a $500,000 loan. Today’s mortgage rates are hovering around 6 percent for a 30-year loan. That would mean a monthly payment of $2,997 and annual payments totaling nearly $36,000; over the life of the loan, you would pay approximately $579,000 in interest.
Now let’s say that home prices dip 5 percent over the next year or so and you only borrow $475,000, but interest rates climb from 6 percent to 7 percent during that time. You would end up paying $3,060 per month in mortgage payments, about $2,000 more each year - and $83,000 more over the life of your loan.
There are a number of other reasons besides rising interest rates why savvy potential buyers should think about shopping for a home now. Traditionally, the winter season has fewer units on the market - and the sellers usually need to move and are thus motivated to make a sale. Buyers can use that to their advantage to get the best deal.
Similarly, winter usually sees far fewer buyers in the marketplace because people are less likely to move during these months. Families with school-age children prefer to relocate once school is out in June and before it starts up again in September, giving winter homebuyers an advantage because of less competition.
Our advice to potential buyers: When you’re making your holiday shopping list, don’t forget to put a new home on it. It could be the smartest purchase you make this year.
Bigelow and Hibbert manage Coldwell Banker Northern California’s two Los Altos offices. Bigelow’s office is located at 161 S. San Antonio Road, 941-7040 or jbigelow@cbnorcal.com. Hibbert’s office is located at 110 First St., 948-0456 or fhibbert@cbnorcal.com.
