How Do Interest Rates Impact Buying Power?

Currently interest rates are at an all time low, and the market seems to be slowing down a little. In Sunnyvale it is still a sellers market by numbers, the average home for sale last month sold for 6.3% over asking price but that doesn’t mean that its not a good time to start shopping and I’ll let the numbers tell you why.

If you’re shopping for a house, you might be trying to decide whether to buy now or wait and hope the prices start coming down. My advice is buy now. Let’s use an average priced house in Sunnyvale for example, $1,400,000 (about what you would pay over the current average asking price of $1,376,000). We’re going to see how interest rates will effect your purchasing power, you have 20% to use as a down payment $280,000.

Let’s say you buy now at 3.2% your payment is going to be around $4,843 a month, $58,116 for the year. Now let’s say, worst case, you decided to wait hoping prices would fall and they didn’t but interest rates jumped to 5% with every thing else the same your payment are now $6,012, $72,144 for the year. Thats a $1,200 a month or $14,000 a year jump, that’s enough to possibly put that home out of your price range.

To add insult to injury over the life of the loan you’ve almost doubled the interest you have paid. at 3% you would pay around $576,000 in interest over 30 years. At 5% you’ve jumped to $1,044,465!

You might be thinking though, “What if prices do fall then I would have screwed myself” And I want to say not necessarily. Let’s say you did wait and prices came down $200,000 and interest still went up to 5%. Your payment would be around $5,153 a month and life time interest would be about $895,254. So now you’re still $300 more a month than buying now and still over $200,000 more in interest over the life of the loan. On top of that you have now paid rent longer Which is money you’ll never get back.

So you tell me which is better, higher purchase price with low interest or low purchase price with higher interest (which in the example is still pretty low)? Lets say you do plan on waiting thinking that you can buy low and refinance when interest drops again. Then you would have to look at how long will you be paying a higher payment, when would interest rates drop to as low as they are now and what could you invest that extra money in if you bought now that would compound your savings monthly?

Just want to add a little disclaimer to this article, all of the facts and figures are estimates and do not include things like taxes, private mortgage insurance, or HOA dues. With that said you can do your own research about interest rates and monthly payments with any mortgage calculator online.

1.4 payment graph

Real Estate Market Seems Slow

I was recently helping another agent in the office with his open house, his sellers still lived in the house and wanted to make sure there was always someone in the living room to keep an eye on their belongings. While I was there a gentleman came in and looked around and then started badgering the listing agent about making an offer well below asking price. He stated that the market had flattened out and was going to go down and suggested the agent inform his sellers that they were way over priced, they needed to be realistic, and should consider offers of much less. I’m talking about $300,000 under asking price and this house was the best priced house in the area. He eventually talked himself out of making an offer and left.

I wasn’t my place to say anything since it wasn’t my listing and the agent I was helping had more experience and years in the business than me. But it got me thinking about the market which has slowed a little recently, I had to ask myself why is that? Clients that I talk to ask me the same question so I figured out the reasons that make the most sense to me.

I think there are a couple reasons, none of which do I think indicate a problem or a large downward trend in the local market. The market is still strong, interest rates are at record lows still which makes buying a home more affordable. There is still a large influx of people coming to the area for jobs at all the tech companies. And rents are still ridiculously high. So why is it that homes are sitting on the market longer and not selling for way over asking price like they were 6 month to a year ago?

First off, I think when home prices are at record highs and home owners are watching homes sell the day they hit the market with multiple offers over asking price they get a little excited. This leads to people selling and moving out of the area for an early retirement or a job in a cheaper area that pays a comparable salary. This increases the inventory and gives buyers more options.

Secondly, most people with kids don’t want to deal with the hassles of moving while getting their kids ready to go back to school. This removes a huge chunk of buyers from the market. And another big part of the market are people that move here for work from out of the area, and now is the prime time for vacations further reducing the amount of buyer in the market. Following all of that are a string of big holidays and only serious buyers are going to be shopping for a home during that time keeping the market slow until the start of next year.

The combination of these two things I think is the major cause of the soften market we’ve been seeing. No one has a magic crystal ball but I think the market will pick back up at the beginning of next year when the excitement of the red hot market has gone down and people are back from vacation, the holidays are over, and kids are settled in school.

I do think its a great time for buyers though, there’s less competition and you have the most buying power right now due to the super low interest rates. Even a small bump in interest greatly reduces your buying power, so the moral of the story is don’t be like the guy from the beginning of this article he’ll end up with less buying power and end up paying more for the property he does buy when he realizes low balling doesn’t work.

First Time Buyer – Finding The Right House

So you’re new to shopping for a house. Hopefully you’ve read my other posts on first time home buying. You can read them here and here. We’re going to assume you already got pre-approved for your loan and know what price range you’re looking in. You can either find an agent or a house next, I would suggest an agent first. Reason being is a good realtor often will be able to find or know of some off market properties. By this I mean a home owner isn’t interested in actively searching for a buyer but if one came along and offered the right price they would sell.

Now you’ll probably want to stick to properties that are on the market first because the sellers are more motivated and are more willing to negotiate. The off market homes are a back up incase nothing else fits your needs.

Sorry for that two paragraph side note, I got distracted. Back to the topic of this article, picking the right house for you. There are some things you want to keep in mind when purchasing your first house. You can always sell it later and move into something bigger or more suited for your future needs. So instead of renting until you can buy the home you ultimately want and cant afford right now you should buy something.

The great thing about buying a starter home is, unlike renting, your mortgage payments will build you equity which you can later use when you buy your dream home. There’s two ways to go about this, you can sell the first home and use your equity to help buy the new one. Or if you’ve lived in the first home long enough and have a higher tolerance for risk you can pull the equity out of your first home, rent it out and buy the home you want. That something you should not decide on by yourself and your unique situation should be taken into consideration, I would talk over your option with your realtor when the time comes.

There are a couple of things you want to think about when you do go out and look though and they’re probably pretty obvious but this article is about buying your first home so I’ll say them anyway. You want to figure out how many bedroom and bathrooms you realistically need, do you really need to have 3 or 4 bedrooms if its just you and your significant other? Also you want to consider the area is it safe, close to work, what kind of people live/ are moving to the area? Do you think it will positively or negatively affect home values 5 years from now?

First Time Buyer – Selecting The Right Agent

It seems that home owners are quite a bit more selective when picking an agent than home buyers are. Which is odd to me, as a prospective home buyer I would want to ensure that I have the best representation. It is the biggest purchase most people will ever make and you should feel confident that you can trust your advisor (realtor).

This article should help you make an informed decision on who to pick to help you when you’re ready to buy. Interview multiple agents, this will help you get an idea of what of what an agent that knows what they’re talking about sounds like verse one that doesn’t. A good way to interview agents without them knowing is to take a weekend or two and go to open houses in the area you are thinking of buying. Just go in and talk to the realtor, see how engaging they are, do they seem happy to talk to you? Are they positive and motivated? Are they interested in getting to know about you and your goals? Ask them questions about the house, the area, and the general market. You’ll be able to tell which ones know what they’re talking about, they will make you feel confident in their abilities to represent you.

Once you find a couple of agents that you are interested in working with make appointments with them to sit down and talk about your goals. Tell them what you want and why, good agents will probably ask you these questions naturally. See how they advise you, are they giving you knowledge that will help you make more informed decisions or are they trying to push you into something and leaving you in the dark as to why.

You should feel confident in the agents ability to help you with the necessary paperwork, which there is a lot of! They should also be a skilled negotiator, their purpose is to help get your offer accepted and as close to the terms you want.

Another thing to remember is just like most successful agents pick and choose what clients they work with, you have the same power you don’t have to work with any particular realtor. If you feel they are not doing their job or are not keeping you informed you can decide to work with someone else. You’ll come across agents that will want you to sign a buyer-broker agreement, which is totally fine, agents use them to keep clients from using them for all the leg work and then switching to an agent at the last minute to write the offer because that agent will give them a rebate of part of their commission. A lot of the really good agents don’t tend to use them, they are good enough at proving their value to their clients and picking their clients that they don’t tend to have that problem as often.

I hope you found this information helpful and I would love to represent you if you’re planning on buying a home in the south bay. Feel free to contact me with any questions at bpickens@bradpickensrealty.com or by phone/text 408.718.9319 you can visit my personal website at bradpickensrealty.com

First Time Buyer – The Mortgage Loan

So since this is a new blog I figured it would be good to provide some helpful information to first time home buyers. I think I’ll break this topic into sections so I can go more in depth in each. Also I don’t think I’m the best at writing but the information should still be helpful.

As a first time home buyer you probably have a lot of questions, like how much can we afford? Is buying a home the right choice for me? Should we buy now or should we wait? Does it matter what agent we work with? Should we go straight to the listing agent? I think the best way to tackle all of these is a step by step guide.

So in the quest to obtain a loan for a house there are two terms which often get confused. Pre-qualified and pre-approved, the first is a quick estimation of your buying power and does not always mean you can get a loan for that amount. Pre-approval on the other hand is much more in depth and usually requires a fee to be paid and the lender takes a harder look at your finances and credit worthiness. In today’s market you should be pre-approved before you go looking for houses that way when you find the one that suits your needs you can make an offer more quickly.

So first thing you should do is get pre-qualified for a loan. This will help you find out exactly how much you can afford and better helps you determine what you would be comfortable paying monthly. There is a couple of things to consider here which I think the general home buying crowd doesn’t consider.

Just because you are qualified for a certain amount of money doesn’t mean you should buy something that costs what you’re qualified for. When a lender qualifies you they are basically telling you the biggest amount loan you can afford. You have to remember that lenders are in the business to make money and the bigger the loan the more money they make. That doesn’t mean they are necessarily going to prequalify you for more than you can pay but they will loan you an amount that will keep you on a tight budget.

My suggestion is to sit down with a financial planner and figure out what you can afford based on your budget. You always want some breathing room for unexpected expenses its never a good feeling to be on the verge of using credit cards for living expenses.

The next thing to remember when getting prequalified is to shop around. Different lenders have different rates and loans. If you already have a realtor you’re working with they will surely have some recommendations for good lenders too. I know its boring and tedious to sit down with loan officers and tell them all about yourself when you want to be out looking at houses. But trust me it will be well worth your time and money to do this, it will help you find the best rates and determine the right kind of mortgage for you. It will also increase your knowledge and confidence making the decision to sit down and write an offer with your agent easier when the time comes.

Once you find the lender you want to work with you’ll want to sit down with them and fill out the application and get pre-approved. With your pre-approval in hand you become a serious buyer when shopping for a house and your offer will be more strongly considered by a seller against someone who is just pre-qualified.

I hope you found this information useful, if you have any questions or are looking to buy or sell in the south bay don’t hesitate to give me a call or text at 408.718.9319 or shoot me an email at bpickens@bradpickensrealty.com you can also visit my personal website for more information about what I can do for you at bradpickensrealty.com

About The Author

Hey there I figured the first post on this blog should be about the author and what the blog is about. My name is Brad Pickens and I’m a real estate agent with Intero Real Estate Services in Cupertino. I was born and raised in San Jose and ended up moving to Sunnyvale for work back in 2010. I always new I wanted to do more than work a 9 to 5 my whole life and it wasn’t until 2015 that I decided to venture into real estate sales. I had a couple of reasons to get my license, first and most importantly, I really enjoy helping people specifically helping people achieve their goals in real estate since owning a home has always been a dream of mine. Secondly and not nearly as important, I wanted to wear a suit everyday haha I know it sounds really weird but its always been something I wanted to do.

I write these blog posts to help people educate themselves on the home buying and selling process and current market conditions. I hope you find the information contained in this blog helpful and informative.