Waiting on the world to change

It’s hard to beat the system
When we’re standing at a distance
So we keep waiting
Waiting on the world to change

~John Mayer

I hear it all of the time.  We’re going to wait.  Wait to buy, wait to sell, wait for the real estate world to change.  I get it.  No one wants to make a mistake with the largest financial transaction of your life.  And adulting is scary, right?

The thing is, in this world there is a cost for everything.

Just last week I took one of my cars into the shop.  The air condition wasn’t working.  It’s not my daily driver, but my daily driver has proven to be a little unreliable.  It’s brand new and has spent 11 days of it’s first year in the shop.  It needs to go in again because the seat belt chime won’t quit bleating at me.  So I took my steady Eddie into the shop to get the air conditioner looked at.  That car has an oil leak that is going to take a day’s worth of work to correct.  That’s an expensive job and I’ve been putting it off for two years now.  Well, there’s a cost for procrastination.  In my case it was a hose in the air conditioning system that rotted out because oil was dripping on it…from the oil leak I put off fixing.  The cost of procrastination for me was $400.  I might as well have dropped that $400 in the street and set it on fire, because had I fixed the oil leak when it was discovered, the air conditioning would have never failed.  The cost of waiting.

Ten years ago when I moved into my home I installed an air conditioner at my house.  I rescue dogs and always have at least one male dog here.  Apparently air conditioners are a big deal with male dogs.  Once they lift their leg on it, the unit warms up when it’s being run and their scent goes all over the neighborhood.  It’s a four legged win/win.  And it will rot out an air conditioning unit in about 8 years.  I could have built a fence around it, or hosed it off weekly and that would have saved it.  I never got around to it so I got to spend another $11,000 replacing the entire system because the old kind of freon systems have to be completely replaced.  The cost of waiting.

Now I get waiting.  I’m have it down to expert level.  It’s not always the best course of action.

Bay Area homes are expensive.  Ridiculously expensive.  Buyers want to wait to buy because they think prices are going to come down.  Sellers want to wait because they think they’re going to keep going up.  I’m going to suggest that the cost of waiting can be insurmountable.

I could tell stories about buyers who wanted to wait for the market to cool in 2013 and are now completely priced out of the market and will probably never own unless they have some windfall in their lives.  Or sellers that wanted to wait in 2006 and ended up loosing their home to foreclosure in 2009.

Hi, I’m a Procrastinator and I like buying air conditioning equipment.

I don’t.  I hate buying air conditioning equipment.  And I hate watching people make decisions that I know are not going to benefit them in the long term.  After all, with very few exceptions, people who own real estate have 36 times the average net wealth that renters have.  Thirty six times!

Part of that is that homeowners are creating equity with every house payment as opposed to making their landlord wealthy with every rent check.  I don’t know how the new tax law is going to affect the mortgage interest deduction (which you can thank me and every other dues paying Realtor member of the National Association of Realtors who fought to keep that deduction in place) and property taxes going forward, but there are still deductions available to homeowners that renters don’t get to benefit from.

OK, so what is the real cost of waiting.

Factors:

  1. Interest rate
  2. Cost of purchase
  3. Tax benefits

Current interest rates are hovering around the high 4’s.  We’re going to use 5% for this example.  And we’re going to use Bay Area prices.

The median price in the Bay Area is hovering around $900,000.  I know, that’s nuts.  There are plenty of homes in other price points in the Bay Area.  Buyer has 5% down so it’s going to be a jumbo loan with PMI.  The total amount to close this is going to be around $72,000.  The payment is going to be around $4,589.82.  Taxes are going to be around $10,000 a year and there is going to be PMI (private mortgage insurance) on the loan at around $335.00.  The house payment is going to be around $5760.  Over a period of two years, this loan will pay down to $827,990.74 adding around $22,000 to your equity.  Now you have around 7.5% equity, plus you’ve been receiving the tax benefit for two years.  What if the market goes up?  Yay!  More equity.  What if the market goes down?  Boo, your equity disappeared, but you’re still living in your own place and no one (except the City) can tell you what to do with it.  You keep paying your mortgage and the market recovers after a long arduous five year wait and the market starts running again.  Yay!  You’ve paid it down to $783,817.23 in your first five years and can probably dump the PMI.  Yay! Again!  And for those five years you’ve been writing off all of your deductions on the home.

Now let’s say you’re the seller.  You want to wait to next year because you want to squeeze every penny you can out of it.  After all this is the Bay Area and it will keep running….right?  Well maybe not.  The same guy who bought the home above could qualify for the large loan today, but interest rates returned to the historic norm which is 6%.  Now that payment is $5126.16 plus $335 PMI and $833 in taxes and that buyer just can’t afford your home any more.  Now you aren’t average and there is pressure on the market and what was $900,000 this year is barely $800,000 because they can only qualify for a $755,000 loan.  That buyer isn’t going to buy that home any more, they’re looking at a smaller home and as a seller, that seller is feeling the downward pressure on the market.

There is a cost of waiting.  Sometimes, it is appropriate.  Sometimes it’s misguided and will ultimately doom someone’s hopes and aspirations.  Don’t let that happen to you.  Find out what you can, can’t, should and should’t do right now.  Call or text 925-381-2998