Should you buy a house now or wait until prices crash?
Today, we are exploring the topic that is on everybody’s mind: Should you buy now given that prices are down and interest rates are still relatively low? Or, should you wait for a big crash and a big adjustment to prices? And, ultimately, is that going to be a better deal?
To help you answer this question, what we’ve done is teed up a couple of scenarios which include several hypothetical scenarios. Obviously, nobody knows what’s going to happen with prices and rates but hopefully this thought exercise will give you some context in order to make the best possible decision.
A Quick Disclaimer
We are not lenders. We are not quoting rates or products. Should you want specific numbers that apply to your situation, we are happy to connect you with our lending partners. So feel free to get in touch with us at the email addresses at the bottom of the page and we will happily connect you.
30-year Fixed-Rate Loans
To start, what we are going to be looking at today are 30-year fixed-rate loans. We’re also going to go through four different scenarios. The first scenario is if you buy a house now based on today’s rates. Next is if you wait for home values to go down 5%, but with a slight increase in interest rates. The third scenario is if you wait for home values to come down 20%, but with higher interest rates. Lastly, since all the first three scenarios are with a 20% down payment, the last scenario is if you wait for the market to come down 20%, but you can only then make a 10% down payment.
Scenario no. 1: If you buy now based on today's interest rates
Let’s begin with the first scenario, which is if you buy now.
For the first scenario, you’ve got a home that is worth $1.5 million, and you’re going to put 20% down. That means you’ve got an 80% loan, or $1.2 million. Also, in this scenario, the interest rate is at 5.75%. This interest rate is consistent with what many of our buyer clients are telling us they’re getting quoted these days.
Given all those figures mentioned above, the monthly payment for the first scenario would be $7,003. Keep in mind, though, that this payment only includes the principal and interest. Any taxes or insurance for any of these numbers today are not included.
- Principal and Interest: $7,003/month
- Home Value: $1.5M
- Down: 20%
- Loan: $1.2M at 80%
- Interest Rate: 5.75%
Scenario 2: If you wait for home prices to fall 5% and interest rates to rise
In this second scenario, the home value is going to be 5% lower than the original price. That means that the same $1.5 million home would now have a purchase price of $1.425 million. Furthermore, assuming an 80% loan-to-value, the new loan amount will be $1.14 million, as opposed to $1.2 million. However, if we wait for the prices to go down, chances are, the interest rates are also going to keep coming up. Therefore, let’s consider a six-and-a-half percent (6.5%) interest rate for this scenario. That is a 0.75% increase in interest rates from our first scenario.
Considering all those numbers, the monthly payment for the second scenario will be $7,205. That is $200 per month more compared to the monthly payment in the first scenario. So, even though you paid less for the house in terms of the purchase price, your monthly payment still increased.
- Principal and Interest: $7,205/month
- Home Value: $1.425M
- Down: 20%
- Loan: $1.14M at 80%
- Interest Rate: 6.5%
Scenario no. 3: If you wait for home values to go down 20%, interest rates increase
For the third scenario, we’re going to consider a 20% decrease in the home price. It’s a major drop in the market, in which prices go down 20%. That means that for the same home, originally priced at $1.5 million, we’re now looking at it being worth $1,200,000.
In addition, using the same loan amount of 80% for this scenario, just like in the first two scenarios, the new loan amount is going to be $960,000. Let’s also consider that during the time that we waited for the market has come down, the interest rate may have also increased further up to 7%. Considering all those conditions, the monthly payment for this scenario would be $6,387.
As you can see, this is a scenario where the monthly payment does come down substantially. In this case, it’s about $600 a month lower than in the first scenario.
However, one caveat to this scenario is that it falls under the conforming loan limit. This monthly payment may change depending on what type of loan you get: either a jumbo or a conforming loan. Generally speaking, jumbo loan products yield better pricing right now compared to conforming loans because of the debt-to-income requirements, reserve requirements, etc. so, you’re getting a better interest rate on those as opposed to a conforming loan. This is one of the reasons why you should make sure that you’re aware of the difference between the two. Consider also how that might affect your interest rate because, potentially, a conforming loan limit could be higher than a jumbo loan when you’re right there relative to the Alameda County limits.
- Principal and Interest: $6,387/month
- Home Value: $1.2M
- Down: 20%
- Loan: $960K at 80%
- Interest Rate: 7%
Scenario no. 4: If you wait for home values to go down 20%, interest rates increase, and your down payment shrinks.
Lastly, let’s look at the fourth scenario. In this scenario, the purchase price is going to be $1.2 million because of that 20% decrease in home value. If the market corrects that much, is reasonable to assume some volatility in stocks and other investments, presumably, are going to do the same. Let’s assume you’re down payment is tied up in the stock market and it looses value.
If this happens, chances are that you’ll also have less cash available and may reduce your down payment. Let’s pretend that you can now only put 10% down. That would create a loan amount would then be $1,080,000. In addition, assuming the interest rate holds at 7%, this now puts the monthly principal and interest for this scenario at $7,185.
- Principal and Interest: $7,185/month
- Home Value: $1.2M
- Down: down
- Loan: $1,080,000 at 90%
- Interest Rate: 7%
Buy now or wait—Key Takeaways
This is a really interesting exercise to go through, especially when you’re considering jumping into the market or sitting on the sideline. We’re hearing from a lot of buyers say things like, “Should I buy now even though interest rates have increased? Or, should I just wait for the market to come down?”
This simple exercise of looking at the figures for different scenarios will surely help give some clarity to those kinds of questions that buyers have right now. Assuming you are payment focused, it does make sense to buy now vs wait. After all, choosing to wait just to have a lower monthly payment and save some money isn’t exactly that easy because you need home values to come down substantially by 20%+, which may or may not happen. At the same time, you also need interest rates to not increase that much.
All of this is also assuming your downpayment is protected, and you can make that 20% down payment when the prices decrease substantially. As we know, in the last recession, a lot of people saw opportunities in the real estate market but just couldn’t access them because of a lack of liquidity. Therefore, ultimately, you really have to ask yourself—what are you buying? Are you buying an investment, or are you buying a home?
Weigh Things More Thoroughly
So it is really important to weigh or consider things more thoroughly. Are you looking to establish yourself in a neighborhood? Perhaps get into a school district or a better walk score? Whatever the case may be, you really have to decide what that’s worth to you today. Then, weigh that against those future hypothetical scenarios, such as what you think your earning power is going to be. Or, what you think your stock portfolio is going to do, which obviously, no one has a crystal ball.
Ultimately, when you look at the net of all of this, unless prices plummet, interest rates hold relatively low, and you have the cash to capitalize on that, that’s the scenario where you might want to wait. Otherwise, the numbers, suggest that you’d probably be better off buying that house now. At the end of the day, you’re the one who’s going to be making that payment. You’re the one who’s going to be living in the house. And that is still the most important thing you need to consider.
The reality is that real estate remains a really strong long-term investment. Ultimately, really ask yourself whether it’s a place you and your family want to be for a long time. If it is, then it’s still a great investment, as we’ve seen over and over again, historically speaking.
Again, keep in mind that we are talking about 30-year fixed mortgage products. We didn’t talk about Adjustable-Rate Mortgages (ARMs), or about interest only. We didn’t talk about other products that might even reduce payments further. There are still alternative negotiating strategies out there that you could employ to get a better deal. You can explore different strategies to get better terms to be included in the contract, and not just the price. We, together with some of our clients, actually used this strategy to get better terms out of a contract. You can check that out in our previous video here.
In other words, there are still a lot of levers you can pull and use to be successful right now. Ultimately, what we hope you understand from this example and thought exercise is that there are a lot of options. Waiting doesn’t necessarily mean you’re going to get a better price. You might get a lower purchase price, yes. But, you might be spending more in the end based on a monthly payment just to get that lower-valued home.
We hope our video and blog on "Should you buy now or wait for the crash?" has helped you.
Need more tips to help you succeed in the East Bay Real Estate Market?
Sign up for Two Minute Tuesday–market updates and stories about East Bay real estate (with the occasional puppy picture) from Hans and Kristin in two minutes, once a month.