How Affordability Works

A quick story of two different buyers...

I am going to tell a story of two home buyers who took different paths to homeownership. The goal of this story is to show how I look at buyer affordability. I'll do this from both my own experience as well as working in real estate for a living.

Buyer number one, let's call him Tom, is waiting for interest rates to come down. He is sitting on the fence and renting for about $4,000 a month.

Buyer number two, let's call her Sally, has decided that she would rather buy now. Start paying her mortgage rather than her landlord's. She has been paying $4,000 monthly in rent, just like Tom. She is comfortable stretching that a bit, but not a ton.

* Both buyers have 10% down payment saved up *

Tom, buyer number one, is keeping a close eye on interest rates and looking at homes for sale occasionally. He is waiting for the right time.

Sally is looking for homes online and found an Onyx Homes Agent. Sally decided it was a good idea to do a 'Home Buying Strategy Session'. After she did, she found out that there are more benefits to homeownership than she thought. She realized the tax benefits of purchasing a home.

** This is not tax advice. You should talk to your accountant **

For anyone who can afford to buy a home in Southern California you likely need a tax write-off, badly.

Sally realizes that her comfort zone for her monthly payment is more like $5,000 after realizing the tax benefits.

With interest rates at 7.25% for this example, Sally realizes she can afford a $600,000 townhome/condo.

She goes house hunting with an Onyx agent and purchases a house for $600,000! Her agent negotiated her a 2-1 Rate Buy down on top of that! Exciting, she is a homeowner.

Fast forward two years.

Interest rates are now at 5%, and Tom is ready to pounce!! He waited for the perfect time to buy.

Because interest rates are down, the market has heated up quite a bit. Prices have increased about 5% (way less than projections) in the last two years.

Tom is looking to buy a home with 10% down and $5,000 a month, the same as Sally.

He goes shopping and finds out that he qualifies for $725,000! Wow, he will be able to buy $125k more than Sally. He is really glad he waited.

He goes shopping and ends up buying a $700k house for $725k because of the competitive market, he had to go over the list price.

Both Tom and Sally are homeowners! Let's look at what has happened over the last two years...

Tom, Buyer Number One:

Purchased a home for $725,000 at a 5% interest rate and has a $5,000 mortgage. He put 10% down, so he has about $50,000 in equity (remember he had to over-bid by $25,000).

Over the last two years, Tom has paid $96,000 in rent ($4,000/mo).

Sally, Buyer Number Two:

Purchased two years ago for $600,000 at a 7.25% interest rate, but her agent negotiated a 2-1 buy down for her. So her rate in year one was 5.25%, and in year two, it was 6.25%, which saved her $13,000 in interest in the first two years.

Prices have appreciated 5%, so her home is now worth $630,000. Sally has also been paying a mortgage for two years and now has equity of $93,000. On top of that, she has had the tax benefits of two years of home ownership. (I'm not a CPA, but I'll guess that's worth at least $10,000).

Now that interest rates are lower, she has just refinanced her loan of 7.25% down to a 5% rate as well! This brings her original payment of $5,000 down to $4,200.

Sally also has the option to sell her current home and upgrade to a larger/nicer home. She can also use her property as a rental property and purchase a new one and start over.

So which buyer won?

There aren't winners or losers. Everyone has their own path, and homeownership is not for everyone.

In this scenario, I was Sally. I purchased when everyone told me not to. "The prices are the highest they've ever been." Keep in mind, this was 2018.

The biggest secret in real estate is to buy and hold. We have this conversation with our clients every day. But timing has to make sense for you.

Does it sound like a bad idea to go through the Home Buyer Strategy Session that Sally did in this example? You can learn more and book a call here.