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Few topics cause more division among economists than the age-old debate of whether you’re better off paying off your mortgage earlier, or investing that money instead. And there’s a good reason why that debate continues; both sides make compelling arguments.
For many people, their mortgage is the largest expense they will ever incur in their lives. So if given the chance, it only makes logical sense you would want to pay it off as quickly as possible. On the other hand, a mortgage is also the cheapest money you will ever borrow, and it’s generally considered good debt. Any extra money you obtain could be definitely be put to good use elsewhere.
The reality is, however, a little less cut and clear. For some homeowners, paying off their mortgage earlier is the right answer. While for others, it would be far more advantageous to invest their money.
Advantages of paying off your mortgage earlier
- You’ll pay less interest: Each time you make a mortgage payment, a portion is dedicated towards interest, and another towards principal (we’ll ignore other costs for now). Interest is calculated monthly by taking your remaining balance, the length of your amortization period, and the interest rate agreed upon with your lending institution.
If you have a $300,000 mortgage, at a 4% fixed rate over 30 years, your monthly payment would be around $1,432.25. By the time you finish paying off your mortgage, you would have paid a total of $515,609, of which $215,609 were interest.
If you wanted to lower the total amount you pay on interest, you don’t need to make a large lump sum to make a difference. If you were to increase your monthly mortgage payment to $1,632.25 (a $200 a month increase), you would be saving $50,298 in interest, and you’ll pay off your mortgage 6 years and 3 months earlier.
Though this is an oversimplified example, it shows how even a small increase in monthly payments makes a big difference in the long run.
- Every additional dollar towards your principal has a guaranteed return on investment: Every additional payment you make towards your mortgage has a direct effect in lowering the amount you pay in interest. In fact, each additional payment is, in fact, an investment. And unlike stocks, bonds, and other investment vehicles, you are guaranteed to have a return on your investment.
- Enforced discipline: It takes real commitment to invest your money wisely each month instead of spending it elsewhere.
Your monthly mortgage payments are a form of enforced discipline since you know you can’t afford to miss them. It’s far easier to set a higher monthly payment towards your mortgage and stick to it than making regular investments on your own.
Besides, once your home is completely paid off, you can dedicate a larger portion of your income towards investments, your children or grandchildren’s education, or simply cut down on your working hours.
Advantages of investing your money
- A greater return on your investment: The biggest reason why you should invest your money instead comes down to a simple, green truth: there’s more money to be made in investments.
Suppose that instead of dedicating an additional $200 towards your monthly mortgage payment, you decide to invest it in a conservative index fund which tracks S&P 500’s index. You start your investment today with $200 and add an additional $200 each month for the next 30 years. By the end of the term, if the index fund had a modest yield of 5% per year, you will have earned $91,739 in interest, and the total value of your investment would be $163,939.
If you think that 5% per year is a little too optimistic, all we have to do is see the S&P 500 performance between December 2002 and December 2012, which averaged an annual yield of 7.10%.
- A greater level of diversification: Real estate has historically been one of the safest vehicles of investment available, but it’s still subject to market forces and changes in government policies. The forces that affect the stock and bonds markets are not always the same that affect real estate, because the former are subject to their issuer’s economic performance, while property values could change due to local events.
By putting your extra money towards investments, you are diversifying your investment portfolio and spreading out your risk. If you are relying exclusively on the value of your home, you are in essence putting all your eggs in one basket.
- Greater liquidity: Homes are a great investment, but it takes time to sell a home even in the best of circumstances. So if you need emergency funds now, it’s a lot easier to sell stocks and bonds than a home.
Two IT giants are planning to expand their campuses in Redmond at the same time.
Facebook has spent $106 million on construction and development permits for Oculus offices in Redmond over the last three years. And in 2018 alone, Facebook spent $88.3 million on Oculus -related permits for as many as eight new offices in the area. BuildZoom’s analysis identifies five properties, in particular, all on Willow Road in Redmond, that span more than 90,000 square feet of lab and office space. Those locations are 10545 Willows Rd., 10785 Willows Rd., 9805 Willows Rd., 9845 Willows Rd. and 9461 Willow Road.
Microsoft will construct 18 new buildings on the campus over the next five to seven years, which currently has 80. It will renovate several other buildings to give them a modern, open feel.
The following analysis of the Western Washington real estate market is provided by Windermere Real Estate Chief Economist Matthew Gardner. We hope that this information may assist you with making better-informed real estate decisions.
The Washington State economy added 83,900 new jobs over the past 12 months, representing an annual growth rate of 2.5%. This is a slowdown from the last quarter, but employment growth remains well above the national rate of 1.6%. Employment gains continue to be robust in the private sector, which was up by 2.8%. The public sector (government) grew by a more modest 1.1%.
The strongest growth sectors were Retail Trade and Construction, which both rose by 4.8%. Significant growth was also seen in the Education & Health Services and Information sectors, which rose by 3.9% and 3.4%, respectively.
The State’s unemployment rate was 4.7%, down from 4.8% a year ago. Washington State will continue adding jobs for the balance of the year and I anticipate total job growth for 2018 will be around 80,000, representing a total employment growth rate of 2.4%.
Home Sales Activity
There were 23,209 home sales during the second quarter of 2018. This is a drop of 2.3% compared to the same period a year ago.
Clallam County saw sales rise the fastest relative to the same period a year ago, with an increase of 12.6%. Jefferson County also saw significant gains in sales at 11.1%.
The number of homes for sale last quarter was down by a nominal 0.3% when compared to the second quarter of 2017, but up by 66% when compared to the first quarter of this year. Much has been mentioned regarding the growth in listings, but it was not region-wide. King County saw a massive 31.7% increase in inventory, though all but three of the other counties covered in this report saw the number of listings drop compared to a year ago.
The takeaway from this data is that while some counties are seeing growth in listings — which will translate into sales down the road — the market is still out of balance.
Home prices continue to trend higher across Western Washington, but the pace of growth has started to slow. This should please would-be buyers. The spring market came late but inventory growth in the expensive King County market will give buyers more choices and likely lead to a slowing down of price growth as bidding wars continue to taper.
When compared to the same period a year ago, price growth was strongest in Mason County, which was up 17.4%. Eleven other counties experienced double-digit price growth.
Mortgage rates, which had been rising significantly since the start of the year, have levelled off over the past month. I believe rising rates are likely the reason that inventory levels are rising, as would-be sellers believe that this could be the right time to cash out. That said, the slowing in rate increases has led buyers to believe that rates will not jump soon, which gives them a little more breathing room. I do not expect to see any possible slowdown in demand until mortgage rates breach the 5% mark.
Days on Market
The average number of days it took to sell a home dropped by seven days compared to the same quarter of 2017.
King County continues to be the tightest market in Western Washington, with homes taking an average of only 13 days to sell. Every county in the region other than Clallam saw the length of time it took to sell a home drop when compared to the same period a year ago.
Across the entire region, it took an average of 41 days to sell a home in the second quarter of this year. This is down from 48 days in the second quarter of 2017 and down by 20 days when compared to the first quarter of 2018.
Although we did see some inventory increases when compared to the first quarter of the year, we are essentially at the same level of homes on the market as a year ago. The market has yet to reach equilibrium and I certainly do not expect to reach that point until sometime in 2019.
This speedometer reflects the state of the region’s real estate market using housing inventory, price gains, home sales, interest rates, and larger economic factors. For the second quarter of 2018, I have moved the needle very slightly towards buyers, but it remains firmly a seller’s market. This shift is a function of price growth tapering very slightly, as well as the expectation that we should see more homes come on the market as we move through the balance of the year.
Matthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has more than 30 years of professional experience both in the U.S. and U.K.
This post originally appeared on the Windermere.com Blog.
Here are the Current stats via “What’s Happening in the Market” for the month of May 2018 for Eastside (based on Residential and Condominium report):
- Is the market shifting? It is too early to call and the real estate statistics show demand still far exceeding supply, however still low, there has been a significant increase in inventory.
- Number of properties for sale is increasing:
o 1,230 active properties for sale is the highest number in the past 20 months or since August 2016.
o Active inventory is up 350 properties or 40% compared to a year ago (May 2018 = 1,230 vs May 2017 = 880)
- Statistics indicating more demand than supply:
o Less than one month’s supply of inventory.
0.9 May 2018 vs 0.6 May 2017 vs 0.8 May 2016 vs 1.1 May 2015
o Sales prices on closed May sales are up 14% to $859,950 vs $753,750 May 2017.
o 58% of houses sold over list price compared to 62% in April 2018 and 61% in May 2017
The increased inventory means Sellers and listing brokers will need to consider active competition. Condition, marketing and pricing will be more important with rising inventory.
April 2018 active inventory rose 25% from March 31 2018 and 17% from April 2017.
Historically listings taken and active listings at the end of the month grow from April through July. In addition the majority of the year’s appreciation occurs in the first six months.
What does this mean:
- Buyers can be a little more picky, more listings are coming, but they still are going to have to be aggressive with their offers
- 62% sold for over list price and 83.4% sold in less than 15 days. However these are the properties that sold.
- April 2018 active inventory rose 25% from March 31 2018 and 17% from April 2017.
- Sellers may want to be cautious about pushing their asking price.
First posted on windermere-bellevue.com.