The Costs of Waiting for Lower Prices

by Dan Lesniak

Over the last three months a shift has taken place in the Greater Washington DC Real estate market. During most of the previous two years bidding wars were very common, especially in places such as Arlington, VA, Bethesda, MD and many parts of DC. Bidding wars still happen on some properties, but they are fewer and further between. Homes that once sold on the first weekend now might take a month or so.

Market Fundamentals are Better than Ever

If you are a seller this is definitely not a cause for panic, but perhaps an adjustment to expectations. Inventory is still fairly low. Homes just are not selling quite as fast. Just because your neighbors home in great condition sold quickly last month does not mean you can now do no work and sell it for three percent more on the first weekend. For now (and who knows if this is going to be a long shift or just a breather until the new year) it means that most sellers should have expectations of a normal market. Be ready to do the work to get your home in showing condition, be flexible with allowing multiple buyer showings and price your home realistically. Now, more than ever, is the right time to make sure you talk to a listing agent that knows how to properly prepare your home for the market, price it right and get it out to the most marketing channels. Make sure you talk to an agent with really great local knowledge as well since the recent shift has affected different price points, home types and locations differently. Many places, such as luxury new construction single family homes in popular neighborhoods, are still selling quickly and with multiple offers. So make sure you talk with an agent that really understands your home and your area.

Now is a Great Time for Buyers

Right now is one of the best times in several years to be a buyer in our area. Inventories have gotten higher then they have been in several years. Buyers are getting into fewer bidding wars. At the same time interest rates remain great, especially when put into historical context. After jumping up to 4.5% in June 0f 2013, the 30 year mortgage rates have steadily declined and are now just below 4.0%, not too far from the historical lows.

30 Year Rate HistoryFive Years of Mortgage History











The first chart shows the history of the 30 year mortgage going back over 100 years and up through 1910. The second chart zooms in on the last five years. There are a couple of key takeaways from these charts to consider if you are a buyer.

  • In the last 55 years 30 year mortgage rates have been above 6.0% for ALL, but five of those years, going as high at 16%.
  • There have been two periods in US History when the 30 year rates have been below five percent. It first happened for five years during WWII. The second time has been the last 3 years.
  • The all time low for 30 year rates occurred for a few months in 2012 and 2013 right around 3.5%

Inventory Has Crept Up Slightly, Should You Wait For Prices to Fall

Some buyers right now might be tempted to overthink the situation. If inventories are creeping up, prices are bound to come down right? Perhaps, but even if that is true would that outweigh the possible effects of a return of interest rates to historically normal levels? During the run up to the 2006 peak prices in the Washington DC area real estate market activity was much frothier than what we have seen in the last few years. While prices did increase at a healthy rate between 2010 and 2014, it was not the double digit growth experienced in the beginning of the decade. New condo buildings took several years to sell out rather than selling out overnight prior to construction. The following factors have made price increases in the last few years much more tame than the early to mid 2000’s period.

  • Access to loans has been harder due to more restrictions on lending
  • Less first time home buyers in the market due to millennials putting off life events (marriage and children) and higher student loan debts
  • People’s memory of 2007

After the peak prices in 2007 was there a big drop in prices? Not really in this market. Most areas had at most a 10% drop. How long did it take most places to recover? Not too long. A few years at most.  So if the price increases this time around were no where near what happened in the early 2000’s is there any reason to think a price drop now would be greater than what happened then? Probably not because of the following reasons:

  • Non-owning options are much worse now as rents have increased a lot more in the last few years than they did in the early 2000’s
  • Unemployment is much lower now, both nationally and locally, than in 2007 to 2009
  • Interest rates are over two percentage points lower now
  • REO and bank inventories are lower now

So if you are waiting for a big price drop you will probably be disappointed.  A few percentage points might happen, but anything more than that is just historically unlikely in our area.

Any Price Drop Will Be FAR Exceeded by the Effects of an Interest Rate Rise

Screen Shot 2014-10-29 at 5.09.42 PM

The above chart shows the affects of interest rates on the cost of borrowing. Remember current rates sit at 4.0% on the 30 year mortgage, however, for 50 of the last 55 years these rates have been 6% or higher. So if rates returned back to the 6% level that would be equivalent to a 26% increase in price! What if  prices fell by half of what they did in 2007 to 2009, by 5%, but rates creeped up just one half percent? In that scenario you would be getting your home for nominally 5% less, but paying 6% more in borrowing costs so even in that scenario you are paying more.

The bottom line is that interest rates are at a level where they are going to drive the costs to buyers way more than prices. It would take just a small increase for this to happen. Just a half point bump up, which can happen in one day. The history right now shows the potential increases in costs due to interest rates are well above the potential savings from a potential drop in prices.

We GUARANTEE You Savings Off List Price, or We’ll Pay the Difference in Cash

So if you are a buyer on the fence don’t put your yourself at risk to potential interest rater increases. Call us today at 571-969-7653 to learn how we will guarantee you 1% off the list price of any home, or pay the difference in cash. You can also email us at [email protected] or fill out the form bellow.



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