Should I Buy or Should I Hold?

Over the past 10 months, the demand for homes has outstripped the supply in the Durango and surrounding areas. Initially, homes in the $1 million and less category were “flying off the shelf” and the volume of sales of homes priced over $1 million were stable. Over the past five months, the supply of homes over $1 million has diminished, as the demand and sales have increased, so it has turned into a strong seller’s market across all price ranges and geographic areas. In this environment, prospective buyers must decide to buy now or wait and hope that the market corrects in the near future.

A crystal ball would come in handy at this time. I think it is first necessary to determine why demand has increased sharply during a pandemic and with all the recent economic uncertainty. The two main reasons that have been cited are the historically low interest rates; additionally, for Durango and other areas outside large cities, the desire for people to find a safer/better place to live. The latter reason appears suspect when you consider that the high demand for homes is prevalent across the country in metropolitan, vacation, and rural areas. So that leaves the low rates as the only apparent reason that appears to be driving the unprecedented demand for homes. Rates have started to move upward over the past few weeks, which may lead to a lessening of demand and the return to a more balanced market over the next few months. Or maybe not.

If we had a crystal ball, deciding to buy this year or wait for a possible correction in the future would be an easy decision; because in addition to knowing future real estate prices, you would also know what the corresponding interest rates would be. At today’s 2.75% rate, a $400,000 mortgage would have a payment of $1,633 a month; that $1,633 would only get you a $322,000 loan at 4.5%, a loss of about $80,000 in purchasing power. If values stabilize but rates go up to 4.5%, the cost to own a $500,000 home with the $400,000 mortgage would be equivalent to the price of the home being about 16% higher ($580,000) at today’s interest rates. If values and rates both increase, buyers who decide to wait will pay both a higher price and lose substantial purchasing power.

If you decide to hold off your purchase, values need to decrease by more than 16% to offset the increase in the interest rate to 4.5%, so the value of a $500,000 home would need to drop to $420,000 to end up with about the same monthly payment of about $1633. Choosing the option to delay your purchase will only really pay off if values decrease over 16% or if values decrease and interest rates stay in the 3% range. With all the money the Federal Reserve has and will be printing; most experts, including the Federal Reserve Chairman, believe that interest rates will need to increase to keep inflation in-check; the beginning of this trend has been evidenced by the steady rate increases over the past three weeks.

In summation, putting your purchase on hold will only pay off if values decrease significantly and rates stay low. If that does not happen, then you would have been better off buying this year, even if you pay top dollar or more. I believe the probability of substantial price reductions and moderately increasing interest rates is far lower than flat or increasing values and interest rates moving into the 4% range. I think that the drove of buyers that are driving up demand intuitively agree with my assessment. Let me know if you find the crystal ball; I really need it!