When it’s a seller’s market, trading up can be tough: Selling for a 10% premium when selling your $500,000 home is wonderful – $50,000 – but paying a 10% premium on the $1 million larger property – $100,000 – can take a bite. Many simply cannot afford it. Worse, many simply THINK they cannot afford it. Often math is the best way to evaluate these concerns. This is where a professional agent’s ADVISORY role has to kick in.
* Let’s assume this $500,000 property seller trading up to $1,000,000 is doing so now in a 3% interest rate environment.
* That extra cost is marginal (about $200 per month) when financed at 3%.
* It shifts of course when interest rates are higher. (At 4% that extra $100,000 costs almost $400 more per month!)
* Many ASSUME that prices will drop once interest rates rise. That is a possibility for sure. Yet in this ultra-tight inventory environment chances of that happening are reduced notably. Rising building material, land, regulatory, and labor costs won’t bring pricing down.
* Worse, as interest rates rise and more people turn to renting – or are compelled to rent – the more attractive returns become for investors as this usually fuels rent prices, especially in a higher inflation environment. The volume of investors buying single-family homes and apartments has multiplied large institutions and new funds are focused on this too The number of ‘competitors’ buying right now has been compounded by this growing segment COMBINED with the coming-of-age Millennial buyers.
While up-sizing right now may be a bit scary, buyers should also think about inflation. Their incomes may rise over time with inflation to catch up with the additional financing cost. Those considering renting to ‘wait this frenzy out’ may start to see notable price increases in rents especially over time. A $4,000 per month rent today escalating at just 3% annually compounded is over $5,300/month 10 years from now. At 2% its almost $4,900 and at 1% its over $4,400…
The fear of the future unknown is often made more palatable – and actionable – by calm, methodical evaluation. Don’t hesitate to contact the Dinsmore Group, we’re here to provide guidance and insight.