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The Costs Of Waiting To Buy In A Rising Market
"I want to wait until the market dips before I buy."
"We could probably buy now, but we want to save up more for a down payment."
In light of the appreciating real estate market being driven by low inventory these past few years, I've heard those words quite a bit this year. Some people are nervous that the market is overheating, others are trying to time the market, and others feel like they need a large down payment before they're ready to buy.
While I totally understand those who are still saving up for a down payment, other would-be home buyers who are currently on the sidelines could be making a very costly mistake by waiting.
In another blog post, I talked about the housing forecast for 2018, which according to industry analysts and economists, shows no signs of slowing down.
In An Appreciating Market, Waiting To Buy Is A Double-Whammy
As home values appreciate, buyers-in-waiting are hit with a one-two punch of higher prices and the missed opportunity cost of rising equity.
Let's take a look at an example.
At the beginning of 2017, let's say the average home sold for $700,000. But if the market appreciated 5% that year, that same home would now cost $735,000. Not only does the home cost $35,000 more than it did a year ago, but that $35,000 in appreciation could have gone in somebody's pocket in the form of equity.
For those looking to save up more for a down payment, when the market is appreciating at 3-5% like it has in previous years, it can be very difficult to save at the same rate or more than the market is appreciating. Going back to the example I just used, do you think most home buyers could save an additional $35,000/year?
But then again, they would need to actually save $70k to match the market when you take the opportunity cost of the equity they missed out on into consideration.
When you think of it like that, it's almost impossible for the average buyer to save up enough to match the market.
Even if the market only rose 3%, that's still a $42,000 swing on a $700,000 home.
For those who are trying to time the market, that almost never works. While a dip is going to come at some point, nobody can know for sure when that will happen, all indicators point to a robust and properly functioning housing market.
So what should somebody do who's thinking of buying but doesn't quite have the down payment?
If you can reasonably afford to buy something inexpensive, now would still be a good time to do so. Again, the forecast for 2018 is predicting another good year of steady appreciation.
Once you get into something, you may consider financing a year or two down the road to drop your payment in light of your newfound equity. You should definitely consult with your lender ahead of time to find out what options are available to you as well as get their opinion on where they see the market going.
As I tell my clients all the time, "The market is ready when you're ready." While some times may be better than others to buy or sell, ultimately, you need to be at peace with your timing. Living on a shoestring budget because you felt like you had to buy a home is no fun. But if owning a home is important to you, come up with a plan and stick to it, and you can make it happen.
Andrew Ramirez was born and raised in Orange County, living in Irvine and Tustin as a child before moving to Costa Mesa in 2001. He lived there for twelve years before marrying his high school sweethe....