An Email to a Client About Buying and Selling in Our Slow Market

My clients, who want to buy and sell a new home, asked me if it were better to act now or wait until spring.  Ultimately, as I'm not omniscient, there is no 'right' answer to give. But this is how I view it - a 'bird in the hand' approach.   This email was a couple of weeks ago.  My clients, in the meantime, also spoke to their lender and we're going to ask the seller to pay the costs for a temporary 2-1 buydown. (Buyers cannot pay for temporary buydowns though they can pay for permanent rate buydowns.)  Very briefly, a 2-1 buydown takes the nominal rate, say 7.5% and drops the rate by 2 points the first year and 1 point the second year.  So -   Year 1: 5.5% Year 2: 6.5% Year 3: 7.5% (the full rate)   The idea here is that the rates will drop enough in the next couple of years so that refinancing makes sense. If rates don't drop, then you're still doing as well as or better than the market. There is, of course, more to know about buydowns but let this suffice for the moment.   Enough backstory.  Here's the email:   Listing in the spring could make a difference - of course, it's impossible to speak to the future.  And it's particularly hard lately because we've had such strange markets in the last few years, so stats aren't always following normal patterns.  What follows are my thoughts - I could be right or wrong - but it's how I would make a decision for myself. (That's my official disclaimer!)   Here are the things to consider:   Interest rates: where will they be?  Right now - today - they are the highest they have been in decades. They have been climbing all month (despite the fact that the Fed did not raise the rate at their September meeting).  The Fed has indicated - but remember they're only making their best guess - that they will raise the rate a couple of more times.  The goal of leaving rates be in September was to let the economy 'catch up' to see the effect of past adjustments.  This will help the Fed decide on future increases/not-increases.  The Fed raises the rates to fight inflation.  Their goal is 2%. Last week the PCE was at 4%, so future increases seem likely unless that inflation number chills out.   But the rates could come down by spring.  They will eventually. But when and how far is impossible to say.  There is talk of rates coming down and there is also talk of them hitting 8%.  Regardless of buying now or in spring, you'll probably be in a position such that you'll be refinancing down the road.   That said, if the rates come down, it will obviously help on your purchase.  It will also make the market more competitive. Spring is more competitive than fall already; if rates decrease, it will bring a lot of potential buyers, now on the sidelines, back to the market.  So potentially-more-palatable payments come with increased competition.   Spring, again, is a busier time than fall.  So as a seller, you will have more competition as well because there will almost certainly be more homes on the market.   The good thing about spring is that prices tend to rise, so you can get more for your house. The bad thing about spring is that prices tend to rise, so you will pay more for your new house.     You are buying and selling in the same market and you are buying ‘up’, i.e. more expensive.  Let's say the values today are: $430K sales price and $580K purchase price. Let's also say the market increases by 5% from now to spring (totally made up for the example's sake). You will get $21,500 more on the sale of your house and you will spend $29,000 more for your new house.  So a net loss of $7,500.  Buying and selling in the same market neutralizes or worsens the effects if you're 'buying up', as you are.   Conclusion   I have been telling folks to buy now because:   competition is scarcer, giving you greater odds of success on the house you find (fewer bidding wars);   the rates can do three things - go up, go down, stay the same.  If they go down (far enough), you refi; if they stay the same, who cares?, if they go up, bummer for you.  A refinance costs but, meanwhile, you're in the house you want and enjoying it.  Even if you wait until spring and the rates have decreased, they're unlikely to have reached the new lows of the next downcycle, so you're probably going to refinance eventually, anyhow.  So the refi cost is in your future, either way.   I would guess that one of your concerns is taking a loss on the sale of your house.  However, remember #4.  And extend it out.  If your house is worth $430K and you wait until it's $500K - a 14% increase but no loss - the house that was $580K is now $661,200.  In pure numbers,  you've made $70,000 but lost $81,200.  So a loss on your sale is actually a gain in the bigger picture.  To put it another way, if you buy the more expensive house now, you're collecting the 14% (or whatever the number is) increase in equity on a bigger number.  

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