The cost of waiting it out

OK over the past month of posting I have been putting a fairy positive spin on where I think the market is heading, and that specifically in Calgary I believe there will be a very modest increase in home prices. While discussing this with clients, friends, and family I have realized most do not really know how this really impacts the overall price of a home. They see 1-3{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357} increase in prices and think that is nothing, but have you ever figured out exactly what a very small increase in home prices along with a very
small increase in interest rates will actually cost you? I have for many of my clients, and without fail every one of them has been quite surprised.

Here is an article I will reference regarding what I believe to be the case for home prices over the next year: This article says that over 2011 so far we have seen an increase in prices of 1{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357}, and that for 2012 they are forecasting an increase of 3{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357}. These are numbers that most dismiss as very insignificant, but are they? And what happens if
interest rates go up long with the prices? Let’s look at some real numbers and find out.

First, the article mentions that the average price in Calgary was $401,186 in 2010 and it is expected to increase by 1{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357} for 2011 to $405,000, and the forecast is for a 3{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357} increase in 2012. The simple math on this results in the average price increasing to $417,150 which is an increase of $12,150 from 2011 to 2012 for the exact same house.

But the impact does not stop there; we also need to look at rates. While most will agree that prime rate will likely not increase anytime soon, that is but a small factor in the overall picture. The reality is that with the discounts on variables having shrunk to literally no discount at all, resulting in a floating rate at or near prime, and fixed rates being at all time historical lows, most are opting for
fixed rates and I believe rightfully so. That is a conversation for another post though. So looking at the best 5 year fixed rate I currently have available at 3.19{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357} do you think it is reasonable and or possible that we could see even a .50{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357} increase in that rate over the next year? I certainly do, and there are many reasons why, but again that is another discussion. The bottom line is that it is very plausible this will happen, resulting in a 5 year fixed rate in the 3.69{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357} range. Well, that is still a ridiculously low rate, so what does
that matter? That is nothing right? If we work with an average mortgage size of $300,000 that 50 basis point increase will cost an additional $7,224 in interest over a 5 year term.

So now looking at the whole picture we see an overall cost of waiting totalling $19,374. This is a very simple calculation and there are many more factors that could be included that could change the results even more, but I am trying to keep this fairly simple. And I don’t know about you, but almost $20,000 is a lot of money to me. To take this one step further, I have calculated that if you are in a 36{435763c83784f7362adf16aec6a4ffa3ed39c2c51e047e7cc3b29dbab8d1e357} taxbracket you would need to earn roughly $26,613 pre tax to pay for the additional cost of waiting.

Of course you need to consult a licensed Real Estate Agent in these matters as well, but I believe that if you are at all considering a move, or purchasing a revenue property, it is a great time to do so.

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