This is a guest post from Sarah Gilbert.
The story of one mortgage
I got my mortgage statement in the mail a few weeks ago. I bought my Portland, Oregon home 10 years ago on a busy street in an up-and-coming neighborhood with what I thought was a super-low interest rate: 5.25%. It was a five-year ARM, meaning that it would stay at 5.25% for five years and then change every year based on some margin over the 10-year treasury rate.
The good news is that it can’t move more than one percentage point in either direction, and also cannot move outside a five point range (i.e., it’s capped at 10.25%). I could remember my parents, who bought my childhood home in 1978, paying 14% or more. An ARM, I thought, could only get so bad.
Now, I’ve been proved so right, I almost cry with joy each year when I get my interest rate statement. After a couple years in the mid-2000s of rising, it’s been going down, down, down, to an all-time low of 2.825% starting April 2012. I’m paying about the same for my mortgage as it would cost to rent a much-smaller, downstairs apartment nearby, the one whose landlord is too chintzy to even provide recycling bins.
I have a home that was bought when the market was in the first half of a decades-long rise. It peaked in August 2008 (my home, says Zillow, was worth $344, 000 then) and has since fallen in value to about 20% less than its peak value (still close to double what I paid and more than double what I owe; I’m not complaining, ever).
But I get questions all the time from friends and readers: should I buy, now? Is the market at its bottom? Is this an interest rate market worth jumping into? And what about the mortgage interest deduction: might it go away? Is home ownership a good thing any more, or is it better to rent? What they all want to know is:
Should I buy a home now?
As always, so much is dependent on your circumstances. I think, generally, yes, the current interest rate market is worth jumping into, and yes, the housing market seems to have come to (at least a temporary) bottom. Given the disclaimer that no one can possibly know anything for certain about the future, I consider myself a pretty good prognosticator. I base this on the belief that trends are all about psychology, something I’m better-than-average at assessing.
In my opinion, the low point of February 2011 will not be seen again for a while. If I’m right, and your market, like mine, is beginngin to trend up (albeit gradually), now is a great time to buy. (Was that enough “ifs”?) Here’s how to decide if you should buy a home now:
- Do you have good enough credit to score a less-than-5% ARM or fixed rate mortgage? If yes, take a look at the proposed mortgage terms and do — or have your mortgage broker do — the math. What is the maximum interest rate you could ever pay, and how much would you pay for your mortgage in that case? Is that more or less than you’d pay in 10 years for rent? (Very probably, rent will increase each year no matter what the real estate market does.)
- How high could your payment go? Could you afford that now? My maximum possible mortgage payment (not accounting for increases in property taxes) is about $1, 400; if the interest rates are that high I’m sure I’d pay that much for rent for my family of five.
- How stable are you? My family is very stable; most of our extended family lives in this city and my husband and I went to the same high school where our children will go. We feel like we belong here. Plus, I’m a freelance writer and my husband is an Army Reservist; it’s unlikely that our jobs will take us away (and if they do, we could conceivably rent the house). If we were more transient, the uncertainty of the market in the immediate future would probably make renting a far safer bet.
- Are you the sort of person who will do it all yourself? Home ownership means gardening and fixing things and making sure your gutters are clean. If you’re paying other people to do it — especially in a 100-year-old house like mine — it can erase any financial benefit of home ownership fast. I love to garden and paint and dig and I even installed the tile in my own bathroom (it’s gorgeous!). My dad and husband have framed and drywalled and done the electricity and plumbing. Not everyone has that skillset or desire.
- Do you have money saved up for a down payment? This is the key, really: when I bought my home, 5% down payments were ordinary. Now even people with great credit must put up 20%. If you don’t have it in non-retirement savings, you should probably rent, keep your expenses as low as possible, and save until you have a nice chunk of change.
- How about this tax thing? There has been a lot of talk lately about eliminating the mortgage interest deduction for taxes. If your home is significantly above the median home price; between $200, 000 and $220, 000; this might reduce your tax bill pretty nicely. Nickel has a nice evaluation of whether this is a big deal; I haven’t itemized for a few years thanks to my plentiful children and low healthcare expenses and state taxes. In any case, I think you shouldn’t count on mortgage interest deduction as part of your home ownership equation.
I think now is a great time to buy a home; the market seems to have stabilized and the interest rates are very, very low. However, I don’t think it’s a sure thing, the sort of market you should rush into blind without doing the math for your situation. And, of course, the real estate market is very location specific.
That being said, the Fed shows no signs of considering interest rate hikes in the near future (~2 years). Rising gas prices only makes it more likely they’ll keep rates low. And home prices are always in flux; if they’re up too high in a few years when you’ve saved a down payment or know where you want to live for the next decade, rent for another year and I’d be willing to bet the market will be down again.
15 Responses to “Should You Buy a Home Now?”
Nickel – I have to disagree.
Price is a function of supply and demand. No doubt that supply is high, but demand is also low (houses still aren’t selling).
This means that the prices are still too high, despite record low interest rates.
When rates rise, prices will have that much greater room to fall.
Tommy: To be fair, rates are currently very low and houses still aren’t selling, which would suggest that someone could snag the best of both worlds right now — a low rate and a good price. Only time will tell.
I can’t believe just how confused people are about interest rates. When rates are low, it is a terrible time to buy! You want to buy when rates are sky high…sell when they are low. Two reasons…first, home prices are a function of what monthly payment people can afford. If rates go up, that does not mean they can magically afford a higher payment. No, instead that means they can afford the exact same payment as before, except now a larger chunk of that payment goes toward interest instead of principle. For this to happen, home prices must fall. Second, because a larger portion of the payment goes toward interest instead of principle, you get a bigger tax deduction. Higher interest rates actually make homes more affordable, not less.
Then, when rates fall, that will increase the price of your home which makes it an excellent time to sell for profit. Given that rates can only go up from here, the real value of homes will fall with absolute certainty. What is not certain is if the nominal values will fall too. I argue no because the government is creating massive amounts of inflation.
When you rent you are paying someone else to do the maintenance.
Or as I like to joke with my wife: now that we own our house, I can ignore maintenance instead of paying our landlord to ignore it.
There is a legitimate argument as far as whether you have the spare time and/or money to deal with the irregularity of home repairs.
I hope the market stays stable so that we can buy a house in the next two to four years. I am like you and can remember the double digit interest rates my parents had to contend with.
I think ownership always boils down to how long you plan to stay. If you plan to make it your home for a while and you have enough to comfortably make a decent down payment, then yes, its a good time to buy. Financial decisions are always based on many factors, so I believe it’s best to be organized, know where you currently sit, and know where you want to be in the future. Nice post.
Just because things are low doesn’t mean they won’t go lower. The Washington DC area has done pretty well but if Obama loses in November and a new administration cuts government spending we could see a decline.
1 million Americans that bought a home in the last 2 years are now under water on their mortgage. Overall I think its a great time to buy, but only if you can put 20% down and know you will live in the house for 3 years or more. Rent is so expensive!
You are in a great situation with your ARM. At these levels I’d be too concerned with rate increases to initiate a new ARM loan.
You really lucked out with that ARM. The timing was just right for you.
If someone is buying today I’d do a fixed rate loan and avoid ARMs. Interest will only go up on the future and an ARM will almost definitely bite you in a few years.
I’d say you’re 10 times more likely to be paying 8% on an ARM after it resets than 3%.
BTW, that landlord may not be to blame for recycling bins, generally the trash company provides those and its not up to the landlord. My dad and I have rentals and the bins come from the trash company. Unless its a large mult-unit then thats how they do it in portland too. If its a multi-unit then the landlord / property management may have more a central trash location. If so the problem is easily solved by buying a $5 plastic bin
Think outside the nine dots! Consider buying a home with a guest house, and/or a room you can rent.
I bought a house with a guest house ten years ago in somewhat pricey Los Angeles. After putting 20% down to buy the property, the 30 year fixed mortgage was $1,500/month. The rental income from the guest house paid for more than half of the mortgage.
Remember that you do not always have to rent to someone. But, it’s a good place to start.
Great post! I like the fact you point out waiting is not such a bad thing right now because time is very likely on your side this year. However, a reassessment of the market very early in first quarter 2013 would be wise as I think the market can shift with more volatility with year end economic news vs mid year news.
Still, all things considered, it is a great time to get in on the market now if using your list shows a person is in position to make a purchase now. FHA rates this week are 3.8%
Great checklist. Many are saying that the real estate market has bottomed out. Interest rates are still low, and owning a home can be cheaper than renting when you take into account the tax benefits.
What are your thoughts on getting an ARM with rates so low?
I’m with you. If people are in a financial situation to buy, they should do it. I’d bet interest rates start to go up before the Fed says they do.
If I was looking to buy a home, I’d be more worried about interest rates increasing than big declines in real estate at this point. A 1% difference in your mortgage payment each month is a big deal.
I refinanced a bit ago and chopped over 200 off my monthly mortgage, now at 4.3%. Not getting quite the deal as you are, but still happy. Great points above.
Great post! I like you point about “As always, so much is dependent on your circumstances”. Your checklist is a good one and as always we need to evaluate our situation independently…there isn’t a definitive answer to whether now is the time to buy. I purchased my condo almost 3 years ago and was pretty happy with my interest rate of 4.375%. Unfortunately, condos in my building have continued to drop and a similar unit recently sold for 40% less than what I paid for mine. That’s the way it goes though and I think now is a great time to consider purchasing a home and locking in a historically low interest rate.
It’s best to evaluate your situation and goals out of home ownership before making a decision but I’m of the opinion that you have plenty of time to jump in before homes start rising again. There’s a lot of excess inventory out the (~7 Million homes through 2016) and for some reason new home starts keep going up…good for jobs but not good for existing home prices.
I like your checklist, but I’d add one more: How would you feel if the value of the home you’re contemplating buying declined 10% after you became its owner? If the answer is something like ‘very queasy,’ might be best to wait a bit longer. Seems quite unlikely that either home prices or mortgage rates will be increasing significantly anytime soon, so you’re not running a big economic risk by being patient.
Also, sinking underwater on a mortgage is stressful: Barring a short sale, etc., to get out of the house, you’d have to cough up in cash the difference between its market value and your mortgage balance. For many, that can mean essentially being trapped in a house indefinitely. Not a good place to be.