What Rising House Values Mean To You As A Buyer

Those of us in the real estate and mortgage industry have been telling clients that we are seeing housing prices on the rise, now there is empirical data to support our anecdotal evidence. The Case-Shiller 20 City Composite report is showing that the average of the 20 cities has the housing prices on the rise, back to the levels of April 2004. In news that is a little more pertinent to our market, Tampa FL is back to the levels of November 2003 and on the upswing with a 10% rise when comparing May 2012 with May 2013.

What does this information mean to you?
This means several things for the prospective home buyer.

1. The days of offering 75% of the asking price on a short sale or bank owned property and getting an offer accepted are likely over, unless the comparable sales in the market show a substantially lower value than the asking price. This is no longer a market where it makes sense for the bank to take whatever they can get and cut their losses as quickly as possible. In today's market if a bank has to keep the house on the market even for 6 months, at the end of those 6 months the property is going to be worth 3-5% more than it was when it was listed. Offers now have to make sense and what we are seeing be accepted today is typically offers within 5% of the asking price
2. It may be time to start thinking of accepting higher loan values and paying Mortgage Insurance rather than depleting your savings, in a market where houses are gaining 10% of their value year over year, many times it makes more sense to keep your money in your own pocket, put less money down, pay a years worth of Mortgage Insurance and let the increase in value remove the Mortgage Insurance for you. To illustrate, let's look at an example home sale of $100,000 to make the math easy. In order to avoid paying mortgage insurance you would have to put down 20% or $20,000.00, which would have a principal and interest payment of $417.00 / month. Instead you could put 10% down, save $10,000.00 and have a principal and interest payment of $469.00 / month. Mortgage insurance would be required and carry a premium oc about $37.00 / month. The math looks like this. 469 (principal + interest at 10% down) - 417 (principal and interest at 20% down) + 37 (monthly mortgage insurance premium) * 12 = $1068. The following year pay for an appraisal, let's estimate high at $500.00. You have spent a total of $1,568.00 to save $10,000.00. If the housing market should increase only by 3% over the next 3 years you are still saving a substantial sum of money looking at a total cost of $3,704.00 paid over three years including the estimated $500.00 for the appraisal vs saving $10,000.00 at closing.
3. Adjustable rate mortgages are about to start making sense again. While the rates were at historic lows in the 3% range, it only made sense to lock that rate in for as long as possible, as mortgage rates climb higher towards historical norms in the 5-6% range, it could make sense to lock in a 3.75% rate for three years. While the mortgage rates are likely to rise, they are also likely to stay within a point or two for the next 3 years, Interest rates haven't started with a 7 since 2002 coming out of the dot com boom. At this juncture it is likely to take significant growth from the economy to raise the interest rate more than a point. When you look at locking in a rate in the 3's for 3 years and the interest rate not likely to be much higher than it is now in three years coupled with the rising price of houses. It may make sense to take a low interest rate for three years, especially for a first time home buyer on a starter home, then sell in three years to move up rather than taking in the higher rate for 30 years.

In summary, now is an excellent time to buy as the market is still in the infancy of the rebound, this is a time where the housing prices are less expensive that they are likely to be at any time in the near future, with rates that are still on the low side historically speaking, but with rising mortgage rates, it may be time to start considering all of the financing options available and not just locking in the rate for as long as possible.