The COVID-19 economy has reshaped the housing market. Mortgage rates reached record lows in January 2021 before moving to today’s post-2008 highs, which are now approaching 7%. Home prices rose nearly 17% in 2021, the fastest rate of appreciation in history, as bidding wars and above-list sale prices drove values up across the country.
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Now, however, the market is cooling so rapidly that canceled contracts have exceeded 15% two months in a row. Remote work has uprooted millions of people who were fighting over sparse inventory as countless new investors rushed to buy property to rent or resell.
With so many variables changing so quickly, even seasoned real estate professionals had a hard time keeping up. It was almost inevitable that when the dust settled, many buyers would wonder if they had made the right decision.
While their concerns are certainly justified, most experts believe that time will prove that their investments were sound decisions.
Tim Trainum, a Northern Virginia real estate agent and owner of Tim Trainum Properties, has a client who questioned his purchase of a townhouse in 2021. Like so many people who bought when the market was at its peak , he came to regret his timing after the market cooled and the value of his home began to fall.
“He was concerned about market developments, having perhaps bought at a high relative price, and the value of his home being lower than it was when it was purchased,” Trainum said. “I reminded him that his financial reasons for buying are just as enduring today as they were months ago, and will most likely continue.”
Indeed, the seemingly bad timing of its purchase allowed it to lock in long-term interest rates low enough to mitigate any short-term depreciation.
“First, he bought at 3.75% just before the rise to current rates, saving him more than $10,000 a year in mortgage costs,” Trainum said. “Second, the loan amortization schedule at its 3.75% rate is significantly better than at the current rate of 6.75%. At 3.75%, about 33% of its mortgage payment is principal, repaying its loan faster. This compares to the current rate of 6.75% of only 13% paid for the principal.”
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Others regret waiting until rates rise, but at least they didn’t wait too long
On the other side of the dilemma facing the Trainum client are the many buyers who waited for high warm market prices only to be forced to buy after the Federal Reserve began raising rates in 2022.
They too should avoid blaming themselves. Although rates may fall in the near future, they could also continue to rise or remain stable for months or years. As a result, potential sellers will likely delay putting their homes up for sale to avoid becoming buyers in such a difficult climate. This would reduce supply and further drive up prices while interest rates are still prohibitive. It’s a double whammy that everyone should be grateful to avoid.
“We are seeing a drop in selling sentiment which will likely keep inventory low,” said Brandon Boudreau, CEO of Birmingham property firm Rail District Ventures. “Sellers – as we see in the latest Fannie Mae index – are less likely to list their homes, keeping supply tight. Values will remain stable and buying will also remain difficult. If rates continue to rise, which is also a very real possibility, the cost of buying will continue to rise and will likely drive people away from the desired market or buy a home.
Like so many who joined the pandemic-era buying frenzy, Trainum’s client went from a lease to a mortgage. Even if he didn’t get the best initial price, the possession pays long-term dividends that are just as valuable as the lower interest rates he has locked in.
“Before, as a tenant, he lost a significant portion of his rent by building his landlord’s equity rather than his own,” Trainum said. “That was about $12,000 a year lost. Finally, there’s the tax benefit of owning, which in his case is about $5,000 a year. All in all, that’s why I said that even taking into account the current lower values and perhaps even more price declines, its specific financial situation is extremely beneficial. Not to mention he absolutely loves his home, which produces a utilitarian benefit that cannot be quantified. Much of consumer psychology focuses on opportunity cost rather than opportunity benefit, even while receiving the benefits. Even for buyers now, there is always a case of opportunity advantage to consider.
Most buyers can take steps to improve their situation
Those who waited too long and found themselves stuck with high interest rates still have the option of refinancing when rates eventually drop and money becomes cheaper to borrow. Instead of wallowing, they should spend the time between now and boosting their credit to get the best rate when the time comes.
Those who regret buying when prices were at their peak, like the Trainum client, have the power to build up additional equity by paying more than their lender requires until the home’s value rises to new.
“Every extra dollar you can spend on this principal each month saves thousands of dollars in compound interest over 30 years,” said Tomas Satas, Founder and CEO of Windy City HomeBuyer. “A popular trick is to pay half the payment every two weeks instead of every month. This translates into an additional payment each year.
Either way, all buyers should look on the bright side. For most homeowners, the value of their properties will continue to rise regardless of their interest rate or purchase price.
“Appreciation is still expected,” said Arzelia Williams of Ally Financial. “Although the current housing market is beginning to cool down, buyers today – and recent buyers – can still expect gradual appreciation in their purchase over a longer period of time.”
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This article originally appeared on GOBankingRates.com: Experts: Why You Shouldn’t Regret Buying a Home
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