Why waiting to buy a home might cost you more money

Jason Kauffman | February 27, 2017

What will the metro Denver real estate market and interest rates look like in 2017 and following years?

When examining the question of whether to purchase or continue renting you have to consider a number of different variables. It’s not enough to simply look at one variable and make your decision based on that.

Home Prices/Values

Regardless of how far you go back, when you track home prices data over time, there is an increasing price trend. The data from January 2008 through January 2016 shows an average annual value increase of 5.24% per year (source Zillow.com – https://www.zillow.com/denver-metro-co_r394530/home-values/). This is a conservative calculation since the years spent between 2008 and 2012 were largely flat for home prices syncing up with arguably the worst economic period in our country’s history. Shortening the historical term to the last 5 years yields an average price increase closer to 10% per year.

But let’s say for the sake of argument that we assume a nominal growth rate of 5.24% annually for housing prices, using the average home value in January 2016 as a starting point ($326k – see Zillow source above). The average home price in the Denver metro area over the next 3 years would look something like this:

2017 – $343,000

2018 – $360,000

2019 – $377,000

And a 3% down payment on one of the above purchase prices would look like this:

2017 – $10,290

2018 – $10,800

2019 – $11,310

Interest Rates

The rate that you get (or are likely to get) on your new mortgage is another variable to consider when you are weighing the decision to purchase or to hold off. Mortgage interest rates are still at relative historic lows. The current average 30 year fixed rate is at 4.16% (on 2/27/2017 – source: http://www.freddiemac.com/pmms/archive.html). The average 30 year fixed rate over the last 15 years is 5.38% (source: http://www.freddiemac.com/pmms/pmms30.htm). Again this is including the interest rate years that were held artificially low by policies put in place by the Federal Reserve to stabilize the housing market following the meltdown in 2008.

A conservative estimate of interest rate trends in 2017 and beyond will put 30 year rates at 5.30% by 2019 (@ .375% per year). The 30 year fixed rate in January 2017 is already up .28% from January 2016.

Rate projection over the next 3 years:

2017 – 4.54%

2018 – 4.92%

2019 – 5.30%

Principal and interest payment progression as a result of rate and average price listed above:

2017 – $1694

2018 – $1858

2019 – $2031

Rental Rates

The last variable to consider are the current Denver metro rental rates. It is important to look at the short and long term trend of rental rates in the Denver metro market and attempt to predict over the near short term what is likely to happen to these rates given historic trends.

The current average Denver metro monthly rent for a 2 bedroom / 2 bathroom home is $1584.66 (source – https://www.colorado.gov/pacific/dola/denver-metro-area-vacancy-rent-survey-data). Rents for new housing run higher than this. In 2009, the same size home would cost $1035 per month.

When you look at the historical rent data from 1981 – current you will see an average annual increase in rental rates around 8% per year. If you cut out the rapidly rising rents over the last 3-4 years the average is closer to 6% per year. There is some credence to using a lower average as vacancy rates in Denver are rising and new apartment construction will soon be increasing the supply of available rentals in the metro area.

Monthly rents assuming a 6% increase per year:

2017 – $1680

2018 – $1776

2019 – $1872

Conclusion

When you put all of this data together what kind of picture does it paint? It’s pretty clear that whether or not you rent or purchase, housing cost is on the rise. And the longer you wait – even given some very conservative price, rate, and rent growth data – the more you are going to pay.

The benefits of purchasing a home over renting are very quantifiable:

• Fix in your housing cost (outside of tax and insurance payments)
• Participate in the equity growth of housing in the Denver market
• Increase your equity through monthly principal payments
• Potentially improve your tax liability over just renting (see ‘How buying a house can lower your taxes’)
• Avoid the cost of having to move when your landlord raises the rent or decides to sell

Of course there are concerns/objections that I hear from time to time by people considering purchasing:

• I will have less flexibility in being able to move around.
• I’ll have to deal with maintenance on the home.
• What if the market doesn’t appreciate?

These are all valid concerns/objections and homeownership certainly isn’t something that is going to make sense for everyone. However, if you do the research on the front end, and consider your situation now versus where it will be in the future, many people will find themselves better off owning instead of renting.