I have an important concept for you as we're coming into this challenging market with interest rates.
So I want you to think about something I call parity pricing. Let's paint a picture:
Imagine you're a buyer now. You have a $400,000 budget to buy a house. And you found one and got it in contract. Your budget for your payment is $1,767 a month. That's for principal and interest — we won't worry about taxes and insurance for this kind of demonstration.
So how we came to that number is if we were buying a home in April and we were lucky enough to get a 5.25% interest rate back then, that's what that payment would equal. But fast forward to today, we were shooting this around September where interest rates have shot up to 7.25%. In order for that buyer who only has a budget of $1,767 a month, or for that buyer to buy a house based on today's interest rate, how much would the seller have to come down to get to a parity pricing just on the payment on this house?
The number they would have to come down is $60,976 in order to get parity pricing.
That's a big number, and most sellers aren't gonna do that. So that's gonna take that house from $400,000 down to $339,024. Most sellers aren't gonna do that, but more and more sellers are gonna get more and more motivated as their house lingers on the market.
When we're out there shopping, we should definitely be targeting those homes over 30 days if we're looking for some maximum negotiation. Because if you've been on the market more than 30 days, you're more likely to be more aggressive on my price.
But here's what's probably more likely to happen:
Maybe the buyer will have to adjust their budget up a little bit and the seller's gonna have to adjust their budget for selling a little bit down. And they meet someone in the middle.
Maybe the buyer ends up paying $375k, and the seller discounts $25k. And the buyer also flexes a little bit on their payment and agrees to eat the 7.25% payment for a little bit anyway until I can refinance maybe two or three years from now.
That's where the market's headed. We've gotta have conversations with buyers on one side and sellers on the other to bring them together.
Now, what's the alternative for a buyer?
A buyer might say, "Hey, I'm just gonna wait it out. I'm not gonna enter the market."
Well, waiting's probably not a great decision today because interest rates are likely to rise. Prices are still not predicted to go negative even in next year. Economists believe that pricing overall will still rise. Not at the same degree it was for certainly for the last couple years, but just simply because we have still super slow supply, prices are still likely. So waiting's not a good choice.
And here's the number one reason why waiting's not a good choice:
If I'm not buying and I'm a renter, rental prices are skyrocketing still. Last year, rent prices went up about 14%. They've come down a little bit to about 12%. That's the annualized rate of increase. But it's likely they're gonna increase by double digits again next year. So if you wait, you're gonna be paying more and more and more in rent. Even if you're coming into what feels like a super high interest rate level, at least you're locking your payment.
And here's what's beautiful:
You're locking your payment. But unlike being a renter, you can refinance this property when interest rates come down and you can actually have your "mortgage" come down in price over time.
So there are some definite benefits to still entering the marketplace. That's the kind of thing we gotta be talking about in the marketplace.
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