The Federal Open Market Committee made the decision to stay rates during their meeting last week leaving the market breathing a slight sigh of relief. This relief may be short lived however as the FOMC made it clear that if they deemed it necessary, more interest rate increases are in our not-so-distant future. This leads to the question for home buyers and sellers, what now?
Homeownership is undoubtedly one of the largest expenses for the American family, but’s also one of the most rewarding aspects of American life. The freedom to choose where and how you live is entirely up to you, so what do you do when it’s just too expensive? What did our parents and their parents do when they thought it was too expensive?
You may have heard an elderly family member talk about a time when their interest rate was 16% and how they made ends meet to afford their home. Now granted, their salaries went a lot further and their homes were a lot less expensive, but still, what did they do to afford their homes?
When my parents got married they lived in a trailer in a trailer park. I never saw the trailer, never lived in it, but I heard stories about the trailer and how they afforded it as a young married couple. They worked hard and bought their first home, the home I was born in, and if I’m not mistaken had a 13% interest rate. Shortly after I was born they bought a piece of property and built their dream home, the home I grew up in. I still remember the home being under construction when I was 3 and it’s truly where my love for real estate began. If I’m not mistaken, they we’re paying nearly 11% interest on their mortgage at the time. I don’t know how much the home cost back then, but the thing I remember most about it was just how FAR it was from everything.
I don’t bring up this story to tell everyone to go move way outside of town to afford being a homeowner, it’s just what my parents did to afford having a home of their own. I bring it up because that was their solution and it helped them to afford to live how they wanted and provide a home for their family.
This very well could be the solution you’re looking for, but it’s just one of the solutions available to you as a buyer or seller in this market. You could wait it out, which my parents could have as well. When they purchased their first home rates were 13%, when they built they were 11% and they didn’t drop to an average of below 10% for 4 MORE YEARS. Since they purchased when they did they amassed the wealth of owning a home and we’re able to turn their investment into long term wealth of ownership.
I don’t know what rates are going to do in the future, but I know the cost of renting and how that affects you when it comes to long term wealth. Today if you pay $2,500 per month in rent, in 3 years you will have paid $90,000 towards someone else’s mortgage expenses. That’s 100% interest, you’re not seeing that money again and you have nothing to show for it.
Now take that same mortgage payment of $2,500 per month at 7% interest. In three years of paying $90,000 you will have paid down your mortgage and increased your net worth by over $11,000. If you can get the interest rate down to 5.75% you will increase that net worth to just over $17,000 in 3 years. This means you’re getting an 18% return on your money compared to getting a 0% return by renting for those same 3 years.
Again, I can’t speak to future rates, but I can speak to the damage done by waiting out the market. Good homes in our area have continued to increase in value despite high rates so the cost of homeownership by waiting out the market is actually making it less affordable. Hopefully rates will drop in the near future, but my concern for those waiting it out is that the market activity will shoot off like a rocket and create a buying frenzy due to the pent-up demand caused by rates being high for so long.
If you want to talk real estate, the market, or options available to you as a buyer you’re welcome to call or email me anytime. 980-250-2795 or Matt@briggsamerican.com. I would love to help you find a way to make homeownership more affordable and a possibility for you!