Big Bond Beat Down

Dated: February 23 2021

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Big Bond Beat Down

Mortgage Backed Securities (MBS is the index that actually controls mortgage rates) broke through an important metric which means we are likely to see an increase in interest rates in the short run.  It is believed that this is a temporary run up, however, mortgage specialists are advising their clients now that it’s time to lock in their rates.  Given the volatility in the market and the increase in average rates of .25%, it’s definitely time for buyers to get off the pot!

The big question for buyers in this market remains:  “is this the right time to be buying a home?” and for sellers who are hesitant to put their houses on the market:  “can they get a bigger return, or where will they go if they sell?”

Schedule a consultation with us to help you find solutions to those questions by calling us at 480.258.9907. 

WHAT BUYERS NEED TO CONSIDER IF THEY’RE BUYING NOW

  1.  Zip Code Appreciation:  Most people hear national averages of 3-5% equity growth, but we know that not all markets are created equal.  It’s important to look at the movement between neighborhoods, so that people don’t get scared off by a google search.  It is not uncommon right now for buyers to bid over asking price and waive appraisals.  Real estate is, and always has been, one of the most emotional financial decisions someone can make.  If you are a buyer and are feeling desperate and discouraged right now, we know the math behind equity and rate of return and can help bring logic back into your negotiations. 
    1. Example of zip code appreciation:  If a house is worth $325,000 and the zip code appreciation is 7.5%, a buyer can safely bid over the asking price by up to $24,375 and expect to break even within a 12 month period.  Another way of looking at it is that average property appreciation is typically in the range of 3-5%.  Average length of home ownership is a little over 10 years.  In even the worst case scenario of only 3% appreciation on the property, the break even would be less than 3 years.  If one stayed for the national average of 10 years, they would have $97,500 in total equity appreciation of $325,000.  If the $24,375 paid over asking price were subtracted, the total return would be $73,125, and a total of 22.5% return in equity. 
  2. Rate of Return on Initial Investment:  The other thing to consider is that the average down payment for a property is 3-5%.  In an appreciating market (like the one we are currently in) despite paying over list/appraisal price, their return on the initial investments would be in the double digits.  Let’s take the example above…
    1. Example of Return on Initial Investment:  Purchase price of $325,000.  Down payment of 5%=$16,250 + $24,375 (added cost over list price)=$40,625.  Annual appreciation of 3% over 10 years =$97,500.  This equals 41.66% return on the initial monetary contribution. 

WHAT SELLERS NEED TO CONSIDER IF THEY’RE SELLING NOW

  1.  If a someone is in forbearance, they have a 3 month extension to determine if resuming their mortgage payments still makes sense for their budgets.  The majority of homeowners have more than 25% equity in their properties, so if they are finding themselves in a distressed financial situation, there probably won’t be a better time to sell for top dollar. 
  2. The cost of waiting.  As interest rates rise, the demand for housing will slow down due to affordability.  On average, a 1% increase in interest reduces a buyer’s buying potential around $30,000.  We are in a market right now where sellers do not have to pay for costly repairs or give closing cost contributions.  If priced right, they will have multiple offers above list price. 
  3. Longer escrows and short term rent-backs will make it easier for buyers to locate a property to purchase.  Buyers just need to be aware that lenders require them to occupy their new property within 60 days, so rent-backs cannot exceed 60 days from close of escrow!   
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John Lick

John Lick--brings his vast experience in contracts and negotiations to the Maurice & Lick team. Prior to becoming a full-time Realtor, he worked for a multi-billion dollar government agency and with ....

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