Should You Buy Now or Wait? Here’s How to Mathematically Calculate Your Options

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In the ever-shifting world of real estate, you find yourself at a crossroads: Do you buy now or wait for more favorable market conditions? 

The housing market witnessed unprecedented shifts during the pandemic, with home prices soaring and mortgage rates experiencing volatility in 2022 and 2023 due to the Federal Reserve’s attempts to curb inflation through rate hikes. The combination of these two situations leaves aspiring investors grappling with the decision of whether to lock in stable leverage today or wait for “the next cycle.”

Here, we’ll look at the argument to buy now versus later, as well as the mathematical reasons for each decision.

Why Buy Now?

The prevailing sentiment at the end of 2023 among buyers is toward caution, with existing home sales witnessing a notable dip and a substantial 85% of consumers deeming it an inopportune time to buy a house, according to the Fannie Mae Home Purchase Sentiment Index. 

However, recent developments suggest a glimmer of hope for buyers in various regions. 

Days-on-market figures are on the rise, providing potential buyers with more time to make informed decisions. Notably, major cities like Seattle and San Francisco, which experienced soaring prices, have seen double-digit year-over-year declines.

Here are some factors to consider if you’re looking to buy now. 

Equity building and long-term investment

Despite mortgage rates playing hard to get and home prices soaring, buying now still could be your golden ticket to building equity and wealth. Stacey Froelich, a broker with Compass in New York City, emphasizes the importance of not delaying, stating, “You cannot time the market, and a home should be a long-term investment.” So it’s like planning for a marathon, not a sprint.

Mortgage rate considerations

While mortgage rates have eased from October 2023’s 8% highs, they currently remain above 7%. Melissa Cohn, regional vice president of William Raveis Mortgage, advises, “When mortgage rates drop and more buyers come back into the market, home prices will rise.” 

If the deal works with the current interest rate, you could lock in the current rate and refinance later if interest rates drop. As the adage goes, “Marry the property; date the rate.”

Credit score, down payment, and long-term ownership

Buyers with excellent credit scores (740 and above) are poised to secure the best mortgage deals. Add a substantial down payment and plan for long-term ownership, and you’re basically the real estate equivalent of a superhero (capes optional).

What if there’s a recession?

Navigating a potential recession is like trying to parallel park on a busy street—challenging but not impossible. While recessions pose risks, they may also present unique opportunities due to decreased competition.

Why Buy Later?

For those inclined to wait for the real estate stars to align more favorably, considerations include the volatility of mortgage rates, local market conditions, and personal financial stability. Here’s a closer look at each factor.

Impact of lower mortgage rates

Waiting for lower mortgage rates could be beneficial, considering recent fluctuations that exceeded a full percentage point in just a few months. When you consider buying in your current market, analyzing the financial outcomes of buying now versus waiting could shed light on the potential advantages of patience.

Local market conditions

Monitoring local trends, such as dropping home values or increasing inventory, may influence the decision to wait. Waiting for improved personal finances, including a windfall or credit score enhancement, can also be a strategic move.

Potential recession and buying opportunities

The probability of a recession by September 2024 stands at 46%, posing risks but also potential opportunities for savvy investors. Less competition during a recession could lead to unique investment possibilities.

Case Study: Making the Right Move Now

Let’s dive into a tale of two investors: Alex and Morgan.

Alex’s strategic move now

Alex, eager to seize the opportunity, purchases a $150,000 rental property with a 20% down payment at a 7% interest rate. The property generates a healthy cash flow of $1,200 per month, leading to an annual rental income of $14,400. 

Over a year, the property appreciates by 5%, adding $7,500 to its value. Simultaneously, Alex’s mortgage balance decreases, contributing to equity growth. 

At the end of the year, Alex’s total financial gain, including rental income, property appreciation, and equity increase, demonstrates the positive impact of taking action despite higher interest rates. Alex is also poised with equity to do a refinance should interest rates drop in the future.

Morgan’s cautious approach

In contrast, Morgan opts for a more conservative strategy, deciding to wait for a potential drop in interest rates. During the year of waiting, the real estate market experiences unexpected growth, with property values surging. 

When Morgan eventually decides to enter the market, the same $150,000 property has appreciated by 10%, reaching a value of $165,000. However, Morgan has missed out on a year of rental income and the initial stages of property appreciation Alex capitalized on. 

Which investor came out ahead?

By comparing the financial outcomes of both investors, the case study underscores the tangible benefits of taking proactive measures in the current market. Alex, despite facing a higher interest rate, accumulated $14,400 in rental income, enjoyed $7,500 in property appreciation, and saw growth in equity. In contrast, Morgan, who waited for more favorable interest rates, faced a more expensive property, missing out on the income and appreciation gained by Alex.

This case study reinforces the importance of considering the holistic financial picture, including market considerations, rental income, property appreciation, and equity growth, when deciding whether to buy now or wait. It serves as a practical example of how timing and market dynamics can significantly impact an investor’s overall success in real estate.

Final Thoughts

The decision to buy now or wait hinges on numerous factors, from credit scores and down payments to local market conditions and the looming possibility of a recession. 

Despite national headlines, real estate remains hyperlocalized, and the optimal decision varies from one market to another. Thoroughly assessing individual financial situations and consulting with experienced local real estate professionals are crucial steps in determining whether the current market favors immediate investment or waiting for better conditions.

Ultimately, the mathematical decision to buy now or later rests on a careful evaluation of these multifaceted considerations. So, make sure your real estate moves align with the rhythm of the market.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.