Buying a house is one of the most significant financial decisions most households make in their lifetime.
Knowing whether or not you should buy a house and when is a little more complicated than you might think. After all, a big part of the traditional American Dream is owning your home. However, personal circumstances and current financial environments can influence whether or not it's the right time to buy a house on an individual basis.
As a fiduciary financial advisor, I get the question of whether or not to buy a house all the time. Or, stated differently, is NOW the right time to buy a home? We are currently facing record-low inventories in many areas (including Nashville) and high demand. This has put significant upward pressure on prices.
There are three critical questions everyone needs to ask to know the right answer.
Why Are You Buying?
Know why you are buying a house.
Is it so you can settle down, lay down roots, and raise your family for the next 20 years? Have you outgrown your current living situation and need more space? Have you just relocated to a new area and aren't sure how long you'll be there but want to feel secure in your new situation? Or some other reason entirely?
Buying real estate is a huge commitment and not one you can inexpensively withdraw from if you find later that it's not what you really want. Selling a home usually comes with closing costs and a 6% commission to your realtor for selling your house. Additionally, financing costs come into play. According to the National Association of Realtors, first-time homebuyers financed 93% of their home compared to repeat buyers who financed 83% of their home. In either case, this shows that the purchase is so large that the vast majority of Americans rely on financing to secure a home.
If you buy a property that doesn't suit your current and future needs, it can lead to more financial stress and unnecessary costs. Therefore, take your time to explore why you are buying a house to focus on properties that best fit your vision for your life.
How Long Will You Hold the Asset?
The general rule of thumb is that if you are going to buy a home, you should plan to live there for a minimum of 3 to 5 years before you consider selling it. The reason for this is so that you give your purchase enough time to appreciate so that you do not lose money on the purchase. After all, buying a home comes with closing costs, down payments, mortgage interest, taxes, and let's not forget things like furnishing or fixing.
Even if this isn't your 'forever home,' you want to avoid losing money on a home buying transaction. Therefore, know why you are buying AND how long you anticipate living in your home so you can minimize your financial risk as much as possible.
Can You Afford It?
After you have clarity over why you're buying a home and how long you expect to live there, your list of 'must haves' and 'nice to haves' can get lengthy. Since this is a significant financial decision, you may become unwavering on details like yard size, the number of bedrooms, and upgrades.
Home prices across the country are 13.2% higher in 2021 compared to what they were in 2020. That means home buyers are financing more to fill the gap.
Just remember that the house you can comfortably afford is based on your monthly income, not the amount of financing your lender approves for you. For most households, your total housing costs should not exceed 30% of your gross income. Personally, my advice to my clients is to ensure their housing cost, on a monthly basis, still allows room in the budget so that savings targets can be met. This may mean that the 30% number should be much lower as a percentage of your gross income to account for this savings.
Soaring Rental Prices Impacting Buying and Selling Decisions
It may come as no surprise that as the cost of buying a home has increased in 2021, so, too, has the cost to rent a home. The national median rent has increased by 11.4% so far in 2021.
Knowing that home rental prices are higher than ever before and continue to increase may cause you to want to buy instead of rent. Therefore, you'll want to weigh the pros and cons of buying in today's market for your specific situation.
Similarly, people who have been thinking about selling their existing homes may be tempted to sell now while the housing market is still up so they can cash out on their equity growth. Just know that if you do sell now and aren't buying another property, you will face sky-high rental costs, which should factor into your decision-making process.
What About Investment Properties?
Investment properties are doing remarkably well right now. During high inflationary periods, commodities, such as real estate tend to overperform.
The high demand for homes coupled with the high cost to own is creating quite a boom for rental properties, according to the Wall Street Journal. The article explicitly cites that the "expected risk-adjusted annual return for build-to-rent investments in the private market is now about 8% on average, according to securities advisory Green Street, the highest of 18 property sectors tracked by the firm."
Owning an investment property is like running a business, and it's not for everyone. It does take time and expertise to manage, but if you are in a position to own a rental property, the chances are good that you can experience a return on your investment and create a passive source of income for yourself.
As a fiduciary financial advisor, I don't advise my clients in a vacuum. Even if the market is ripe for single-family investment properties, you still need to assess the benefit and risk according to your circumstances. Never jump into any major financial decision without a thorough evaluation.
Today's housing market is high, but so is rent. Therefore, I encourage people to pursue home-buying in any market if it aligns with their needs and long-term financial goals. To have a deeper discussion about whether or not home-buying is right for you right now, don't hesitate to schedule an appointment with your financial advisor to explore your situation. Your financial professional should help you consider all your options when it comes to major financial decisions. If they don't, you're welcome to schedule a call with me.