Financial Literacy

Should I Buy a House Now?

With record-low interest rates, buying a house might seem like a good idea. When asking yourself ‘Should I buy a house now?’, run the numbers to see if the time is right.

With 10.1 million people out of work, why is the housing market hotter than it’s been in years?

In December 2020, the median sales price of an existing single-family home was $314,300. This represents a 13.5% increase from the prior December and is also the highest median price range for a December on record.

If so many people are out of work in the financial crisis of the Covid-19 pandemic, how can others afford to buy a house?

Answer: low interest rates. The average APR on a 30-year fixed-rate mortgage has been hovering between 2.8% and 2.9% since the start of the year. 

Yet, just because the real estate market is hot, doesn’t mean you should call up a real estate agent and start looking at houses. Here’s why.  

Questions to ask before buying

Ask, research, explore, calculate: Ramit has a simplified checklist of questions to ask yourself when contemplating buying a house:

  • Will I live here for 10+ years?
  • Is my total monthly housing cost lower than 28% of my gross monthly income?
  • Have I saved a 20% down payment?
  • Am I OK if the value of my house goes down?
  • Am I excited about buying?

If the answer to any of these questions is a hard No, then it might be worth reconsidering the purchase of a home. It might not be your time to buy.

More on the second question regarding total monthly housing costs: Many simply consider this to be made up of the mortgage alone. However, the monthly cost can be much more than that. Think of it as your TCO (Total Cost of Ownership). Additional “phantom” costs in the form of maintenance, taxes, HOA fees, private mortgage insurance, and inflation must be figured into that monthly payment.  For example, you might need to spend $20,000 to replace the roof in six years. Do your homework on upfront costs, anticipated maintenance costs per year or over several years, and spread those expenses into your monthly payment. You might be surprised by how much that monthly cost goes up.

Additionally, the 20% down payment is becoming more out of reach for many first-time homebuyers. While people might be finding ways to save more money and strengthen their finances, they might not be able to keep up with the skyrocketing prices of the current market.

If a 20% down payment is out of reach, it might be better to keep renting and wait until home prices cool a bit.

Beware the propaganda

Ramit advises to beware of an industry that praises homeownership and shames renters, pointing out two myths that the industry tries to tell renters in order for them to pony up and buy a house:

You’re just paying your landlord’s mortgage.

Possibly, but most likely not. Some landlords do sit back and bank your rent payments — the mortgage has been paid off and your money is the landlord’s income. Other landlords break even and, still others, actually lose money each month, as your rent payment is nowhere close to the monthly mortgage and expenses that they need to shoulder.

Your landlord can only charge you what the market can bear.

If you’re paying rent, you’re only throwing money away.

This of course is not true. There’s a roof over your head; a kitchen in which to prepare food; a place to sleep. With so many people working from home, you might consider your rental payment as part of an office lease, and so paying rent enables you to even go to work.

People often overlook the “use value” of that rent payment. If you enjoy your space and derive value from it, then it’s not money thrown away. For more on this, check out our article Buying vs. Renting: Which is the Best Option for You?

What about credit scores?

Low mortgage rates are not enough to get you a mortgage. There is also the matter of credit scoring, which lenders rely on to set your mortgage rate.

However, a curious thing happened during the pandemic: credit scores skyrocketed. If people have been struggling to pay bills, missed payments, or potentially have maxed out credit cards, how could the average FICO credit score hit a record high of 711 in July 2020? 

It was probably the federal relief packages, including stimulus payments, student loan forbearance programs, and extended unemployment benefits, that have helped people stay financially afloat. 

It’s worth noting that this might be only temporary, and part of the propaganda the homeownership industry uses to get people to buy when they might not want to.

While achieving a high credit score is an important part of your financial health, beware that a high score alone should not be the motivation to buy a house right now.

How you can run the numbers

If you’re strongly considering buying a home and are ready to buy, run as many numbers as you can. You can start by using a buy vs. rent calculator (such as this awesome one from the NYT) for house values in your area.

But don’t stop there: go deeper. Ask yourself: Is buying a home a better investment than say, buying shares in an index fund?

While it would be impossible to both invest your monthly housing costs AND use it on rent — just to see which comes out higher — consider what you might do with the “extra” funds you might have that would normally have gone on a house. That TCO mentioned above includes so many additional expenses that could be put to better use in an income-bearing investment.

It helps to think of your home as a part of your Rich Life. With this perspective, you can make decisions like buying a house for the right reasons. 

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