Thinking about buying a home?
Statistics tell us that 40 million Americans are on the move annually and nearly 75 percent of the population moves every five years. If you’re thinking about buying a new home, or your first home, those statistics need to be seriously considered.
While it’s no secret that interest rates have fluctuated within a historically low range for more than 10 years now, it doesn’t necessarily mean that now is the best time for you to buy. Here are the questions you should be asking yourself before getting emotionally involved in the process of searching for a new home.
Is this the best time for me to buy a home?
The one thing that most economists are in full agreement on is that interest rates will eventually rise. In a market where we’re seeing little to no appreciation year after year to begin with, higher interest rates will most likely put downward pressure on today’s home values. So while you’re trying to determine if you can afford both the mortgage payment and a life, spend a little time thinking about the eventual exit strategy for when the time comes.
What does your crystal ball tell you?
Imagine you took the plunge and purchased a condominium five years ago. Shortly thereafter you met your soul mate and now you decide it’s time to get married and start a family. That spacious condominium seems to be a little too tight for a family of three. Five years ago interest rates were just below 4 percent and the monthly payment fit perfectly into your budget. You paid $155,000, plus another $7,000 in closing costs. Now that you’re ready to move on you look at the current market value and your condominium is still worth about $155,000, and that’s the best case scenario. Factor in closing costs to sell the condominium, sales commission and transfer tax are two of the big ones, and don’t forget paying off your existing mortgage. If you took out an FHA, VA or PHFA mortgage so that you wouldn’t need a large down-payment, you probably have little to no equity, so it’s either bring money to the settlement table to sell your condo, or keep it and rent it out.
Do I want to be a landlord?
While it’s true that real estate has created more wealth in the US than any other investment, not everyone has the stomach or the patience to be a landlord. Unless you hire someone to manage the property for you, be prepared for the calls and emails when the heat’s not working, there’s no hot water or a pipe is leaking. I’m really not trying to talk you out of building your real estate empire, but too often people enter into this situation weighing only the positives. While it’s great to have someone else making your mortgage payment for you each month, will you be prepared to carry two mortgages if you get a bad tenant or are faced with a vacancy when a tenant decides to move on?
The big question, buy or rent a home?
The answer to this question is… it depends. If your next move is intended to put you in the house where you intend to stay for the next 10 or 15 years until the kids are off to college, go for it. Interest rates are still historically low, values are well off the highs of 2004/2005 and you have time on your side. If your timeline for moving is more like three to five years, you might be better off just sitting tight and stashing away a little more cash. Although the US economy and consumer confidence has been showing signs of improvement, lack of wage growth for the middle class continues to be a major concern.
Right now real estate values are holding steady, but are being supported by the low interest rates and are still well off their 2004 highs. The days of falling interest rates sending property values sky high ended almost a decade ago and there’s no reason to believe that we’ll have a repeat anytime soon. When rates do eventually begin to rise, and they will, it’s quite possible that we will see yet another market correction.
As I made reference to earlier in this article, real estate has created more wealth in the US than any other investment vehicle. Success does however depend a great deal upon market conditions and timing. A select few will have the skill and the resources to buy/sell when the conditions are just right. The rest of us will just have to take a practical approach buying a home and make smart decisions that make financial sense.