One Reason Explaining Why Waiting to Buy Your Los Altos Home Might be a Mistake?

Most of today’s home buyers and sellers are apprehensive about our real estate market. Everyone is wondering where prices are going. Are they going to rise, drop, or remain flat?  If they move up or down, how much will they adjust and when?  Ideally, every buyer and seller wants to time the market.

I’d love to say I could predict where the Los Altos real estate market is heading over the next 90 days, 180 days, 1 year, or 3 years, but I can’t. There is one thing that buyers and sellers should strongly consider, the cost of money, otherwise known as mortgage rates.  Here is an example why.

According to mlslistings.com (our local MLS provider) the median priced home in Los Altos for the month of June 2011 was $1,660,000. Assuming a 20% down payment and a current jumbo loan rate of 5%, today’s home buyer would pay approximately $7,100 per month for their loan. If rates were to increase by 1 point, the monthly payment (using 20% down) would increase to approximately $7,922. If rates dropped 1 point (not likely), the monthly payment would drop to approximately $6,320.  How does home price fluctuations affect a buyer’s monthly mortgage payment?

Using a 5% jumbo loan rate and a 5% drop in the median home price ($1,577,000 purchase price, $1,261,600 loan), a home buyer’s loan payment would be approximately $6,745 per month.  At 6%, the loan payment would be approximately $7,527 per month.  Assuming that rates stayed the same as today, a buyer hoping for home prices to drop 5% would save $355 per month in mortgage payment, $16,600 in down payment and $83 in property taxes.

However, loan rates are at historical lows.  It is probable that rates will increase.  If home prices drop 5% and the jumbo loan rate increases 1 point (jumbo loan rates have hovered around 5.6% over the last three years and as recent as August 2008 were slightly over 7%), a buyer’s monthly payment would be approximately $7,527 or $426 more than buying a $1,660,000 home today at 5%.   If rates jumped 2 points (not likely in the near future) the monthly loan payment would be $8,345 or $1,245 per month more.

Buyers and sellers should think about the costs of financing.  There are many excellent websites with charts, graphs and analysis that help consumers understand the mortgage markets.

Will home prices adjust more than loan rates or will loan rates adjust more than home prices?  My best guess is that any negative adjustments in home prices will be offset by higher financing costs.  Should prices continue to rise (the median home price in Los Altos for the first half of 2011 is up 7% over that of 2010 and 10% over that of 2009), buyers will miss the boat.  At least that’s what I see for the Los Altos real estate market.

Should you have any questions about the value of your home in today’s market or you wish to purchase a home, please call or text me at 650 465-0755.