The only sure thing in this life is uncertainty. This fact is necessary to understand when it comes to financial planning. For a decade or so, prior to the pandemic, buying a home seemed to be an exception. Home prices grew slightly during the 2010's, while 30-year mortgage rates steadily declined. This made it seem incredibly easy to buy a home for a long time.
Since 2020, home prices have surged and in the last couple of years, so have interest rates. These changes have dramatically and exponentially increased the cost of buying a home using a mortgage in a very short period of time. There's a lot of fun economics to discuss here - monetary policy, theories on free markets, rational behavior, corporate capital, etc. But we don't get asked about economics and market research, we get asked about buying a home. So we're going to address some common questions here.
Should I wait to buy a home?
I don't know. Do you know who else doesn't know? All the people that tell you that they do know. This can only be answered by digging into the details of your personal situation. What I will say is that interest rates go up and down. Home prices go up and down. But historically, with a couple of notable exceptions, home prices tend not to don't drop dramatically. When interest rates fall, it usually happens slowly over time. We can't control either of these factors. If you wait, perhaps it will get more affordable... but we also have to accept that buying a home could get less affordable. I don't say this to compel you to run out and buy a house, I say it so you understand that you should refocus on the things you can control and not on other factors.
Are interest rates at historical highs?
Ask someone 20 years older than you. From 1978 to 1986 mortgage rates were in the teens. This is absolutely an oversimplification of a very different time period, but it's important to have some historical context. Current 30-year interest rates are still relatively low, historically speaking.
Why is it so hard to buy a house?
Since I was born in 1985 (it was exactly like the Bowling for Soup song, if you were wondering) home prices have risen about 465%, more than 4 1/2 times the rate of inflation. In the same period of time, median household income has grown by about 27%, which is about 1/4 of the rate of inflation during that time. Basically, we have relatively less money to buy a house that costs relatively more. There are a lot of factors at play to explain this, but they are all things someone looking to buy a home cannot control, so we won't get into those details.
What mistakes should I avoid?
- The biggest mistake I see people making is buying a home they can barely afford assuming they can just refinance when interest rates go down. Interest rates may go down, but they may also stay unchanged or even go up.
- Waiving contingencies when buying. Yes, it's hard to have your offer accepted, but unless you can afford to fix any unseen problems, waiving an inspection or an appraisal may come back to haunt you. For example, in CT we have issues with crumbling foundations. There are state funds available to those affected, but not if you waive an inspection.
- Keeping up with the Joneses. Your friend bought a beautiful 5-bedroom house a few years ago. They have a similar income and situation, so you think you should really buy something similar. Well, you can't control the situation they were in vs. the situation you're in. Sorry, but that house may have been $500k then with a 3% loan. A similar house may be worth $600k now. If your interest rate is 7.25%, a $300,000 home will have the same monthly cost.
- Waiting for the right circumstances. As I've mentioned a few times already, you can't control the circumstances. If purchasing is a goal, you may have to put more work in. You may have to buy a fixer-upper. But circumstances outside of your control may not get better.
What should I do if I want to buy a house?
- Start saving as much money as you can. More money down means lower monthly payments.
- Speak to a lender. Understand what you're qualified for.
- Start doing market research. Look at the areas you may consider buying. Look at taxes, insurance rate, home values, price per square foot, etc.
- Don't fall in love. Be as practical as you possibly can with this decision. Once you understand what you're looking for, you can only look at houses that are in your range that have everything you're looking for. You'll like a lot of them but don't grow attached, it may blind you from being able to make sound financial decisions.
- Speak with a financial planner. Make sure you're not forgetting anything. See how this decision affects other parts of your life. Can you still retire? Afford college? Save money? Will you have to incorporate other lifestyle changes? Does this affect your estate planning? Taxes? Insurance? A lot of these questions are hard to answer because the math is dynamic - each change affects the equations used to answer other questions.
- Interview some real estate agents. Make sure they understand your parameters. What you're willing to do and what you're not willing to do. Make sure they aren't going to push you to make uncomfortable decisions or stretch your budget.
If you're thinking about buying a home and want to discuss any of this, or if you want to find a great lender, real estate agent, attorney, or other professional don't hesitate to contact us. We'd be happy to refer you to some vetted professionals in our area or have a conversation about how to vet folks if you're not in the central Connecticut area.
Happy House Hunting!