How much will that home cost in 2013?

I've been saying for the past year that home prices are finally starting to move upwards. The recent increases (2% - 4% range depending on where you look) is due, in my opinion, to historically low interest rates and some pent up demand. Rates alone have not done it, we've had rates hovering at or near all time lows for a ridiculous period of time now. Even going back in to 2008 and 2009 when they were "all the way up in the mid 4% range," when you stack that up against the average 30 year fixed rate mortgage at 8.661% and paying 1.38% in points, rates have been low for a long time. (Keep in mind, the 8.661% average takes into account the rates we've seen this year which for 2012 the average is 3.7% w/ .72% pts. That is accounted for in the average. If you take out the rates since the Fed began buying mortgage backed securities to manipulate the market and "force" lower interest rates, the number changes to an average of 9.144% on a 30 year fixed paying 1.5% pts up front.)

Lets side track and look at a mortgage today of $200,000 and compare to the averages.
2012 year to date average of 3.715% on a $200,000:
$912.10/mo principal and interest and you'd pay .72% to get that rate, or $1,440.

Pre-Q.E. average on a $200,000 mortgage:
$1,640/mo principal and interest and to get that rate you'd pay 1.5% upfront or $3,000.

So the exact same loan amount today compared to the average over 5 years:
Total Monthly savings: $43,674
Up front savings: $1,560
Total Savings over 5 years: $45,234.

10 year total:   $88,908
15 year total:   $132,582
Life of Loan:   $263,604

That is a STAGGERING figure. Couple that with home prices living in the gutter for a few years and you're talking about buying a home today compared to average market conditions can in essence boost your net worth by somewhere around $75,000 in a 5 to 7 year time frame without you doing anything at all except making the decision to do something.

.....I digress. So back to home prices.....

Part of the recovery in home prices is due in part to the rates but rates have been "there" since 2009. So what is different in 2012 and moving into 2013 that wasn't present in 2009 - 2011? Nothing other than the consumer getting sick of being scared and anxious. You look at the fact that everyone in their late 20's up to around the age 40 are all in a position and probably have been in a position to NEED more square footage. That age group is the group getting married, having children, expanding their family and therefore needing more space. In the first years of the real estate crash, those people had the need but were apprehensive due to the current market and the fact that they were upside down in their existing home. It took about 3 years for the conditions to be right, the heard to be thinned in the lending world, and finally some good advice and strategic financing options to make themselves known and all those people finally said, "enough is enough....I need to do what I need to do for my family and I am sick of being scared." That's the only difference and that, in my opinion is what accounts for this recent and slight uptick in home prices.

These projections for 2013 I think may be conservative but are probably pretty close. I think this is just more of that same pent up demand making it's way to the market place. Now factor this in.....when, not if, but when the labor market as a whole recovers, part of that will be driven by the housing industry. Housing creates jobs and jobs create housing. So when we see the labor market as a whole get just a little traction, housing will tick up yet again. When that happens, it will add fuel to the fire in the labor market which will in turn further spur on housing and the circle back up continues.

Why is all this important? Looking at just the 2013 projections of 3.1% increase in home values, the $250,000 house today would in theory require you pay $257,750 for that same house 12 months from now. If my snowball theory holds up, which I'm confident it will fiscal cliff or not, you should then see a doubling in home values for 2014, so an increase of around 6.2%. That would mean that same house in 24 months would cost roughly $273,730. Now for the heavy stuff.....Because "average rate of appreciation" for a home is somewhere around 4% you may say that doubling is unrealistic. I completely disagree. The average is just that, it's a long term average. So if home prices over the past several years saw a 15%-20% decline across the board, some places much more, then in order to get back to the average, we'll absolutely without a doubt have to have several consecutive years of substantial appreciation just to get back to that rule of thumb average. So I'll project out just one more year....2015 would then see about a 12.4% increase in values. If you think this is unrealistic, remember just a few years back when home prices were doubling in a 3-5 year window. Unsustainable growth for sure but I'm not talking about doubling, I'm simpling projecting a 12.4% gain in this third year. So with this projection, that same house would cost you about $307,600 in 36 months.

Now for the second piece of the puzzle. A recovery in the labor market as a whole will mean that we'll see and hear talk about inflation. It's inevitable. We've been printing money like it's going out of style for the last 4 years and this will have serious consequences and repercussions when it does come calling. One of those will be a substantial increase in rates......

So humor me a second. Our $250k house, lets assume a 10% down payment today and a rate/fee structure at the 2012 average.
$225,000 loan amt at 3.715% = $1030/mo principal and interest and $1620 upfront.
$25,000 down + $1620 fee = $26,620 out of pocket.
Balance in 5 years: $202,673

That same house 3 years from now using interest rates 2000. (About where we should expect to be if this plays out as I have it above.)
$307,600 sales price
$276,840 loan amount at 8.05% = $2040/mo principal and interest and $2,768 upfront.
$30,600 down + $2768 fee = $33,368 out of pocket.
Balance in 5 years: $263,191

Over 5 years, the savings on buying now verses buying in 3 years:
$1,010/mo x 60 months = $60,600 in monthly savings
Down payment and fee differential = $6,748
Mortgage debt differential = $60,518.

Total 5 year benefit: $127,866

So the question is simple.....Is your current housing situation as it needs to be or have you been saying, "maybe we'll wait for the market to come back a little first....."

Waiting could cost you $127,866 in the first 5 years after you buy if you wait. Just sayin.

Call me and lets work up a plan to release some of that pent up housing demand that is already making itself known. It only makes sense!

Daily Update

YOU Magazine - December 2012

YOU Magazine - December 2012