The Advantage to Buying, Even in this Aggressive Market: One Buyer’s Scenario

I would like present a scenario I recently heard about for a 1st-time Homebuyer (aka a Renter). Fast-rising rents have many people seeking the protection that a consistent, fixed mortgage payment provides. Through this narrative I hope to demonstrate the advantage to buying a home, even in an unprecedented Seller’s Market like the one we are in now.

A Buyer is living in an apartment, paying $2,050 a month in rent. They are ready to buy a townhome. They have been fully approved by their lender for $325,000 but have decided to search under their maximum approved amount so they have some room to bid up, as is a common tactic in the current market. A desirable townhome was listed for sale for $250K; it is more spacious than the Buyer’s current apartment, and has many features the Buyer values. The Buyer put in an offer at $260K with an Escalation Clause, capping it at $2K higher than highest competing offer.

Putting an Escalation Clause in an offer may be one way to place your bid above others on a given home.

The Seller received multiple offers with the highest offer at $298K, $38K above the Buyer’s offer. The Seller’s Agent contacted the Buyer’s Agent and gave the Buyer the opportunity to invoke their Escalation Clause and win the contract. The Buyer’s new offer with Escalation Clause would be $300K

The Buyer rejected the opportunity, refusing to pay $50K over list price, which they considered an excessive amount for the home, even though the Buyer aspires to own a townhome just like this one. (List price is actually irrelevant — how was that price set? Was it set below market value, to bring in more prospective buyers? Over market value, by an aggressive and inexperienced Seller?)  Let’s examine the advantage of buying that home, even at what seems like an excessive price for that property. We will use a five-year period to examine the differences in Renting vs. Buying, as the Buyer wants to “wait it out”.

In this case, the Buyer’s monthly mortgage payment (PITI — Principal, Interest, Taxes, Insurance) and HOA (Homeowners Association) payment for the home would equal the same amount they were currently paying rent for their apartment: $2,050. One of the strongest advantages to buying is related to that monthly payment: With a mortgage, that number never changes. Rent payment will increase yearly, at an average of 5%. Realistically, due to the current increased demand of rental properties, rents are increasing quite a bit more than 5% per year. However, using the modest 5% increase in our model, a rent today at $2,050 will go up approximately $100 per month every year. After five years, that rent is $566 per month higher — $2,616, while a mortgage payment remains at $2,050.

We know that rent rates increase an average of 5% year over year. We also know that home values increase year over year, around the same rate. Following this estimate, the value of a $300,000 home after five years is $382,884.

Including the payments made on principal ($26,684), and market value increases (at a modest 5% Y-O-Y) the Buyer will have $109,568 in equity in their home after five years.

The Renter will not have gained any equity, but has likely been building the equity and wealth of their landlord. Over five years, the Renter will have paid $142,764 to their landlord. Total monthly mortgage payments and HOA equal $123,000. Even after accounting for $7,000 to cover closing costs, the Buyer still comes out thousands ahead of the Renter as far as monthly payments go.

There are definitely costs associated with homeownership that are not part of a renter’s budget: the initial downpayment, home repairs, HOA special assessments, taxes, and insurance. Home ownership can also take up more personal time than renting, as there is not landlord to manage repairs and maintenance.

Since they declined the opportunity to go Under Contract on the townhome, the Buyer is still searching the market. With multiple offers on almost every property and very few days on the market, it remains challenging to win a contract. However, interest rates have risen over 0.5% since they put their offer in and declined to invoke their Escalation Clause and win the contract (winning a contract is no easy feat).

Due to the increase in interest rates, the Buyer’s dollar will not go as far as it did in months before. For every 1% interest rates increase, buying power decreases by 10% of purchase price. A higher interest rate lowers the amount paid on the monthly principal included in that $2,050 purchase price. The Buyer cannot afford the same priced home that they could a few months before. The Buyer will also end up spending more money on interest over the life of the loan. Home prices are rising steadily month-over-month as well, so a townhome that sells for $300,000 this month may sell for $315,000 or more in just a couple of months.

No one wants to buy at the top of the market, and no one wants to pay top dollar. The Buyer’s reservations are understandable. However, our current market is the result of supply and demand. The increase in price appreciation is the direct result of low inventory and high demand. New home construction was low even before the pandemic began, and Millennials and Gen Zs are now in the active buyer group, increasing the number of buyers searching for homes. There are no signs of the market slowing down, and if readers are worried about a crash similar to 2008, this is not that market. That market held high inventory, high demand, and very low financial requirements to acquire a mortgage, with buyers even leaving the closing table with some extra cash, such as with an unsettling 125% loan. That scenario is not happening today, mainly due to more stringent regulations. 

Are home values too high? Are they inflated? Below is a chart that shows a house price index for the Atlanta/Sandy Springs/Alpharetta, Georgia area, from 1995-2022 [fred.stlouisfed.org]. Recessions are shaded in gray. Notice that during and after each recession, home prices continued in their trajectory upwards, except 2008 (The Great Recession), where conditions were very different from today. The housing market has adjusted — recovered — over the last decade, and home prices are back on a similar trajectory as they were before 2008. And apart from The Great Recession, most Buyers always paid “top dollar” for their homes because home values have consistently been on the rise.

As far as protecting yourself against inflation —  what better way to protect yourself than to lock in a mortgage payment and keep your largest monthly cost the same year after year, all the while growing your equity in an investment?  Consider spending $142,764 in rent over 5 years, resulting in $0 equity, or spending $123,000 over 5 years on mortgage payments, ending up with $109,568 in equity . . . It is a good time to buy a home.


I would like to extend sincere thanks to Marc Garfinkel, my colleague and my preferred lender, who works with Prosperity Home Mortgage, part of our Family of Services at Harry Norman, Realtors. Marc initially shared this scenario with me and then encouraged me when I decided to present it here. He enthusiastically assisted me as I worked to create all these charts and figures. I love working with Marc, and my Buyers always benefit from Marc’s down-to-earth approach. Marc provides numerous options to Buyers and he gives clarity to all of us in every situation: he strives to help prospective Buyers think outside the box. He makes himself available to clients after business hours; the demand for this is unavoidable in the climate of this challenging market. (Shout out to Marc for writing up a “Fully Underwritten Approval” letter for my clients’ offer on Thanksgiving Day — we won that contract!)


Metro Atlanta Living – Things that impact our lives and our real estate

A Thriving Metropolitan

The ATL, Hotlanta (does anyone still say that anymore?), A-Town, Hollywood of the South, City in a Forest, or just plain “A” . . . Atlanta, Georgia is a city rich in culture, industry, and community. What makes this city stand out? What is attracting so many to visit and stay? Outside of recording studios, the new booming movie industry, World Class sports teams, Civil Rights activism center, reigning Coca-Cola capital, and attractions like the Georgia Aquarium, Atlanta is emerging as a top-rated U. S. city to live and work in. Metro Atlanta has the 3rd-highest growth rate of large metro cities in the last 10 years. Georgia population is now 10.8M, which makes it the 8th most populous state in the U.S. Last year, in 2021, we had the 5th highest growth in the country. What is driving people to Georgia, and to Metro Atlanta, in particular? The most relevant factors appear to be jobs, affordability, and lifestyle.

Atlanta, Georgia, Getty Images

Jobs

Have you been hearing about national and international companies moving a regional or national headquarters to Atlanta? Rivian, Hapag-Lloyd, Google, Visa, Microsoft, Micron Technology, Mercedes Benz…the list grows daily. Job growth in Metro Atlanta may be the #1 reason for the city’s population growth.

Georgia is attractive to businesses, big and small. Ranked #1 in the nation as the Best State for Doing Business, Georgia maintains desirable criteria including a lower overall cost of doing business, a cooperative and responsive state government, a competitive labor environment, robust workforce development programs and attractive available real estate. Home to 16 Fortune 500 companies, Atlanta is ranked #1 Metro Area for Tech Diversity and Growth Potential as a Tech Hub. A majority of tech companies moving to Atlanta cite the recruitment of Georgia Tech students and grads as a draw. Small tech startups are a large part of the Metro business growth as well. Movie studios are popping up all over the Metropolitan area. In fact, you can’t drive around the Metro Atlanta one single day without spotting the yellow directional signs posted for cast, crew, and extras in a Netfilx show or the next blockbuster movie in the works.

Affordability

And Atlanta remains in a positive position as far as housing affordability. At the end of 2021, the average cost of home ownership was 28.7% of income. Compared with Denver, CO (35%), Austin, TX (37%) and Brooklyn, NY (78%) Atlanta’s housing affordability is attractive to would-be homeowners. Inventory levels are expected to improve in 2022, with new construction re-appearing as an option for many. This year more jobs in construction are being filled and the the supply chain bottleneck is easing (although some continued delays can be expected) and costs of materials appear to be leveling out as well. Looking across Metro Atlanta, most new construction sales are in Fulton and Gwinnett Counties, at a variety of price points. The acceleration of new construction availability will boost the strained supply of houses on the market and may help the residential real estate market lean away from a Seller’s Market toward a more Balanced Market.

Lifestyle

Atlanta ranks in the top tier of cities considered “Most Neighborly” within criteria based on satisfaction with neighbors, community sense, and residents’ involvement in community activities. Atlanta is a top 5 large market for millennials — who are the largest generation of current homebuyers. Proximity the the Hartsfield-Jackson International Airport is a strong attraction to living in Metro Atlanta. Our airport serves 150 U.S destinations and over 50 countries around the world. It’s the busiest airport in the U.S, and second busiest in the world. The mild climate in Atlanta affords for practically year-round outdoor living. Georgia’s great outdoors offers a variety of exhilarating activities: whether it’s hiking from the beginning of the Appalachian Trail, canoeing through the Okefenokee Swamp, basking in the sunrises and sunsets of a coastal beach, weekending at the lake, riding a lazy raft down the Hooch, or bicycling among the flora of Calloway Gardens, we can certainly find a recreation that suits us!

Getty Images

“Atlanta can expect the strong housing market to continue. With moderate price appreciation, supported by population and income growth, low unemployment, and relative affordability, Atlanta is expected to outperform national housing market growth.” 

Harry Norman, REALTOR’s publication, “Metro Atlanta Residential Real Estate Forecast, 2022.”


If you’d like a copy of our 2022 “Metro Atlanta Residential Real Estate Forecast”, please let me know via email and I can pop one in the mail to you! elizabethkay.pinder@harrynorman.com



Resource: inspired from Harry Norman, REALTOR’s Publication “Metro Atlanta Residential Real Estate Forecast, 2022.”