Buying Power

When you start thinking about buying a home, most likely you begin with how much house can you afford to buy.  I know that’s how I started.  But the way to really look at how much you can afford is to think of your Buying Power in terms of your monthly payment.

There are many factors that go into calculating the actual price range of homes you can afford, but for simplicity we will make some assumptions.  You have a 20% down payment toward a 30-year fixed rate loan, good credit with FICO scores in the mid-high 700s, and you have a stable job where you can show pay stubs each month — basically, a solid buyer.

In our example, let’s say you have decided you don’t want to spend more than $3,000/month on your mortgage (of course there are other expenses like property taxes, insurance, HOA, etc).  If interest rates are 6.25% today, then this means you can have a loan amount of $487,000; add your 20% down payment and this gives a purchase price of $609,000.

I know there are quite a few buyers “on the fence” right now who would like to take a “wait and see” position because they think prices are going to drop further due to all the bad news in the media.  I completely understand, and waiting for prices to drop may make sense depending on your underlying reason for buying a home.

However, waiting also comes with a risk.  For the same example above, lets say you are determined to wait until home prices drop further before you jump in to buy a home.  If during the time you are waiting, interest rates go up 1/2 of a percent (from 6.25% to 6.75%) this will impact on your Buying Power.  Now, at 6.75% your same $3000/month mortgage budget can only get you a loan of $462k, and with your 20% down payment, your Buying Power came down to $578k — basically the 1/2 percent of interest increase has cut down your Buying Power by 5%.

In the end, your Buying Power is the most important component of buying your home.  It may not make sense to wait for home prices to come down 5% (from $609,000 to $578,000 in our example) because if interest rates go up 1/2 of a percent during the time you are waiting, the same home will still cost you $3,000/month mortgage. 

So while you are waiting the home prices to come down more, you also need to pay attention which direction the interest rate would go in the future.  Put together your Buying Power profile and when you feel it is as strong as you can get, you should focus on finding the right home that fits your profile no matter what is happening in the overall market.


Meeting the market challenge in 2008 by Wells Fargo

I recently attended a special event at the Oakridge movie theater.  I was invited to join a 1-hour session hosted by Wells Fargo Bank in which they assembled a live panel of 4 high-profile people within the real estate business in front of an audience of thousands of real estate professionals.

A moderator asked some leading questions and the panel responded from their perspective as this event was broadcast live to dozens of theaters.  The speakers were Cara Heiden, Co-President of Wells Fargo Home Mortgage; David Bach, author of the bestsellers like The Automatic Millionaire and Start Late, Finish Rich; Terry Watson founder of Watson World and notoriously famous real estate family brokerage; and Brian Buffini, enormously successful former real estate broker and now founder of his training and business coaching company for Realtors — all very well respected in their fields.

The title and underlying theme was about Meeting the Market Challenge for 2008.  Essentially, it was a great time to hear how these very influential people believe the market correction we are experiencing today has created a great buying opportunity.  They are encouraging us as real estate professionals to bring this message to our clients since opportunities like this in the housing market happen about once every 15 years (historically).

What I found to be the most interesting take away was that Wells Fargo sponsored the whole event.  This was broadcast to 50 movie theaters across the country where 12,000 agents gathered to hear the insights of these speakers.  To me, it was nice to see a company like Wells Fargo committed to bringing a positive message to the industry.  With so much negative media around housing and financials, it was refreshing to hear a new perspective.

I don’t think anyone will be able to point to “the bottom” of the recent housing shift until we are well into a recognized recovery, but in my opinion, when big home loan institutions like Wells Fargo bring a message — we have money and we are here to lend to your clients and take advantage of market opportunities — it must be a step in the right direction.