A little while back, I wrote about why my wife and I don’t yet own a house. In short, the lesson is that if you don’t have a long-term plan to be in one location, then from a pure financial standpoint buying a house is likely to lose you money. The cost to both buy and sell, in the form of closing costs and commissions, is very high and would necessitate a pretty significant increase in home value over a short period of time to keep you out of the negative. Given that long-term housing prices essentially just track inflation, and in the short-term are very volatile, rapid appreciation isn’t something to count on.
But the market has recently moved in a direction that has made buying less affordable, which has brought up the question for us and for others as to whether now is the right time to buy a house before it’s too late. Today I’d like to explore the recent market movements and what they mean for potential home buyers.
Housing prices have risen
According to the Case-Shiller index, national housing prices have risen 10% in the past year. That will of course vary market to market and even house to house. But let’s say that you could have bought a house for $200,000 just one year ago and compare your long-term costs to what that same house might cost today, assuming a 10% increase in price:
Not only would you have to come up with $4,000 more up front for the down payment, but you would end up paying almost $31,500 more over the life of the loan.
Interest rates have risen
Not only have housing prices increased, but according to zillow.com the average interest rate on a 30 year mortgage with excellent credit and 20% down has risen from about 3.75% one year ago (and as low as around 3.20% in December) to 4.20% today. So let’s look at the same example above, but factor in the change in interest rates as well:
You still have the extra $4,000 up front, but now you’re paying an extra $47,087 over the life of the loan. That’s a lot of money!
How might this be interpreted?
There’s a certain way that I’ve heard many people interpreting this information. It goes like this: housing prices have clearly hit bottom and are on their way up. Same with interest rates. Both of these things are only making housing more expensive. So if you want to buy a house, you’d better do it now before you cost yourself a lot of money.
I can certainly understand this mentality, and it may end up proving true that waiting will simply cost you money over the long-term. I have to admit that when I look at these numbers, it’s a little disheartening and even a little scary to think about what it might look like in a couple of years. But I do not believe that you can simply look at these numbers and decide that it’s the right time to buy a house. In fact, I think that doing so could be dangerous for your family’s financial security.
Buying a house is personal
Buying a house is likely to be the biggest financial decision of your life and should not be taken lightly. The above examples merely reflect broad national averages and have nothing to do with your personal financial situation. If you couldn’t afford to buy a house a year ago, are you suddenly in a position to afford one now when the cost has increased? Possibly, but the answer to that question has nothing to do with national trends in housing prices or interest rates. It depends solely on your family’s personal circumstances: How much money have you saved? How long do you plan on living in your current location? Are you prepared for the ongoing maintenance costs? Will your family be growing in the near future? How would a mortgage payment affect your budget? The list of personal questions is long and cannot be answered by summary statistics from a national index.
The numbers in the examples above are real and should not be ignored. Though interest rates have increased recently, they are still at historic lows and if you can otherwise afford to purchase a house, then it very well might be an excellent time to lock in a low rate. But that should not be the primary driver of your decision. Making a quick decision to buy based largely on some short-term market movements is a recipe for financially over-committing before you are truly ready.
And besides, what are those numbers really saying? All they tell you is that the cost has risen over the past year. They say nothing about what will happen in the next one, two or five years. The reality is that we don’t know what will happen in the near future, and anyone who tells you they do is either selling something or reacting out of fear to yesterday’s news. When you add in the variables of your specific situation, the predictions become even more murky and less useful. The right time to buy a house is when it makes sense for you and your family, not when the talking heads on TV are telling you that you’re about to miss your opportunity.
Like others who hope to buy in the near future, I am of course worried about the potential for increased housing costs. Nobody wants to pay more tomorrow for something they could have had for less yesterday. But the fact of the matter is that the reasons we haven’t already bought still exist, and buying out of fear won’t make those reasons disappear. If anything it’s more likely to make them more pronounced.
A house is a place to make your home. It can be the emotional center for your family, a place full of love and memories. And it may even save you money over the long run. But it will only be those things if you make your decision based on a realistic view of your personal financial situation and what you can afford, not what the markets are doing at any given point in time.
Image courtesy of digitalart / FreeDigitalPhotos.net