It's the payment not the price

Fullerton Homes

Everyone has done it. When it is time to look for a brand-new car, narrowing down the car of choice is the first step. After isolating the perfect car, the next step is to sit down and negotiate. Once the initial paperwork and credit application are complete, the salesperson leaves the negotiating table and visits privately with the manager. Upon their return, they then go over the payment for the car. After going back and forth to lower the monthly obligation by $20, it is not uncommon to get up and start calling around other dealers to see if a better payment is out there. After all, it will be the same monthly amount that will come out of the checking account for five-years!

In purchasing a home, buyers tend to focus a bit too much on the price of a home and do not consider enough the monthly payment. After settling on a home and closing, the price no longer matters, it is the payment that is withdrawn from the checking account every single month for 30-years. It happens 360 times for a home loan versus 60 for a car. As a society, why is so much time devoted to the monthly payment for a car and not a home?

Everybody is focusing on how high values are today. For detached homes they are up 60% in Orange County since bottoming in 2011. Homes appreciated significantly from 2012 through 2017. In June of 2017, values eclipsed the record peak reached prior to the Great Recession in June 2007. Since breaking the record, values have only increased slightly. Homes are not appreciating much at all in 2019. Many believe that home values are unaffordable and have reached a peak. That is what a lot of buyers are hoping for. That is simply not correct, home values have not yet peaked.

Many buyers are sitting on the sidelines and waiting… and waiting. They are trying to time the market. Yet, economists and prognosticators will attest that timing markets is next to impossible. As a result, many capable buyers have been permanently sitting on the sidelines rather than cashing in on an excellent opportunity.

Housing is in a very good spot right now and it has everything to do with interest rates. In November of last year, the 30-year mortgage climbed all the way to 5%. Consequently, housing slowed to a crawl. But, since then rates have plummeted to 3.5%, that is down 30%. For a $700,000 loan, that is a $614 per month savings, or $7,373 per year. That is a HUGE savings!

In digging a little deeper, prior to the Great Recession, mortgage rates were at 6.35% in 2007. A $625,000 home with 20% down had a monthly payment of $3,111 back then. Today at 3.5%, the monthly mortgage payment is only $2,245, an $866 per month savings, or over $10,000 per year! The difference is jaw dropping.

The giant savings are a result of excellent interest rates. They have been an absolute lift to housing this year and the momentum is slowly building. Homes are not unaffordable today like they were prior to the Great Recession. So, just because home values have returned to their prior recession levels, the current low interest rate environment is very good for housing. And, rates are not going to change much anytime soon.

In Orange County, demand is up 13% year over year and the active inventory is down 8%. And, unlike last year, the inventory is dropping right now. It will continue to drop through the end of the year and 2020 will start with a lot fewer homes than the start to 2019. With lower rates, demand will be stronger at the beginning of 2020. As a result, the market will be a lot hotter than what everybody has become accustom to.

An important message for buyers: do not wait on the sidelines. Instead, cash in on these incredible rates now. An important fact to remember, buyers do NOT have to put 20% down to purchase a home. FHA financing allows buyers to buy a home with as little as 3.5% down.


Tony Leocadio, Team Leader
CalBRE# 01737259


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