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With the recent shift in the GTA housing market, and some areas seeing prices lower than in the beginning of the year, many homebuyers find themselves in a bit of a limbo. You may be one of them. It’s now easier to buy, with less buyer competition, and the inventory/selection has increased. On the other hand, there’s your “wise” uncle, or perhaps one of many tv/online gurus, telling you to wait till the market “crashes” before you actually purchase something. Like Warren Buffet, you think, your investment will be made at the perfect time. Well, maybe not.
As most folks know, there are a few reasons as to why the housing market got so hot. Inventory is always number one on the list, then buyer psychology, covid lockdowns causing increased savings for many, and (of course) the low interest rates. Interest rates, to hone in on one specific reason, were very low. When borrowing is that cheap, prices go up. But, when interest rates start going up…
So, back to that dilemma of yours. Let’s look at a very realistic scenario, just to see what happens when you wait for just the right time to buy. Here (with thanks in large part to my colleagues’ at the office) is a very realistic example with numbers.
If Person A bought a $1M house at the peak of the market, with an interest rate of 1.5% and the usual 5-year term. After paying the mortgage for 5 years, their principal balance will be around $828,720. So, they paid off about $171,280 in principal in 5 years. (Obviously a real mortgage of $1M or more would be actually 80% of the purchase price, etc.. But we’ll do 100% financing just for the sake of easier math.)
Some time passes, and the market cools down. It’s far from a crash, bubble-burst, etc. But, we all agree that a correction is happening. Let’s say that the same $1M home (or one just like it) is now on the market for $950k (so the price is down by 50k.)
Person B buys this house, in a slower market, which is good. But the market is slower, in pat, due to the increased interest rates. So, Person B has a $950k mortgage at the (new) rate of 2.5%, for a standard 5-year term. After paying the mortgage for 5 years, their balance will be $804,060. In other words, they paid off about $145,940 in principal in 5 years.When they bought, Person B was thinking that they bought for $50k less than Person A, but after 5 years, the difference is actually $24,660. That’s not insignificant, mind you, but less than half of the “discount” of buying in a slower market. They bought lower but paid a higher interest.
There is, however, one more piece to this (fake-but-realistic) story. See, Person A and Person B did not, obviously, buy at the same time. Assuming Person B was renting (otherwise they would have already been a homeowner and would be selling and buying in the same market,) they would have been paying rent the whole time that Person A was already a homeowner. Let’s say they were renting for $2500 (probably more in real life) per month and waited one year to buy. That’s $30k spent, with no particular monetary benefit to Person B. Had they bought at the same time as Person A, around 50-60% of that would at least be going towards principal. If it was 6 months of renting, then it’s still $15K of lost money and $7-8K of possible mortgage principal.
When we started, Person B thought they had bought for $50k lower than Person A. In the end with time and interest in mind, the final numbers were actually not that far apart. The reality of the housing market is, however, far less certain than my simple example here. How do you know that the market will be down in one year? How do you know that the house you like, and is available now, will be available later (in 6 months, in 1 year?) After over a decade in the business, and having spoken to countless realtors that have been in the business for almost as long as I’ve been alive, I’ve heard many stories of folks trying to “time the market.” Outside of sheer luck, in many ways, the folks in those stories were very sorry that they waited. Some, unfortunately, ended up not being able to buy what they wanted. Far from trying to perpetuate the “fear of missing out,” my intent here was to simply show you the reality of the housing market, interest rates, and the value of time.
I know that most cases, like yours, are likely a bit more complicated than the simple example above. If you have any questions, concerns, or just want to chat about the housing market, please feel free to give me a call.
