Home prices continue to climb at precipitous rates, fueled by competitive bidding wars and a demand that far exceeds supply. On top of that, mortgage interest rates are on the rise again as well.
Does it even make sense to buy a home these days?
As with any housing market, that depends on your situation, and the answers to these questions: Are you ready to buy a house? Have you weighed the pros and cons of going all-in on home ownership?
Because that’s what it boils down to: each individual’s readiness. Waiting for all the stars to align—price is right, perfect home in the perfect neighborhood, crazy-low interest rate, little or no chance that anyone will outbid you—can mean a long (if not unending) wait .
“The concept of timing the market doesn’t work with stocks and certainly doesn’t work with home ownership,” said Mike Lavender, Director of SELCO Mortgage. “The only right time to buy a home is the time that’s best for you.”
Let’s take a closer look at whether it makes sense for you to join in the current housing frenzy.
Why the time might be right:
Your equity will grow exponentially
Yes, the median home price in the United States is the highest it’s ever been. While the initial sticker shock may be, well, shocking, you’ll also build equity at a rapid pace. Even when the market eventually cools, you can still count on your property value to appreciate if you regularly maintain your home. Homes won’t appreciate at the current accelerated 14.5% average annual growth rate forever, of course. (Oregon home values continue to go up, albeit at a slower pace than the recent frenzy.) But even at normal annual growth levels of 3.5–3.8%, after 10 years you could expect a $400,000 home to be worth more than $570,000.
“A huge benefit of homeownership is ‘paying yourself,’” Lavender said. “Each month, you’re putting money into what I like to call a ‘home savings account.’ As your principal balance shrinks, you’ll build up some serious equity, which you can use down the road when you sell or decide to do a cash-out refinance. You can’t pay yourself when renting.”
Your mortgage payments will stay the same
Over the past few years, it was anyone’s guess how low mortgage interest rates would go. More and more Americans took advantage of the bargain-basement rates by jumping into the house-buying and refinancing pool. By locking into a rate now, your monthly principal and interest payment will remain the same over the life of your loan—even as your home’s value grows. But keep in mind, your overall monthly payment will adjust occasionally to accommodate tax and homeowners insurance fluctuations.
The extra benefits you’ll enjoy as a homeowner
Running parallel to rising home prices are rentals going skyward at record levels. In fact, the biggest increase in rental prices has taken place in the Pacific Northwest. What to do? Your best bet would be to comparison shop similar-sized homes for sale and for rent. If a mortgage would be less than a monthly rental payment, and your financial house is in order, it’s probably a prime time to dip your toes in the housing waters. There are other advantages to owning a home that you don’t get when renting, such as:
- Tapping your equity to pay for a variety of expenses. With a home equity line of credit (HELOC), you can make home improvements, pay off debt, or fund other expenses that may come up.
- The freedom to put your own touches on the home. Most rental units are off-limits for personalization.
- Tax deductions or savings. Owning a home may allow you to deduct mortgage interest and other expenses from your taxable income each year.
Why it may not be the best time:
It’s a dog-eat-dog market for buyers
With the number of would-be homebuyers dramatically tipping the scales, it has been difficult to win a bid on a home. Sure, the competition has cooled significantly, but more aggressive buyers still won’t hesitate to go thousands above the asking price or make a cash offer that guarantees they’ll get the house. The last thing you want to do is borrow more than you can pay back on a monthly basis, so it would be wise to set a cap for what you’re willing to bid. But keep in mind that there are bidding wars for rentals, too.
The ‘fear of missing out (FOMO)’ trap
Prospective buyers are at a bit of a crossroads. As interest rates rise but demand remains high and inventory low, where will the market go next? Real estate experts have seen many people go to financial extremes to secure a home for “fear of missing out (FOMO)” on prices that are only going up.
Theoretically, higher interest rates will pull many buyers out of the race. And once supply and demand line up, the market will stabilize—and maybe you won’t have to bid way over the asking price to get the home of your dreams. But can you wait it out? Or should you?
“I recommend focusing on key questions like: How does the payment compare to my rent? Do I plan to stay in this house for at least 3–5 years? Can I afford future maintenance?” Lavender said. “Having these answers front of mind will help you make sense of the right time to buy.”
You simply aren’t ready
Even when buyers hold all the power, there are many forces that need to align before you take on perhaps the largest debt you’ll ever pay. You’ll need to save for a down payment. There are upfront expenses to consider, not to mention the aforementioned maintenance costs that a landlord won’t handle for you. A steady, secure job and a budget that allows you to make all your payments on time are also crucial. If you’re unable to check off these boxes, waiting is likely the smartest play.
So, does it make sense to buy a home now? If you’re still unsure, make an appointment to talk to a mortgage professional. But if the positives outweigh the negatives—or you determine there are no negatives at all—and you want to take the plunge, contact a SELCO Loan Officer and round up a real estate agent to get started on finding and funding the home of your dreams.
