If you’re thinking of buying a home, it’s important to consider a number of factors. These include your current financial situation, employment stability, and future plans. The market conditions themselves may not be as important as you think.
Now may be a good time to buy a home if:
- You have a stable job and income
- You have saved up for a down payment
- You are ready to commit to a long-term mortgage
If you have a stable job and income, now may be a good time to buy a home. Buying a home is a long-term commitment, so it’s important to be sure you can afford to make monthly mortgage payments. It’s also important to have saved up for a down payment, as this will help you get a lower interest rate on your mortgage, and give you more flexibility in the loans you can qualify for. Finally, if you are ready to commit to a long-term mortgage, now may be the time to buy a home.
On the other hand, you may want to wait to purchase a home if:
- You’re not sure about your job security
- You don’t have enough saved for a down payment
- You aren’t confident that you will be living in the same area for more than 2 years
- Your lifestyle may be changing. For example getting married, having kids, retiring, etc. that may require you to upsize or downsize your home in the very near future.
Ultimately, the decision of whether or not to buy a home is a personal one. You’ll need to carefully consider your own circumstances before making a decision.
The other major factor to consider is the current real estate market.
If you’re thinking of buying a home, it’s important to pay attention to market conditions. Are prices rising or falling? Is the market hot or cold? These factors can impact your decision of whether or not now is a good time to buy a home.
Let’s talk about buying a home in a hot market, typically called a seller’s market. This is characterized by low inventory, high prices, and lots of competition. In this type of market, it may be difficult to find a home that meets your needs and budget. You may also end up paying more for your home than you would in a cooler market.
Does this mean it’s a bad time to buy? Not necessarily. Let’s break this down:
Low inventory means you have less options to choose from. This means you may need to get a little out of your comfort zone. That is from either a price or a physical standpoint. You may need to look at slightly higher priced homes to find what you are looking for, or look at homes that are under your budget, but will have to have an over ask price to be competitive.
Nobody wants to overpay for a home, but real estate is one of the few assets that consistently appreciates over time. An average home appreciates between 3-6% annually, and when we look at average home price index appreciation from 1975-2014, California homes appreciated 6.77% annually, Colorado at 5.25%, Florida at 4.09%, Georgia at 3.49%, North Carolina at 4.06%, New York at 5.57%, and Virginia at 4.92% to gives some general examples. What this is really saying, is that you can realistically overpay by 3% or more, and expect to see that made up within the first year, and in some areas, within the first six months of home ownership.
With lower inventory, you may need to look for a home that isn’t quite turn-key. You may need to remove the requirement for a pool or a remodeled kitchen. Look at things in a home that you can’t change and make sure those are your base requirements. Things like location, number of bedrooms and bathrooms, and lot size are all much harder to change than paint colors or appliances.
Think long term, you can work on a major project each year, start with the kitchen, then move to the backyard the following year. Given this flexibility, you can often time your projects to be worked on during off-seasons when contractors have more time and often give homeowners a discount. It’s also a great time to roll up your sleeves and do some of the work yourself to save money.
Another option is to put yourself on a longer time plan, and use the equity in your home to do a complete remodel. Consider a home equity line of credit, or HELOC, which allows you to draw money as you need it and usually comes with lower interest rates than many other loan types. This pulls money directly from your home’s equity and you can use that to do all of your upgrades and remodeling. This let’s your home’s equity do the work for you.
Now let’s dig into buying in a cooler market, or a buyer’s market. This is typically characterized by higher inventory, lower prices, and less competition. In this type of market, you’ll have more options to choose from and may be able to find a home that better meets your needs and budget.
If you’re considering buying in a cooler market, there are still some things to keep in mind. First, while prices may be lower, they may not stay that way for long. It’s important to have a realistic idea of what you can afford and to consult with a real estate professional to get an idea of how much home you can realistically expect to get for your budget.
With higher inventories, you do have a lot more options, but it’s important to still be decisive and not get caught up in the “paralysis of analysis”. It can be easy to get caught up in looking at too many homes and never making a decision, but it’s important to remember that the longer you take to make a decision, the more the market can change. It’s best to stay within your budget and look for a home that meets as many of your requirements as possible.
If you see prices dropping in general, it’s very important to have an agent that understands the current conditions and can guide you in the proper offer amount. You can only get a loan for the amount that a home appraises for, so it’s important to make sure you aren’t overpaying, even if prices in the area are dropping. As new homes are sold at lower prices, the value of your home technically drops, so make sure to move quickly on your offers and getting appraisals done as soon as possible. This helps ensure that the offer price, and the appraisal price line up and you can be confident in the transaction. Not every seller is willing to lower their price if an appraisal comes low, and you don’t want to have to come out of pocket to cover the difference, especially in a cooler market with prices already dropping.
The question then comes up with, should I keep waiting for prices to drop more? It really depends on your personal circumstances, but in general, if you see a home that meets your needs, it may be best to go ahead and make an offer. In a cooler market, there’s less competition so you may not have to worry about multiple offers driving up the price.
It’s also important to remember that while prices may be dropping in general, they may not drop in the specific neighborhood or type of home that you’re looking for. So if you find a home that you love and is within your budget, it may be best to go ahead and make an offer rather than risk waiting too long and missing out on your dream home.
And as we can see from 30 plus years of real estate price history, homes do not decline in price for long, and over the long term, have a more than 3% average appreciation annually.
The last note to consider is what your payment will be looking like in the future. If you are currently renting, you can expect your rent to increase anywhere from 1-5% each year. So far, in the last 20 years, the national median rent has increased at an annual rate of 4.17%. Year over year rent changes have not fallen to a negative rate since 1934, so you shouldn’t expect your rent to ever drop, or even stay the same from lease to lease.
Your mortgage payment never changes for the lifetime of your loan. The only things that can change are insurance, taxes, and HOA dues if you live in a community with one. Consider this as part of your long term planning, how much easier would it be if you were paying the same rent as you did 15 years ago? Would you be able to save up for vacations, remodeling, or even for retirement? And once you’ve paid your home off in 30 years, all you have left to pay is taxes, insurance, and possibly HOA dues.
In summary, it’s best to be financially ready to buy a home, and the market doesn’t need to dictate whether or not it’s good to buy. There are pros and cons to any market, but in the end, it really depends on your personal circumstances. If you’re looking to buy a home, don’t let the market scare you off, nobody can “time the market” just like you can’t time the stock market. When you are ready, then the time is right, and don’t put off buying because the market isn’t perfect, it will never be.