If you've been thinking about buying a new home, you might be looking at the market conditions and getting confusing signals from the experts. Should you buy now or should you wait? Are mortgage rates going to stay low or will they begin to rise? Will housing prices start to drop if many homeowners default on their loans and the lenders foreclose?
Since the advice isn't clear, let's analyze the factors that may affect your home-buying decision and try to find a logical answer that makes sense for you.
Mortgage Rates Are at All-Time Lows
In addition to housing prices, interest rates are a major factor in the amount of your monthly mortgage payment, and recently, they have been at historic lows.
To put current mortgage rates in perspective, let's look back in history. In 1981, the Federal Reserve Bank took aggressive steps to control inflation. During that time, the 30-year fixed mortgage rate reached a high of 18.5 percent, but it has since been in a steady decline. For example, the average 30-year rate was 8.25 percent in 2000 and declined further to 3.66 percent in 2015.
Currently, the 30-year mortgage rate is hovering around 3 percent and is expected to remain close to that rate for the near future. However, if the economy gets stronger as states allow businesses to resume normal operations, interest rates could begin to climb, and this could lead to an increase in mortgage rates. That would make the same house at the same price cost more due to the increased interest you would pay. Even if the price of the house went down, the price you pay for your home purchase might not be enough to offset the rise in interest costs.
Read More: How Low Can Mortgage Rates Go?
Home Prices Continue Steady Rise
Investments in real estate, especially your home, have traditionally resulted in excellent returns over the long term. According to data from the St. Louis Federal Reserve Bank, the median sale price of a home sold in the United States rose from $224,300 in 2010 to $346,800 in 2020. This is an average annualized increase of 4.4 percent per year. This rate of increase is expected to continue over the next several years, making homeownership one way to achieve your financial goals. This is especially attractive if you've discovered your dream home while house hunting.
Regional price increases may be above or below the national average for the real estate market, so you need to look at the price trends in your local area to get a better picture of your local market. You might want to visit a real estate agent or realtor to get a fuller picture of home values in your local area or area of interest.
What About Inventory of Houses for Sale?
The COVID-19 pandemic has disrupted the supply and inventory of homes for sale. With so many people losing their jobs, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act that had regulations preventing landlords and lenders from evicting homeowners from their homes for nonpayments. The CARES program provides up to one year’s forbearance of payments. The payments are not forgiven but are delayed until some future time when homeowners can resume normal payments.
The right time to buy is when you have all of your finances in order.
The conventional thinking is that once the forbearance periods are up, lenders may begin to foreclose on these properties and add inventory to houses for sale. This increase in inventory would reduce the pressure for price increases.
Read More: 10 Things You Must Know When Buying a Home
In addition, major homebuilders have been filing building permits for new housing developments at a rate around 10 percent above the same period a year earlier. These new houses would add to the homes-for-sale inventory and further reduce price pressures.
Homebuilders are increasing housing starts. They may try to attract buyers with special promotions, such as discounted prices, no closing costs, upgrades for appliances and concessions to mortgage terms.
However, even if more houses are added to the inventory for sale, the housing market will remain strong, and prices will probably not go down, but the rate of increase will slow.
Read More: Forces That Affect Real Property Value
Is Now a Good Time to Buy a House?
There are several market forces indicating that now may be as good a time to buy a house ever. Mortgage rates are at all-time lows and have nowhere to go but up. Home prices are not likely to be going down anywhere, except in certain areas where people are fleeing high taxes and crime. Inventory of homes for sale is likely to remain low for the next few years, keeping pressure on prices as the number of home buyers exceeds the supply of homes available. Of course, the ongoing effect of the pandemic is a big unknown.
Still, if you're waiting for a buyer's market with lower prices and lower interest rates, that's not likely to happen. Therefore, the decision of whether you should buy a house or not depends mostly on your financial condition and preparedness.
Read More: Am I Ready to Buy a House?
Here are the factors you should consider:
- Savings: Although FHA only requires a down payment of 3.5 percent of the purchase price, your mortgage loan will be higher with larger payments. You'd be better off increasing your savings so that you can make a down payment of at least 10 percent. Plus, you need additional cash for closing costs, which can run about 2 percent to 5 percent of the purchase price. Also, if the down payment is not sufficient, you will need to pay private mortgage insurance (PMI) each month.
- Credit score: The minimum credit score you need is 580, which is the lowest to qualify for an FHA loan. Conventional loans start with a credit score of at least 640. Unfortunately, lenders have gotten stricter with their credit requirements. According to the New York Federal Reserve Bank, mortgage borrowers in the third quarter of 2020 had an average credit score of 786. For comparison, the average credit score for everyone in the U.S. is 706. This doesn't mean you won't be able to qualify for a mortgage with a lesser credit score, but it does mean you'll pay a higher interest rate.
- Mortgage payment to income: The general rule is that lenders don't want your mortgage payment to exceed 28 percent of your pre-tax monthly income. For example, if your gross monthly income is $5,000, your mortgage payment, which includes principal, interest, taxes and insurance, should not exceed $1,400.
- Debt-to-income: The next ratio to consider is your total debt-to-income ratio. This ratio is the sum of your mortgage payment plus any other monthly fixed payments you may have, like a car payment. Generally, lenders do not like to see your total debt payments exceed 38 percent of your monthly gross income, However, some lenders may allow a debt ratio up to 40 percent.
- Job stability: How comfortable do you feel in your job? The COVID-19 pandemic has created much uncertainty with employers. Buying a home is a long-term commitment, and you want to feel that you're going to have a job with stable income for at least three to five years.
The right time to buy is when you have all of your finances in order. This means you have enough for a reasonable down payment, expect your income to be stable, and you have a 700+ credit score.
- Forbes: Is This a Good Time to Buy a House?
- Motley Fool: Is Now the Right Time to Purchase a Home?
- The Mortgage Reports: Is Now a Good Time to Buy a House?
- Bloomberg: A Pandemic Is a Terrible Time to Buy Real Estate
- TheStreet: Historic Mortgage Rates: From 1981 to 2019 and Their Impact
- HousingWire: Is 2021 a Good Time to Buy a House?
- Federal Reserve Bank of St. Louis: Median Sales Price of Houses Sold for the United States
- The Ascent: Here's Why You May Need a Higher Credit Score to Get a Mortgage Today
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.