Realtor Magazine recently shared some statistics that may sound surprising given the record breaking home sale prices we are experiencing. While home prices are surging, the number of home sales is down one percent from this time last year. To top it off, only 38.5% of potential homebuyers think now is a good time to buy, which is down from 45%. What is the cause for these declines? It turns out there are a few factors at play.
First of all, the average home sales price in Newport Beach in May 2018 was $2,611,996. A year prior it was $2,192,886. In Laguna Beach, the average home sales price in May 2018 was $2,782,988. Formerly it was $2,589,736. Clearly, affordability has become more of a stretch for prospective buyers.
Another important consideration is the change in interest rates. This time last year the average interest rate was around 4%. Fast forward to today and it is on the rise, closing in on 5%. The increase in interest rates has a direct impact on the monthly payment that a buyer can expect. A quick visit to the Zillow mortgage calculator reveals how affordability can be impacted by a change in interest rate. A $2,000,000 home with 20% down at a 4% interest rate would have a monthly principal and interest payment of approximately $7,635. Bump that rate up to 4.5% and the payment rises to $8,103. At a 5% interest rate, the payment jumps to $8,585. That’s a big difference in monthly payment – about $1,000 month. And that doesn’t account for the fact that $2,000,000 would most likely not buy you the same home in 2018 that it would have in 2017 in our area.
I’ve heard from a number of buyers that they are not rushing to change homes now due to these conditions. In fact, a lot of people are afraid we are at the top of a peak. While we have no way of knowing if this is true, it is accurate that prices are at a high point for this real estate cycle. However, interest rates are a matter of perspective. Yes,if you were looking for a home in 2016 or 2017 the interest rates may seem high and have affected affordability. However, according to lender Mark McDonell with Eagle Home Mortgage, in 2007 we saw interest rates average in the 6 % range. In 1987 they averaged in the 10% range. Ouch!
Home sales may be down slightly and the idea of buying a home may not be as appealing as it was last year, however it’s still wise to consider the cost of buying verses renting. Just as home prices have soared, so have rental prices. There are financial considerations to factor in, like tax write-offs. It may be worth it to do some number crunching, talk to a CPA or financial advisor, and make the decision that makes the most sense for you.
By Holly McDonald
Holly Schwartz McDonald is a Realtor with Villa Real Estate who lives in Newport Beach and has been featured on HGTV’s hit show “House Hunters.” She can be reached at HMcDonald@VillaRealEstate.com.