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The Waiting Game: An $80,000 Mistake

The Waiting Game: An $80,000 Mistake

We saw housing prices gain north of 12% along the Wasatch Front and the state of Utah in 2020. That’s remarkable given the circumstances. We know that Utah currently has the lowest unemployment rate in the country. We’re #2 in terms of in-migration, or families relocating to work in Utah. This accompanied with interest rates mind bogglingly low has created quite the demand for housing. 

I wanted to play out a scenario of a conversation I recently had with a past client who’s considering taking advantage of those rates to purchase a bigger home for his growing family.  Let’s call him Rick. Rick called because he told me he wanted to buy a bigger home, but thought that maybe waiting a year or so for inventory levels to increase would be his best option. Rick owns a home worth about $400k and is looking to sell that with a great equity position as he bought that home for roughly $300k 4 years ago. He’d be looking at buying a bigger home in the same area in the $600k range. 

I told Rick there are 2 things that would work against him by waiting a year. First of all, appreciation. Let’s assume appreciation will be 10% in 2021.That’s an easy number to do math with. In one year Rick’s home will be worth $440k. However the $600k home will now be worth $660k.  The waiting in this scenario will have cost Rick’s family $20,000 as 10% of $600k home over the course of a year, is more $20,000k more than the 10% of the $400k that Rick currently owns.

The second thing that works against Rick is our current monetary policy response to COVID. The government’s stimulus, the COVID relief, is an example of the government printing dollar bills to get into the hands of those in need. The printing of dollars bills comes at a cost, inflation. Inflation refers to a general increase in price levels due to an increase in the quantity of money; the growth of the money stock increases faster than the level of productivity in the economy.

In a nutshell, the government’s primary weapon to combat inflation is to increase interest rates to slow down the demand of goods and services and hedge against inflation. When the feds increase their rates, we will see an increase of 30 year mortgage interest rates begin to rise. In fact, we’ve seen a slight uptick in interest rates in the last 2 weeks. This is the market’s preparing for the inevitable. While I don’t expect that interest rates will increase more than 1% from last year to 2021. A 1% increase in mortgage rates impacts the cost of owning a home by, you guessed it, 10%. So now that $600k home would have the same house payment as if the home were priced at $660,000.  That’s $60,000 more than it would be if Rick were to make his move today. 

So in a nutshell the appreciation rate of 10% would cost Rick $20,000 and an increase in mortgage rates by only 1% would cost Rick and his family, $60,000.  The total cost of waiting is now $80,000.  So, Rick and his family made a good decision to go ahead and move forward today.

I love having these types of conversations with my clients. If you have questions like Rick, feel free to give us a call or send in an email.  Would love to dive-in on this, perhaps for our next blog.