Wednesday, January 30, 2013

A PSA

A warning to those who don't understand how mortgages work and yet still read this blog:  Higher interest rates means your mortgage payments will increase.

To illustrate this shocking revelation, here is the affordability chart with a line denoting what affordability would be if rates were no lower than 7% (current reading in this series* is 4.15%).

*V122497 - Average residential mortgage lending rate 5 year

62 comments:

totoro victoria said...

Good PSA. Get a ten year rate if you are concerned.

patriotz said...

The people who ought to be concerned wouldn't be able to buy at today's 10 year rate.

totoro victoria said...

ooohhh - new shiny 68 year old penny. just like patriotz?

koozdra said...

I wonder if the interest rates started creeping up if we would do our own QE.

dasmo said...

Some interesting front end mortgage math for y'all...
The year is 2013 and a five year fixed is 2.99%. The crystal ball says rates in 2018 will be 3.99%. 2023 5.99%. 2028 6.99%. Then in 2033 7.99% and then back down to 6.99% in 2038. We will also assume that you renew for a five year fixed each period.

Choice one is buy now, for simplicity sake let's use a $500,000 mortgage.
Total interest paid = $345,109
Total paid = $845,109

Choice two is buy in five years, prices are down 10% so the same place for a $450,000 mortgage.
Total interest paid = $406020
Total paid = $856020

Choice one expanded
Term 1 the balance is $427,291interest paid $69,111.
Term 2 the balance is $349,765 interest paid $77,295.
Term 3 the balance is $265,436 interest paid $91,818.
Term 4 the balance is $155,293 interest paid $73,874.
Term 5 the balance is $0 interest paid $33,011.

Choice two expanded
Term 1 the balance is $391,6741interest paid $85,553.
Term 2 the balance is $332,071 interest paid $107,632.
Term 3 the balance is $256,563 interest paid 102,357.
Term 4 the balance is $153,091 interest paid $82,161.
Term 5 the balance is $0 interest paid $28,317 .

DavidL said...

@dasmo
Interesting number crunching... but I think that you may have overlooked a couple of things.

[1] Postponing a house purchase for 5 years means that a larger down payment is possible. That $450 mortgage might be just $375K is the buyer has managed to save $15K per year for 5 years, such that they can make a larger down payment. I'd be curious what the "expanded" numbers are with a $375K mortgage.

[2] What happens if prices drop by more than 10 percent? Even the "conservative" banks are calling for a correction. What happens if the drop in price is 20 percent? Are you willing to recrunch the numbers?

Leo S said...

I like Roger's wait or buy tool (in the right sidebar of the site) for this purpose.

No one is ever going to agree on the set of assumptions about interest rates or price drops, and you're ignoring a whole swath of other variables and costs, so it's much easier to just use that tool and do the calculation for yourself.

Also 1 to 2 years is probably the timeframe that most people think ahead anyway. 2018 is stretching it. 2028? Forget about it.

DavidL said...

@totoro

The avatar used by patriotz is a nickel, not a penny. I remember seeing a few of them still in circulation when I was a kid. Note the "V" for victory is also a Roman numeral five.

DavidL said...

I figure that by 2018 I'll be ready to buy a different house or maybe a recreational property. It takes me a couple of years to figure out which car make/model I want to buy...

Leo S said...

This Victoria girl sounds strangely familiar.

(despite what that sounds like, not actually spam)

dasmo said...

375000
69628 326396
89694 276727
85298 213803
68468 127576
23598

Total interest paid = $336,668
Total paid = $711,686 + 75k extra down = $786,686

dasmo said...

Roger's is a good tool. I used it! I wasn't trying to prove anything but the relevance of considering the front end load of interest that the bank takes.

dasmo said...

Yes, she is very infomative...

dasmo said...

Speaking of rent vs buy, If you were renting for 1200/month while saving for the down payment you would have spent 72k in rent so really to total for the "370000" should be $858,868 LOL....but then there is taxes maintenance blah blah bah...Just use Rogers tool...

DavidL said...

TIM or Taxes, Insurance and Maintenance on my house are $450/month, $5400/year or $135,000 over a 25 year period. Something to think about...

patriotz said...

Some interesting front end mortgage math for y'all...

You are ignoring the opportunity cost on the accumulated principal payments.

Since at any given time the person who buys now has more accumulated principal, this makes his expenses look lower than they really are. His cash interest + opportunity cost is always higher than for the person who buys later at any given time, simply because he paid more.

koozdra said...

This is what they call a "jackpot" in the UK? Pffft, most Canadian's have made more just by living in their homes. We're all rich!!!

British man hits jackpot when he finds ‘smelly’ sperm whale secretion worth $68K on beach

koozdra said...

Oh sure the NAR (National Association of Realtors) can't be trusted. I'm sure during our collapse the honest people working our CREA won't pull anything like this.

Hopefully calls for open data with respect to housing sales will be revisited.

http://online.wsj.com/article/SB10001424052748704476604576158452087956150.html#articleTabs%3Darticle

DavidL said...

@koozdra

Interesting WSJ article ... I cannot say that I'm surprised. My wife's cousin is a real estate agent in Portland, Oregon. Her analysis has always been more pessimistic than the (US) National Association of Realtors.

DavidL said...

Maybe those HELOC's are tapped out?
Best Buy closing stores across Canada

totoro victoria said...

Doesn't surprise me that Best Buy is closing. We can buy a new computer cord online for $5 while they sell it for $80. I ordered my current computer from an online retailer. The market for real world stores for tech products is constricting. Buyers of tech products know how to shop online. I would say it is unrelated to HELOCs.

dasmo said...

Amazon is killing all by losing money....except the apple store which is one of the top retailers right now. But they offer service and an experience. Best buy does not...See ya big box store...

reasonfirst said...

What if all the big box stores close and you have now where to go to actually look at the HDTV you want to buy. I sure wouldn't spend big $s online before I saw things like that actually in use.

dasmo said...

Exactly what was killing BB. Anyone remember consumer distributing?

reasonfirst said...

Just heard the Uptown BB's doors are locked.

koozdra said...

They just announced on the radio that all three are closing on the island.

Introvert said...

Good riddance, Best Buy! Now if only Wal-Mart would take a hike. Too bad that will never happen.

Leo S said...

There is literally zero point to best buy in uptown. They are right next door to future shop which is the identical store with 90% identical products, just a different name.

Alexandrahere said...

I have a condo now and heat with BB electricity. What would you say the Oil/Gas/Electric heating bill is now for the average 3 bedroom 2bath home with basement? And what is the avg hydro bill? I have a very large condo and my total Hydro incl heat adds up to about $500 per year. Just curious thanks.

Renter said...

@Alexandrahere: We're in a 3 bdrm duplex and use our oil furnace sparingly. VERY sparingly. We share one wall. It costs $1200 to fill our oil tank and we can't get through 2 winters without having to fill it up. So maybe $700 a year for us? But heat is off at night and through most of the day as well, and when it is on, we keep it to 17C unless we have guests. I imagine that other people might have to fill their whole tank every winter.

yogurt said...

@Alexandrahere, I read that four times as "I heat with Best Buy electricity." I thought your condo was on top of one of their stores or something.

I don't have any average info for you, but here's one data point:

We rent a 1970s 4-bedroom SFH with single pane windows, an electric forced-air furnace, and a gas hot water heater.

We pay roughly $2400 in electricity per year and $900 in gas.

BC Hydro's smart meter web tool says we use less electricity than our neighbours.

totoro victoria said...

We have baseboards. We also have a gas fireplace.

Our gas fireplace has become our only heat source because we enjoy the flames, don't need heat at night, and our place is really energy efficient.

It is on from November through March and costs us $400 per year in total. Our place is 1400 square feet.

yogurt said...

"BC Hydro's smart meter web tool says we use less electricity than our neighbours."

However, their Compare Your Home tool says that the average B.C. SFH 2000-2500 sq foot home with electric heat and non-electric hot water uses about 13073 kWh/year. We use way more, almost 17000 kWh. :(

Alexandrahere said...

Yogurt: I can see why you thought that as previous blogs were about best buy. The "bb" stands for base board heat or electricity.

After considering DavidL's comments on his costs of living in his home; I was thinking how much a couple without kids renting a decent one bedroom apartment could save in the next five years for a down payment on a home.

Say $750 for rent, $20 parking, and probably $25 electricity if heat is included. Content insurance as well for those who wisely insure.

Just Jack said...

Sale volumes for houses in the core districts are down 18 percent from a year ago. Market exposure is up 43% from this time last year with the typical home in the core averaging 86 days to sell. The months of inventory now stands at 7.6. Increasing inventory and days to sell have pushed prices down a modest 6.5 percent for homes in the core. That's a $40,000 drop for the typcial Victoria home in just one year.

Since both the months of inventory and days to sell are still increasing, that would cause the rate of decline in prices to accelerate.

The condominium market in the core districts is suffering more than detached home market. Volume is down 24%. Months of inventory now at 8.3 That has pushed the median price of a condominium in the core down 14.5 percent from this time last year to $231,500. The good thing is that the days to sell has been reduced by 15 percent, from this time last year, as the lower prices may be attracting more interest from prospective purchasers.

The core districts are in the same position as the Westshore was this time last year. And we all know how that has worked out.



DavidL said...

Our 1979 two story house has 2100 sq ft. that is heated (all but the 300 sq. ft. garage). 240V baseboard heaters are used throughout, all with programmable wall thermostats. Different rooms have different heating patterns - but the heat is never higher that 18C, and at night it is turned down to 13C (except for bedrooms at 16C). Basically, our house is cool, and if you stay up past 10 PM in winter, you might want to put on a sweater.

Between September 2011 and September 2012, we used 28,312 KWh of electricity, costing us $1988.40 (including fees and taxes). Looking at what is used during the summer (mid-April through mid-October, when the heat is turned off), and then prorating for the entire year: 16,425 KWh are used for everything (lighting, stoves, fridges, freezers, laundry, hot water, etc.) except for heating. The 11,887 KWh that are used for heating works out to $834.84 per year.

DavidL said...

@Just Jack
I love all those statistics ... I don't know where you get them from - but they always seem to be accurate!

DavidL said...

@Introvert
Now if only Wal-Mart would take a hike. Too bad that will never happen.

Agreed! For the most part, I like the new Uptown development, but the Walmart just degrades the whole place. I prefer to buy my cheap crap from Canadian Tire and London Drugs ...

DavidL said...

@Alexandrahere
After considering DavidL's comments on his costs of living in his home; I was thinking how much a couple without kids renting a decent one bedroom apartment could save in the next five years for a down payment on a home.

I would suggest $15K per year = $75K after five years (plus some compound interest!)

Victoria said...

I say good riddance to Best Buy. I wish they would take Future Shop with them.

I haven't gone into a big box electronics store for years because the commissioned salespeople were mostly pushy and disingenuous.

I buy software, etc online. Amazon is a great resource. My sister is an amazon retailer and the rules are STRICT. It's good for the consumer.

Bring back the friendly small business folks actually live, work and shop in their own neighbourhood. I am one and I love my neighbourhood and the folks I see everyday.

totoro victoria said...

Average rent for a one bedroom is 800 excluding utilities in Victoria.

Can you find a decent place in Victoria for 725 including utilities?

totoro victoria said...

In any event, a couple renting a one bedroom can definitely save for a down payment with the money they would have spent on buying a home.

They don't get any equity paydown or perhaps rental income but they will likely have more free time too.

In a falling market they don't lose on paper, nor will they gain if prices start to rise.

Introvert said...

I prefer to buy my cheap crap from Canadian Tire and London Drugs

Ditto.

For the most part, I like the new Uptown development, but the Walmart just degrades the whole place.

I'm not really a fan of Uptown. Too tall, too squishy, too ugly, and not enough access points to the various parking lots and parkades. Poor planning.

And the largest Wal-Mart in North America? In Saanich? I think it runs counter to Saanich's character.

Saanich sure scored some huge tax revenues with Uptown, though. They were seduced by the money. The age-old story.

not yet said...

nor will they gain if prices start to rise???????????????

totoro victoria said...

Renters don't have papaer appreciation in a rising market as homeowners do. Not sure if what I wrote was unclear but it seemed to inspire an emphatic question - or did your finger get stuck.

koozdra said...

"papaer appreciation in a rising market"

Paper money can disappear just as easily as it appeared.

totoro victoria said...

Umm... are you just into repeating things that support your views? As you will see, I have already stated that in the same post.

Leo S said...

In any event, a couple renting a one bedroom can definitely save for a down payment with the money they would have spent on buying a home.

If you can make do with an apartment, there is no way you can't come out ahead in today's market by renting one instead of buying a SFH.

In a falling market they don't lose on paper, nor will they gain if prices start to rise.

No market is further away from rising prices than this one. The chance of that in the next year is zero.

not yet said...

I guess that my question was do you think that values may rise in
the near term?

Al + TOH said...
This comment has been removed by the author.
Al + TOH said...

Don't know if anyone sees the new household spending numbers released yesterday by StatsCan:
Survey of Household Spending, 2011

Marko said...

What a messed up week so far. I had a developer reject, as didn't even bother to counter, an offer 1% below asking price on a new condo, my buyer walked away.

Another client made a full price offer today on a brand new listing, seller rejected with rationale of they have 3 showings lined up for tomorrow.

And a third buyer client walked away yesterday due to unrealistic seller. Didn't want to negotiate because her assessment went up...damn.

I am finding low motivation on the part of many sellers this particular week.

koozdra said...

"Another client made a full price offer today on a brand new listing, seller rejected with rationale of they have 3 showings lined up for tomorrow."

Ouch.

StalJ said...

TD bank thinks things are looking *peachy* for our next wave of
homebuyers.Unemployment among Canada's youth aged 15-24 will cost over $20 billion in lost wages over the next 18 years.

Seller denial aint just a river in egypt.

totoro victoria said...

I'm surprised on the survey of household spending at how much families with kids spend on average.

I'm also surprised at the average monthly expenditures for housing - they seem low. Must be lots of people with paid-off homes.

patriotz said...

Must be lots of people with paid-off homes.

Indeed there are - about 30% of all homeowners. Another large group bought a decade or more ago at much lower prices and much higher interest rates, and so are paying very little today.

Marko said...

I would say an area like Oak Bay is closer to 50% no mortgage, going by the titles I look at.

Leo S said...

@marko. Wow at the seller confidence. I guess they know the market is about to boom this spring and they don't want to be the sucker that didnt sell in a bidding war

Marko said...

I think quite a few sellers will get burned in this market with their irrational decision making...

Friday February 1, 2013 7:50am:

January January
2013 2012
Net Unconditional Sales: 294 372
New Listings: 1,080 1,088
Active Listings: 3,870 3,715

Please Note
Left Column: stats for the entire month from this year
Right Column: stats for the entire month from last year

Chickinvic said...

I agree with you Marko. I bet that your clients' offers will be the best ones that they'll get and by the time they come to accept that fact it will be too late. Too bad for them:)

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