While many prospective buyers remain “on the fence” concerned housing prices may fall further or while they remain focused on squeezing the sellers to perhaps unrealistic valuations, it may be a good idea to highlight the small benefit in a reduced price versus the potentially high risk that mortgage rates will increase and the long term cost of those higher rates. While rates are low now, we all expect that they will eventually climb back to more normal and historical levels, causing some buyers to have qualification issues and all buyers to pay more for their homes over the long run.
Unfortunately, many buyers view the cost of home ownership based exclusively on the price they pay for the property, but a more accurate way to judge the cost is how much they will pay PLUS the cost of the interest paid over the term of the loan.
To illustrate this point, assume that a buyer is going to purchase a $250,000 home with a $200,000 loan. The interest rate is 4 percent. Many buyers are worried about prices falling further. If the prices were to decrease another 5 percent, that means that the property would decline in value by $12,500. A 10% decrease, which is highly unlikely would result in $25,000 decrease in value.
However, If interest rates increase from 4 percent to 6 percent, the cost of waiting would be extremely high. Over the life of a 30-year loan, the borrower will pay $87,937 more in additional interest. The cost of owning that home costs a whopping $75,437 more than the apparent $12,500 they might have saved by buying at the “bottom of the market” even if they were lucky enough go guess that correctly.
Don’t let your buyers miss out on opportunities for the home of their dreams simply because they may not be seeing the real picture clearly.