Now is Never the Wrong Time to Buy

On this President’s Day weekend, I am going to make this article very short, but filled with lots of data.  First, I want to share a very powerful spreadsheet that shows how homeownership has been the winning ticket for decades, no matter when you purchased.

 

The spreadsheet below shows the average appreciation if you bought a home for $100,000 and held it for 10 years.  We used $100,000 for ease of calculation and understanding.  Since this is an average of all home prices, the actual price of the home doesn’t matter.

 

The only time since 1942 where after 10 years you had less equity was in 2006.

 

 

 

 

The next series of data points shows how waiting for rates to go down will end up costing you more than if you were to purchase now.

 

Here’s the scenario:

 

The purchase price of a condo today is $600,000 with a 10% down payment.  The current interest rate is 6.990%.  In our scenario, rates will drop ½% in the next 6 months, and another ½% a year from now.  We are using an annual rate of 5.38% for appreciation.

 

 

 

 

If you would like a custom report for yourself, please email me at alan@hawaiimortgage.net.

 

Don’t be fooled that waiting is a better strategy.

 

You can always refinance and get a better rate later.  But you can never earn the lost appreciation by waiting.

 

 

 

 

And now the week’s economic news…….

 

Conflicting Data

The major economic data released this week sent a mixed message.  On the one hand, inflation was significantly higher than expected.  On the other hand, consumer spending fizzled out in January.  Overall, investors placed more weight on the inflation data, and mortgage rates ended the week higher.

 

The Consumer Price Index (CPI) is one of the most widely followed inflation indicators.  To reduce short-term volatility and get a better sense of the underlying inflation trend, investors typically look at core CPI, which excludes the food and energy components.  In January, Core CPI rose 0.4% from December, above the consensus forecast and is 3.9% higher than a year ago.

 

Although the core CPI annual rate has fallen from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed.  One big reason is that shelter (housing) costs remained elevated and again were responsible for the largest portion of the increase.  However, the CPI data measures shelter costs with a lag, and more timely indicators from other sources suggest that this component will slowly come down later in the year.  Other categories with large monthly increases included airline fares, food, and auto insurance.

 

Adding to the inflation concerns, another indicator released this week which measures costs for producers also was much higher than expected.  The core Producer Price Index (PPI) jumped 0.5% from December, far above the consensus forecast of just 0.1%.

 

Due to the higher than expected inflation data, expectations for a reduction in the federal funds rate have been pushed out until later in the year.  While some investors not long ago were saying that the first rate cut would be seen at the next Fed meeting in March, most now anticipate that it will not take place until June.

 

Despite higher prices and credit card rates, consumer spending remained surprisingly strong in 2023 and was one of the primary pillars supporting economic growth.  In January, however, retail sales plunged 0.8% from December, far below the consensus forecast for a decline of just 0.2% and the largest monthly loss since March 2023.  The results for prior months were revised lower as well.

 

Some of the decline in consumer spending can be attributed to unusually severe winter weather in many parts of the country.  Most notably, building materials and garden equipment dropped 4.1% from December.  Weather does not fully explain the unexpected weakness in January in several other areas, however, such as electronics, appliances, clothing, and motor vehicle parts.

 

 

 

 

 

 

Next Week

Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy.  It will be an extremely light week for economic reports.  Existing Home Sales will be released on Thursday.  The minutes from the January 31 Fed meeting will come out on Wednesday.  Mortgage markets will be closed on Monday for Presidents Day.

 

Until next week…….