Attention first time homebuyers- the market is shifting
It’s the middle of October in Hamilton real estate land and if the stats from September are any indication, October and November could prove to be excellent buying months for the first time homebuyer.
The inventory of homes on the market in the Hamilton-Burlington area has made a rapid climb back up to early 2015 levels. From early 2015 to mid 2017 the market experienced record breaking sales, yet at the same time there was a constant reduction in number of homes listed for sale. Inventory levels fell to a critical level in the spring of 2017. At the end of March 2017, there were only 1,641 properties on the market; down 35% from March of 2016.
Demand went up- supply went down
As the inventory dropped, buyers who had a home to sell became very leery about listing their home before they had successfully purchased another one. That exasperated the inventory problem. In a nutshell, the market became very skewed; competition for the homes that were on the market went thru the roof; prices escalated at a record pace. Faced with new lending regulations and increased competition from well funded investors, the first time homebuyer ended up being kicked to the curb
The shifting market
It was only a matter of time before things turned around. For most people, real estate is much more than an investment- it’s the roof over their head. For most people, their real estate purchase will be the place where they raise their family and put down roots in their community. There’s merit in the saying “Home Sweet Home”.
When is it time for a first time homebuyer to jump in?
As a first time homebuyer when do you know that it’s time to buy? The answer is simple- when you can afford it. A good way to determine if you should buy or not is to use a occupancy cost approach. Can you rent the same place cheaper than you can buy it? The calculations are simple.
Consider the purchase price of $300,000 which requires approximately $20,000 in your bank account; $15,000 for the downpayment and $5,000 for closing costs and incidentals. That leaves a mortgage of approximately $285,000. High ratio borrowers must qualify at the banks “posted 5 year rate”. Today that’s approximately 4.8%.
With a $285,000 mortgage stress tested at 4.8%, you’ll need to qualify for $1,625 a month, however, most banks are offering a 5 year mortgage at 3.5%. A 3.5% , 5 year fixed rate mortgage will really cost you $1,422 a month: interest and principle. That rate will stay the same for the term of your mortgage- in this case, 5 years. Over the course of 5 years, you will have paid $46,273. in interest; and $39,102.00 off of the principle, leaving a $246,606 mortgage at the end of 5 years.
Now, lets do a bit of math
Take the total interest cost for the 5 years and add on property taxes for the full 5 year term. For this example I’m using 1% of the purchase price- $3,000/year. Be safe and assume that taxes will increase by $200/year, so total property tax paid over 5 years would be 3000 + 3200 + 3400 + 3600+ 3800 ($14,000)
Add on the total interest cost for the 5 years: $46,273 + $14,000= $60,273.
Divide the total amount by 60- the total number of months of your mortgage term. 60,273/60 = $1,004/month. This figure is your true cost. The amount that you’re paying down your mortgage is actually increasing your net worth because you’re reducing your mortgage debt.
Is it worth it to you?
The question any buyer has to ask themselves is “can I get the same thing…either by buying or renting in this area for less?” When you buy, you have a lot more control and stability; you never have to worry about your landlord not renewing your lease. You’re able to settle into a neighbourhood, improve your property and reap the rewards from doing so. Buying has a lot of benefits.
Home inspections and the first time homebuyer
First time home buyers should have a thorough home inspection that provides them with a detailed report covering life expectancy of the:
- driveway surfaces
The inspection report should also cover the condition of the
Any deferred maintenance should be noted.
If the life expectancy of anything is less than 5 years then it must be taken into consideration. These are things that you’re going to have to do sooner than later and you’re going to need the funds to replace or repair.
A commitment to 5 years
When buying your first home, try to make sure that it is a home that you can stay in for 5 years. Selling a home is expensive and there’s no guarantee as to how much any home will appreciate year over year. In a normal balanced real estate market there’s also no guarantee that you’ll receive a full return on any improvements you make when it’s time to sell. Residential real estate should be viewed as a long term investment that can provide you with great stability over your living costs.
So back to the Hamilton real estate market! With Hamilton real estate inventory levels rebounding and competition staying low, it’s definitely time to get pre-qualified and start the search for your first home today!