Is Now a Bad Time to Buy a Home in San Diego, and How Much Will My Monthly Mortgage Payment Be?
Photo Credit: Flickr: Geoff Lang
(this article was updated in Spring 2022)
I recently posted an article titled "Is Now a Good Time to Buy a Home in San Diego?", a question I get asked frequently. In that post, I discussed why this is a complicated question, AND I provided some tips to help you decide if now is the right time for you to embark on the adventure of buying a home in San Diego.
In this post, I’ll talk a little bit more about how to make that decision, using some solid numbers that paint a picture of how changing home values AND interest rates can impact your monthly mortgage payments.
I'm going to show you what it costs to buy a home now AND compare that to what it might cost if you wait 3-4 years to buy.
HOW MUCH DOES IT COST TO BUY A $1M HOME?
Let’s take the case of someone looking to buy a $1,000,000 home with a $250,000 down payment and a $750,000 loan. Since interest rates are currently around 4.75% for a 30-year fixed rate mortgage, this means their monthly PITI housing payment would be about $5,050 per month. This includes mortgage principal, mortgage interest, property taxes, and homeowner's insurance (PITI).
WHAT IF HOME VALUES GO DOWN A LITTLE IN THE NEXT FEW YEARS AND INTEREST RATES GO UP?
Now let’s imagine that same person INSTEAD decided to put their home search on hold for 3-4 years because they believe we are at the top of a home value curve and prices will be lower in a few years. By waiting 3-4 years, let’s assume they are able to buy a similar home for only $950,000 instead of $1,000,000.
However, 3-4 years from now, let’s assume that interest rates have also climbed back to a more normal range, around 6.5% (which is still a historically low interest rate for mortgage loans, considering that rates were between 10-18% during the 1980s). Here are two ways our buyer could respond:
- They could put the same amount down ($250,000) and take a smaller loan ($700,000). This would raise their monthly PITI housing payment to about $5,515, so even though they are buying the home for $50,000 less than they’d pay today, they will pay almost $500 more per month on their mortgage.
- They could put $50,000 less down and still get a $750,000 mortgage, keeping that extra $50,000 in the bank. With this option, their monthly payment would jump to about $5,830, almost $800 more per month than they’d pay today (buying the $1M home at today's rates). If they keep that mortgage for 30 years (until it's paid off), they will end up paying $280,000 more in payments, which makes the $50,000 in savings (on the purchase price) look like a really bad deal.
WHAT IF HOME VALUES GO DOWN A LOT IN THE NEXT FEW YEARS AND INTEREST RATES GO UP?
ALTERNATIVELY, what if we have another "great recession" like we did in 2006-2010 where home values declined anywhere from 20% to 50% (depending on the area)? What if four years from now the "$1,000,000 home" of today is worth only $750,000? If our buyer gets lucky or has a crystal ball and decides to wait for this "perfect time to buy" and still puts $250,000 down (although they might not have the $250K any more if it was in the stock market during that 4 year recession), they would now only need a $500,000 loan and their monthly PITI payment would be only $4,050 per month, saving them around $1,000 per month.
THAT SAID, they would have been paying rent for the past four years rather than paying down their mortgage, meaning they would have an extra four years left on their 30 year mortgage. Let’s assume their rent over the past four years was around $4,000 per month; taking into account the extra four years of the $4,050 PITI payment they'd be paying if they waited to buy, they would actually end up paying only $168,000 more over the course of the 30 year mortgage if they bought today at the “presumably $250K higher price". Factor in income tax savings for owning a home, and the gap becomes even smaller. Essentially, I'm calculating that this buyer is saving themselves on average $2,000 per year for the next 30 years.
THE MORAL OF THE STORY: The "savings" this buyer achieved by waiting to buy a home until prices declined were largely offset by higher interest rates, rent payments before the home purchase, and lack of income tax savings. All that said, I think IF you are capable of accurately predicting a 25% decline in home values, it would be worth it to wait for that decline and then buy a home.
As I discussed in Part 1 of this post, it’s very difficult to predict where home values will be a few years from now. Economists (who get paid to know a lot more than REALTORS® about market forces and economic forecasts) disagree with each other about what the future holds. If I had to throw out a guess, I would say that home prices will hit a high point somewhere in the next 1-5 years. At that point, history suggests we might begin a cycle of declining home values for around 5 years or so. As for what interest rates will look like in 3-4 years, that can be even more difficult to predict. All of this is just conjecture, though. Nobody knows what the future holds.
***Deciding when to buy a home, how much to put down, and how big of a loan to get depends on your unique financial situation AND your long-term goals.***
It’s the RIGHT TIME to buy a home when (A) you can afford it, (B) you find a home you love in your price range, and (C) you have a long-term plan for the home. If those three puzzle pieces are in place for you now, then you may want to consider buying now, regardless of what is going on with interest rates and home values. At the end of the day, you need a place to live - whether that means spending money on buying a home or on renting.
If your long-term plan is to own (and keep) a home in San Diego, AND if all of these other factors line up, there is no bad time to buy in San Diego (in my opinion).
If this is the case, I recommend that we meet for a Buyer Strategy session in which we can discuss your specific situation, what you’re looking for in a home, and how I can help you.
Also Read: Is Now a Good Time to Buy a Home in San Diego? (Part 1)
Also Read: What is a Buyer Strategy Session?
Also Read: What is an Exclusive Buyer Agent?
Also Read: How Does a Buyer's Agent Get Paid?
Also Read: Is San Diego a Buyer's Market or Seller's Market?
Justin Gramm is the founder and principal brokerof Globella Buyers Realty, your San Diego Exclusive Buyer Brokerage.
Exclusive Buyer Agentsdo not list homes for sale and never represent sellers. They have no "inventory" to try to sell you. They can represent you in purchasing any home. They are specialists at representing buyers only on the buyers' side of the transaction. Exclusive Buyer Agents work to get buyers the best price and terms when they buy a home.
If you have excellent credit and plan to buy a home or condo in San Diego County within 90 days, contact Justin Gramm to hire an agent on your side of the transaction. Call Justin at 858-437-2662 or Email.