Home Costs vs. Price

    Many home buyers searching for their first home often go on the internet to view available houses and see for themselves how their chosen market is doing. It is hard to gauge how a market is doing simply by looking to houses posted on Craigslist or Zillow, but you can sometimes glean some vital information from what is available. The danger in surfing the internet for potential homes is that buyers often become fixated on one thing: Price. Truth be told, while price is very important for a potential home buyer the thing they should really be concerned with is the actual cost of the house rather than the price.

    As a seller, you will be most concerned about “short term price” – where home values are headed over the next six months. As either a first-time or repeat buyer, you must not be concerned only about price but also about the “long term cost” of the home. These vastly different concepts can be the difference between tens of thousands of dollars in savings and having to claim bankruptcy. For sellers, there isn’t much to worry about beyond the six-month projection, but buyers must worry about the cost of a home 30 years from now.

    There are many factors that influence the “cost” of a home. Two of the major ones are the home’s appreciation over time and the interest rate at which a buyer can borrow the funds necessary to purchase their home. The rate at which these two factors can change is often referred to as “The Cost of Waiting.” Essentially, you look at the projected markets for both housing appreciation and the national mortgage interest rate. If homes continue to appreciate and the mortgage rate continues to steadily climb then the cost of waiting will be high, sometimes astronomically so.

    What will happen in 2015?

    A nationwide panel of over 100 economists, real estate experts, and investment and market strategists project that home values will appreciate by almost 4% by the end of 2015 (that’s an extra $4k per every $100k in home value).

    Additionally, Freddie Mac’s most recent Economic Commentary & Projections Table predicts that the 30-year fixed mortgage rate will climb to 4.5% by the end of 2015. These predictions are a mixture of the most optimistic and the most bearish projections averaged out over the panel of 100.

    What does this mean to a buyer?

    This can make a world of difference to a buyer when it comes to buying while the market is still affordable versus buying when both the interest rate and home value have appreciated beyond affordability. Here is a simple demonstration of what impact these projected changes would have on the mortgage payment of a home selling for approximately $250k today:

    Can you think of absolutely anything you could spend an extra $172.32 on each month? Dinner and a movie a couple of times each month for date night? While you don’t need us to tell you what to do with your extra money, the difference between price and cost is plain to see. Focus on cost more than price and you will set yourself up for more success in the future and you will be able to help anyone understand home cost vs. price.

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