Buying a Home
Today's real estate market is completely different from what it was just a few months ago. Both buyers and sellers are left wondering whether they should wait or make a move.
"I tell my clients the only thing you can count on when deciding to buy or sell is what is happening in the market right now," says Michelle Larnard, owner/broker of Michelle Larnard Real Estate. "No one can predict what will happen in the future."
According to Michelle, "the best thing for home buyers to do is understand their current living and financial situation, and compare that with the cost of waiting to make a move. Factors like personal finances, monthly payment affordability, and desired location get balanced with the knowledge of upcoming living situation changes: a job move, a new baby, or perhaps downsizing. Once they evaluate in this way, deciding to buy or sell a home becomes an easier decision."
1. Should I wait for interest rates to drop before buying a home?
Interest rates are the highest since 2008 and may continue to rise in the short term. A recent report from The Mortgage Reports polled eight industry experts about mortgage rates in the future. The below graph represents what the experts predict for 2023. What is clear is that mortgage rates are unpredictable. Instead of rates dropping, they could just as easily increase.
THE BOTTOM LINE
Buying now is a good decision. You can’t predict what mortgage rates will be in the future. The only thing you can predict is what they are today. Given that you can refinance at a lower rate when rates drop, it’s best not to gamble with the future and make a move dependent on your life plans and not on the market. Choosing the right real estate professional is key to finding the right home with the best outcome.
Even with higher interest rates, monthly payments and overall costs could be similar. As home prices level off and there is more inventory, fewer bidding wars exist. This means homes are selling closer to their market value. Subsequently, buyers could pay the same mortgage even though their interest rate is higher. Check out this example from Realtor.com.
2. SHOULD I RENT INSTEAD OF BUY RIGHT NOW?
Buying a home is one of the most significant financial decisions you will make in a lifetime. The upside is fixed monthly payments, building equity, and investing in a major financial asset.
According to the Federal Reserve Bank of Dallas (using data from the federal consumer price index), year-over-year rental price growth will rise from 5.8%, as of June 2022, to 8.4% as of May 2023.
THE BOTTOM LINE
Owning a home instead of renting is a better option if you're in it for the long haul. Like the tortoise and the hare, owning is a slow and steady investment. While buying a home costs more upfront, you will get that back (and probably more) when you sell.
Below are approximate equity calculations using a home price of $750,000 with a 10% (or $75,000) down payment.
Your mortgage (minus a $75,000 down payment) will equal $625,000.
If your home's value increases at an annual rate of 3%, your home's value over five years will gain $119,455, making your total equity $194,455. However, given the rate properties increase, homeowners could see equity closer to $243,455 over five years.
Now compare what you gain in home equity to investing the down payment amount instead and continuing to rent.
- On the flip side, investing in the S&P 500 at the average return rate of 10% would make that $75,000 turn into $120,788 over five years.
Once you factor in capital gains and paying rent over 5 years, buying a home is a better investment. Not only will you own a home and continue building equity, but you could also sell and invest that lump sum toward an even nicer house.
3. BUYING A HOME TODAY IS A GOOD DECISION: HERE'S WHY
During the pandemic, home prices skyrocketed at an astonishing rate. But, experts predict prices are expected to return to a pre-pandemic pattern. Historically, home prices appreciated at a 4% rate year over year. According to Keeping Current Matters, most forecasters expect the market will mirror this growth rate again.
THE BOTTOM LINE
Buying a home in today's real estate market is more consistent with pre-pandemic conditions. This means:
The bidding wars buyers experienced throughout the pandemic are not as prevalent.
Overbidding for a house is less common.
The value of a home is better aligned with its sale price.
Buyers can request home inspections when presenting an offer, and sellers will consider the offer.
Buyers can include contingencies, and sellers will consider the offer.
At the end of the day, buying a home is a personal decision that can only be made based on your current financial and life circumstances. As long as buyers take the necessary steps to buying a home, they will be successful. Start the process by determining your current home goals as well as where you want to be in five years. Then, talk to a local real estate professional who will discuss current market conditions and help guide you through the process. Click below to let us help you create a custom home search so you can realize your home-buying dreams.