The REAL Reason You’re Being Told To Buy Now.
Shaun Nilsson Helps You Do The Math
The latest real estate buzz that’s being passed around by those ‘in the know’ seems to indicate that now is the perfect time to buy – especially if you’re a first time home buyer. It’s simple enough to just heed this advice as gospel and move blindly forward, or conversely, to dismiss it as hype and ignore it; but if you’re anything like me, you’d at least like to understand why this is the prevailing theory.
Perhaps I can help – detailed here is the primary reason why buyers are now finding themselves in the ‘perfect storm’ of opportunity in the residential real estate market. Not surprisingly, we will have to use a little bit of simple math to get the full understanding, but I promise we’ll forgo the advanced quantum mechanics this time and stick to the easy stuff.
Two powerful market forces have combined to create the following amazing leveraging scenario. Let’s look at the purchase of a $350,000 downtown home with a $50,000 down payment and a $300,000 mortgage in 2008 versus now. The big factors are as follows:
(1) Prices have come down (slightly)
To keep the math simple, let’s say that the price has come down 10% since this time last year (a very realistic number in many cities – Greater Toronto’s average price is down only around 5% as of March, though, for example) on your ideal first home purchase. Great! That means that your home that would have cost $350,000 last year is now on the market at $315,000; and your mortgage that was $300,000 is now only $265,000. It doesn’t take a 5th Grader to realize that this means much more purchasing power for you when shopping for your new home. Simple enough, right!? Sure, but now combine this with:
(2) Current mortgage rates
… and watch the real magic happen! If you’re not into mortgage calculations (and I’m not surprised if you aren’t), don’t let your eyes glaze over – follow me here. Let’s say you’ve chosen a 5-year fixed rate mortgage – a very common option, suitable for many buyers. At this same time in 2008, you would have been looking at around a 5.9% interest rate from most lenders to borrow this money. However, these same providers are today offering this mortgage product at roughly 3.7% interest. Amazing! But what does a measly 2.2% savings really mean, you may ask?
A lot. In 2008, your monthly payments on a $300,000 mortgage would have been approximately $1,674 to live in your new dream home. Return to 2009, however – and you are now able to carrying the exact same mortgage for only… (drum roll, please)… $1,268! Even more illuminating is the realization of what this means for your purchasing power. If you could afford a $300,000 mortgage in 2008, you can now similarly afford a $396,000 mortgage!
As if that weren’t enough, let’s quickly combine the two forces. As we’ve deduced, you can now theoretically afford a $396,000 mortgage. Congrats! We also decided that you have a $50,000 down payment, and we know that our real estate market has come down 10%. This means that you can, in 2009, afford a home priced at $446,000 – the same exact home that would have cost $495,000 had you tried to buy it last year when prices were up!
Would you prefer a $350,000 home or a $495,000 home? I bet I know your answer. Buying now and locking in the current mortgage rate let’s you exploit this literally once-in-a-lifetime leveraging opportunity and gets you into 40% more home than last year in comparison. Any questions? I’d love to carry on the conversation at shaun@shaunnilsson.com. I answer my emails personally.
Until next time,
Shaun Nilsson
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