Is Now the Right Time to Buy a House?


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:

graph1

Assumes 20% down on a 30-year mortgage with a 4% interest rate.

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:

graph2

Assumes 20% down on a 30-year mortgage. The interest rate is 3.75% for 2012 and 4.20% for 2013.

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.

Conclusions

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

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  • DC @ Young Adult Money July 3, 2013

    I bought a house last October and so far I’m happy with the purchase. There have been a ton of expenses that we wouldn’t have had if we didn’t buy a house, but it was the right time for us. I think we can focus on interest rate and housing prices, but honestly it’s hard to time the market. People were getting laughed off the television who warned us that the market was about to crash 5 years ago. How do we know housing prices won’t drop again? We don’t.

    • Matt @ momanddadmoney July 3, 2013

      Glad it’s worked out for you! I agree that interest rates and prices matter, simply because they factor into the decision about whether you can afford it. But like you say, we really don’t know what will happen in the future, so making decisions based on predictions is not a good practice.

  • Holly Johnson July 3, 2013

    I would be scared to buy if I wasn’t sure if I would need to move or not. I have never sold a house before but it looks like a serious pain!

  • We wound up selling just nine months after buying. We got SOME of our down payment back

    • Matt @ momanddadmoney July 3, 2013

      Hopefully it didn’t put you guys too far in the hole. That’s exactly what we’re trying to avoid.

  • Pauline July 3, 2013

    One day it will make sense for you and if houses are expensive and renting is much cheaper you’ll rent a bit more, there is no right or wrong. I knew I would move a lot so I chose to buy a rental, to still get to build some equity while not having to live there for life.

    • Matt @ momanddadmoney July 3, 2013

      Great point, there’s no right or wrong answer. Converting a house to a rental is certainly an option, and one many people have done successfully. We may eventually decide to do that, but we’re not there yet, which definitely factors into the decision.

  • AvgJoeMoney July 3, 2013

    The market is always the 2nd piece of info I look at when deciding whether to buy a house. The first piece is always my own budget and how it fits. Clearly you’re doing a great job of weighing both of these when making a decision.

    • Matt @ momanddadmoney July 3, 2013

      Thanks Joe. Agreed that the market plays a role, but that role is secondary. The market can definitely help dictate what you can afford, but it doesn’t inherently make it a good or bad time to buy.

  • Jacob @ MPFJ July 3, 2013

    Thanks so much for joining in on the Tour de PF fun!

  • Grayson @ Debt Roundup July 3, 2013

    My wife and I are trying to sell and buy a home. We want to move to a better suited neighborhood to raise our son and make it a longer lasting home (if that is possible these days). I don’t like the raising prices and interest rates, but I have to do what is best for my family. That is the biggest concern right now.

    • Matt @ momanddadmoney July 3, 2013

      Perfect example of how the market can’t dictate decisions. You guys want to move because it’s best for your family. The fact that the cost has gone up doesn’t necessarily cause you to change your mind. It may affect how you make your decision, but it isn’t the primary factor.

  • Michelle July 3, 2013

    The fact that interest rates and housing prices are going up is stressing me out since we are in the planning stages of buying. We have been thinking about putting it off for a couple of years though and just staying in our current house now.

    • Matt @ momanddadmoney July 3, 2013

      It can definitely be stressful. For us, the key thing to keep in mind is that our plans can’t involve what we think the markets will do. They have to center around what’s best for our family, financially and otherwise. When we’re really ready, the current market at that time will help guide our final decision because it will affect what we can afford. But we won’t rush to buy because we think the cost is rising, and we also probably wouldn’t delay simply because we hop the cost decreases (unless we really couldn’t afford the current market prices).

  • Budget & the Beach July 3, 2013

    I’m sad that I live in one of the most expensive cities for housing, and I was laid off from my good job right at the heigh of the recession. I have to say the prospect of buying a home in my lifetime feels like a far off dream. It feels like my goal of hopping to get married one day…I don’t’ mind being single (or in this case renting), but I would like to be married (buy a home) at some point.

    • Matt @ momanddadmoney July 3, 2013

      Yeah we live in a pretty expensive area too. It definitely makes it harder. I’m like you in that I don’t mind renting for now, but I’d like to own someday. It’s one of those things that can definitely feel far off though at times.

  • Done by Forty July 3, 2013

    I really enjoyed this post, as it provides an insightful lesson: focus on your own situation & run the numbers, rather than trying to interpret market trends.

  • John S @ Frugal Rules July 3, 2013

    Nice post Matt! I know it can be tempting to see where things are going and jumping in on the action. But, like you said, it’s a personal decision and it has to be right for “you”. At the end of the day, if it doesn’t fit in your budget and you don’t have an appropriate down payment then you could be paying for that in the long run.

    • Matt @ momanddadmoney July 3, 2013

      Exactly. Making quick decisions based on short-term trends is a recipe for long-term disaster. Not something I’m eager to get into.

  • E.M. July 3, 2013

    Completely agree! It is disheartening to see prices and interest rates going up, but I am definitely not ready to buy a house. I want to move, so it would be very silly. We don’t know what the future holds – for all we know we might get lucky and prices will drop again in a few years! Your personal situation should be what you base your decision on, not external pressures out of your control.

    • Matt @ momanddadmoney July 3, 2013

      Lots of people in your situation would buy anyways, just because it’s what your “supposed” to do. It’s great that you’ve recognized the silliness of that logic. And you’re absolutely right that for all we know prices could go down again in the near future. And even if they don’t on the aggregate, the price on the house you want might go down. Too many unknowns to make concrete predictions.

  • Alexa Mason July 3, 2013

    In my area housing prices are still very low. I think buying a house should not be something you do just because interest rates and home prices are low. There is so much more that goes into the decision. I think when you are ready to buy a house you can still hunt you down a good deal.

    • Matt @ momanddadmoney July 3, 2013

      I agree. There are always deals to be had. General market trends are just that: general. They don’t necessarily apply to the specific house(s) you’re looking at.

  • Jules@Faithful With a Few July 3, 2013

    Just bought our house a few years ago, not planning on moving soon. Thank goodness, so stressful!

  • Andrew July 3, 2013

    I’m still renting…housing prices in NYC are still not that affordable, though I’m sure if it will ever be. I was thinking that the increased interest rates would cause the house prices to drop or at least stay the same. My wife and I would like to move to a bigger place in about a year since we’re starting a family so we’ll probably have to decide whether to rent a bigger place or buy a condo or co-op. Houses are pretty much out of our reach at this point.

    • Matt @ momanddadmoney July 5, 2013

      It’s a tough decision. I like how you broke it down in your piece though. The thing I’ve reminded myself about renting is that our son really doesn’t know the difference. It’s not like we’re doing him a disservice by renting until we have the right situation. Until we’re more settled, we’re making sure we have enough space at a low cost, which just lets us get where we need to be financially even quicker.

  • femmefrugality July 3, 2013

    I agree! Plus, if you buy now just because the rates are going to go up, even though you’re not financially prepared to do so (or ready to settle down in one, specific home for the long-term,) aren’t you just perpetuating the problem that got us into this mess in the first place?

    • Matt @ momanddadmoney July 5, 2013

      Great point. Many people got caught in the bubble by buying simply to participate in the rising market. We all know how that ended up.

  • Cat Alford/ Budget Blonde July 3, 2013

    We will probably be renting for a long time, but I love reading posts like this to keep tabs on the market!

    • Matt @ momanddadmoney July 5, 2013

      Thanks Cat! I think there are a lot of cases where renting can make a lot of sense, even for the long-term.

  • Rachel@Mobilligy July 3, 2013

    I think you hit the nail on the head: “The right time to buy a house is when it makes sense for you and your family”. We purchased our home in May of 2010 and intend to be in it for at least five more years, but probably longer. I do think it was the right decision for us, though we felt pressured to buy because we thought we would miss the opportunity of purchasing at all-time lows. Turns out, if we would have waited a year longer, we could have secured a much lower interest rate and probably paid less for the house (or one similar).
    Even given our high (relatively speaking) interest rate, we really love our home and couldn’t imagine living anywhere else. And luckily, we’re in a great neighborhood, so we are confident that everything we put into the house, we’ll get out of it when the time comes to sell.

    • Matt @ momanddadmoney July 5, 2013

      I’m glad you guys have found a place that works for you! This is actually a great lesson in why timing the market correctly really isn’t all that important. Even though you guys could have saved some money by waiting, you found a place that you love and want to stay in. Isn’t that the whole point?

  • cashRebel July 3, 2013

    I think this ia timeless wisdom. I remember in 2007 a lot of folksrwere worried about being “priced out” of owning a home, but that’s not a good reason to buy if you’re not ready.

    • Matt @ momanddadmoney July 5, 2013

      It’s funny to look back and think about people worrying about being priced in 2007, but that mentality is exactly what I’m talking about here. Great example.

  • I could not agree more. I’ve been holding off on buying a house and though it hurts to see the prices go up, I’m not going to rush into anything.

    • Matt @ momanddadmoney July 5, 2013

      Sounds like we’re in similar situations. Let’s hope we both find something we like when the situation is right.

  • Laurie @thefrugalfarmer July 5, 2013

    Right on, Matt. I would wait until I know in my heart that it’s the right time/house. I’m not nearly a big of fan as home ownership as I used to be. Plus, if you have a huge mortgage, you don’t truly own the house anyway…..
    You guys will know when the time is right. 🙂

    • Matt @ momanddadmoney July 5, 2013

      Agreed. I’ve always thought the term “own” when you have a mortgage is a little misleading.

  • Rita P July 5, 2013

    Very good post, It is very stressful in current situation when both the prices and interest rates are going up. Hope the inverse proportional law will act soon and rising interest rates may lower the price in near future, a small correction may be

    • Matt @ momanddadmoney July 8, 2013

      I would prefer lower prices and higher interests than vice-versa, so let’s hope that comes true.

  • Lindsey @ Cents & Sensibility July 5, 2013

    As usual, a thoughtful and well-researched article about the pros and cons of buying a house now. You’re definitely right about the numbers only giving you a small slice of what housing trends are going to do in the future. If it’s right, it has to be right for your family and not because pressure is being created due to a rise in interest and prices over a course of twelve months.

  • DebtFreeGuys February 5, 2014

    With the current drop in new home sales and construction, now may be the time to buy . . . especially with this cold weather when no one else wants to shop for a home. Less buyers mean more negotiating power for you.

    • Matt @ momanddadmoney February 5, 2014

      I don’t really view those things as being much help at all when making such an important personal decision. First off, those large national indicators may or may not have any relevance when it comes to the specific houses you look at. Second, the right time to buy a house is when it makes sense for you both financially and in terms of where you are in life. If those things already say “buy”, then those external factors can certainly come into play (although then you’re getting into market timing and that’s a dangerous game). If not, then I’d say those factors are pretty irrelevant.

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