After being cooped up for months, many people, especially those in compact, urban situations, are asking themselves if it’s time to invest in a larger living space. While there are obstacles for potential homebuyers right now – the job market, the economy, the pandemic, and student debt – mortgage interest rates are at record lows, offering borrowers a significant opportunity.
Let’s break down where the market is today, and how you can start to make the right choices for your financial future.
Real Estate Snapshot
Even though the U.S. is in a recession, unemployment has never been higher, and the future economic effects of the pandemic are unknown, housing sales are rapidly on the rise as states begin to reopen.
According to the National Association of Realtors’ (NAR) index of pending home sales, contracts for previously owned U.S. homes rose in May by 44.3 percent (the biggest increase they’ve ever recorded).
While home sales are increasing at large, interest in suburban homes is especially increasing. Realtor.com reported a 13 percent uptick in views of homes in suburban areas in May, which was more than twice that of urban homes.
Another data point on the rise? Median home price. According to the NAR, the median existing home price for all housing types in May was $284,600.
However, the inventory of available housing is low - down 17 percent compared to last year, according to recent data from Zillow.
Among all these changes, one factor that’s definitely changing in the buyers’ favor is current mortgage rates. As of July 16, the benchmark 30-year fixed mortgage rate is 3.14 percent with an APR of 3.41 percent (the rate after fees and other expenses are included), according to Bankrate’s latest survey of the largest mortgage lenders. To put that number in context, current mortgage rates are nearly half what they were a decade ago.
Together, these factors create an interesting time to be on the residential housing market. Buyers may have to offer higher-than-normal bids for the limited, and expensive, market inventory. But, historically low mortgage rates might outweigh that cost over the long term.
So, What Should I Do?
We sat down with Roger Ma, Certified Financial Planner at lifelaidout and author of Work Your Money, Not Your Life, to get his advice examining this opportunity from the perspective of your unique financial situation.
“Don’t get distracted by external events or let external elements influence your personal timeline,” he advises. You have to consider your unique situation above all other factors. Ma suggests that potential homebuyers ask themselves three questions:
First: Can you buy?
Initially, you need to decide if you have enough cash on-hand to make a 20 percent down payment, cover closing costs, and have a 3-6 month emergency fund. Ma also recommends you extinguish credit card debt by paying off cards monthly, and don’t forget to tackle any high-interest personal loans.
Then, ascertain if you have sufficient income to make your monthly payment. That housing payment should not be more than 28 percent of your household’s gross income. When combined with student loan debt, that figure should not be more than 36 percent of your gross income. And as Ma reminds us: “That’s a limit, not a goal.”
Also, do you have a competitive credit score that allows you to get the lowest mortgage rates? As of March 2020, people with high credit scores (720 and above) are locking in mortgage rates that are as much as 78 basis points lower than borrowers with low credit scores (660 or below), according to the Urban Institute.
And, consider your other debts, like student loans, that might prevent you from getting approved for a mortgage because of high payments or high interest rates. “If you haven't already, consider refinancing with someone like Commonbond to score a lower interest rate and lower monthly payment.”
Second: Should you buy?
Ma advises that buyers plan on being in their homes at least 5-7 years. Real estate agents and certified financial planners use this benchmark because the actual cost of buying and selling your home is expensive. Closing costs typically range from 4-6 percent when you buy and upwards of 10 percent when you sell.
Also, spend some time reflecting on where you are in your career and life. Those that are earlier in their jobs might want to determine that they’re fully satisfied with their career path. Is grad school in your future? Are you happy with where you live, geographically? If you’re unsure about any of these factors, renting might be a better option so you have more flexibility.
Third: Do you want to buy?
“Whether you can buy or you should buy, I think it comes down to your other financial goals,” Ma says. “What is your priority for each of those? If you have to put down 20 percent and you’re allotting a significant chunk of your income for the monthly payment, that’s going to prevent most people from doing something else.”
Take the time to fully understand what you want, and don’t get distracted by the mortgage market or housing prices. Ma says people should ask themselves, “What kind of life do I want to live, and does buying a house actually fit with that life?”
“Nine out of 10 clients who come to me say one of their primary goals is to buy a home, but 70 percent of the time, as we work through it, they realize that other financial goals are more important to them in the immediate term,” he says.
But...isn’t renting a huge waste of cash?
“You often hear people say, ‘Renting is just throwing away money,’ but you have a lot of wasted money when you buy, too,” says Roger. This includes interest on your mortgage, property taxes, HOA fees, and more.
Obviously, the decision to purchase a home is complex. With all of these considerations, don’t forget your mental health as well. “People often ask, ‘Should I put more down so I have a lower monthly payment?’” If, for example, a $5,000 per month payment will keep you up at night with worry, then consider putting more down. If not, you could invest that money elsewhere.
Remember: It’s really all about you
“Oftentimes, when people think about buying versus renting, they’re trying to come up with the mathematically correct solution,” Ma says. “But that solution is not often the right solution for you.”
Take the time to really evaluate what’s best for you and your long-term happiness. And if you’d like more guidance on how to make that happen, don’t forget to check out Ma’s book, Work Your Money, Not Your Life!