Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Tim in VT: Hi Brian, I have no understanding of the real estate market. One of my good friends told me that he is going to get serious about saving to buy a house. He says he wants to buy a house in about a year and expects he needs to save at least $15,000. That seems absurd to me. He’ll need to save more than $1,000 a month, which is about 25% of his take-home pay. He told me this because he doesn’t plan to go on vacation this year and is cutting way back on weekend activities. He says if that isn’t enough, he will consider getting a second job or finding a roommate to pay part of his rent. Do you see why this seems absurd to me? Why would anyone give up a good life today to buy a house when the prices are ridiculously high and will have to come down eventually? I think he’s going to lose a lot of money along with missing out on the great lifestyle that we have enjoyed since finishing college and starting our careers seven years ago.
Answer: Hello Tim. I have one question for you to get this conversation started. Is your rent going down?
I can be almost certain that your rent has gone up several times over the seven years that you’ve been renting. Without being specific about your local market, data from Realtor.com says that national rents for a two-bedroom apartment increased 17% year over year in March. The same data for home prices is 13.5% higher compared to last year. Right there, it should tell you that although it costs a lot to buy a home, it is going to cost less in the long run than renting. But there’s a lot more to it than just that.
The biggest reason that you can expect the price of homes to continue going up is that there has never been such a severe shortage of homes in the U.S. A recent estimate from Freddie Mac is the demand from would-be homebuyers is 3 million more homes than are available on the market. There are a lot of reasons for this, starting with pandemic-related supply chain and labor problems preventing builders from constructing houses as fast as they can sell them. Even when they can get materials, the prices for those materials are driving up home prices by tens of thousands of dollars. Another major reason why you can expect home prices to keep going up is that the largest generation, the millennials, is settling down and buying homes. Keep in mind that the millennial generation is even larger than the baby boomers, which means that the unprecedented demand for houses is going to continue for many years.
So why would you want to buy a house knowing all this, along with mortgage rates going up. One basic fact is that as soon as you buy a home and lock in a 30-year mortgage, you are also locking in your biggest housing cost for as long as you own the home. You become a lot less concerned about 17% rent increases and 13.5% home price increases because your monthly payment now stays the same. Not only that, but every month you make a mortgage payment you are also building equity. It’s like putting money in a savings account that you can’t easily access. And your equity does much more than that. It keeps pace with the rising cost of houses. If you decide to buy another house, however much the cost of houses has gone up by then will already be saved in your current home as appreciated value. Your next home won’t seem nearly as expensive to buy as the first one. Most people have a goal of eventually paying off the entire mortgage by retirement age so that they don’t have a mortgage payment or rent payment at all. That is what makes buying a home your biggest asset and the American Dream.
Along with the major reasons above, there are more good reasons to buy a home at today’s high prices. You can still deduct mortgage interest on your federal income tax if you itemize deductions instead of taking the standard deduction. Depending on some variables, you may also be able to deduct other homeowner related costs such as mortgage insurance premiums, points that lowered your mortgage interest rate, late payment fees, and interest on home equity loans or home equity lines of credit used to improve your home.
If you are concerned about rising interest rates, keep in mind that historically even 5% is considered a good rate (e.g. 1970s: 9.03%, 1980s: 12.70%, 1990s: 8.12%, 2000s: 6.29% – according to Freddie Mac). Also, if rates go down, you can probably refinance to the lower rate.
Tim, I’m thinking that your friend understands a fair amount about the many advantages of owning a home. It’s true that for most people there is never a perfect time o buy a home. It will be challenging even if we eventually get to a buyer’s market. When we get to a buyer’s market, don’t expect to pay less for a house than you would today. In a buyer’s market, you probably won’t have to deal with bidding wars, and you might be able to haggle a little over the price. But in a year or two, you can still expect that the price where you start will have gone up another 10% or 20%. Like your friend, if you get started today fixing any credit issues that you have and saving that down payment, you might find that when you are ready to make an offer is the same time it becomes a neutral or buyer’s market. Then you can forget about rent increases for the rest of your life.
If nothing else, it’s a good idea to do your research. After crunching the numbers, you may find that your mortgage payments will immediately cost less than you’re currently paying in rent.
Please comment with your thoughts about buying in today’s market.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].