It’s no secret the housing market has become more expensive over the last couple of years. Most regions have seen double digit inflation in the cost of homes. This growth has been driven by several factors such as millennials hitting their prime homebuying ages, the desire to have a home rather than rent due to the pandemic, and historically very low interest rates. Personally, I have witnessed my hometown housing market, which is relatively tame, jump to life with bidding wars at every level of the market and random phone calls offering to buy my home in cash.
While I try not to give blanket advice on our coaching line, I am generally encouraging of people looking to buy a home because it does support long-term wealth building in most cases. Recently, I have had to ask callers to be a little more circumspect before taking the housing plunge. When mortgage rates started to take off, the rising prices collided with the increased cost of borrowing, and I started to see some callers scrambling to buy because the homes they were seeking were simply unaffordable.
Can you afford the home? Generally, mortgage lenders use a total debt to income ratio of 36% to determine what you can qualify for. This means your total debt (mortgage plus other debt) should not exceed 36% of your pre-tax income. If you go up to the limits of what you qualify for, does that leave you enough cash flow to cover your family’s needs and continue to save toward retirement or other goals? If not, you need to determine what you can afford.
You can start by reviewing your expenses today and determine how much of your income currently goes toward housing. Then you back into a number that works well. One rule of thumb is to target about 25% or less going to housing.
This number has worked for me personally, but it may not be realistic depending on your market. The truth is no one can tell you for sure what is affordable for you, but a few signs that a home may be beyond your reach is if you are sacrificing money for significant goals to get into the home. Also, if you can squeeze in the mortgage but have not included a way to cover the cost for the upkeep and maintenance of the home within your budget then right now may not be the right time.
Should you buy a home now or wait? I think if you have found a home that you can afford and that meets your family’s needs for the next five years, it’s reasonable to move forward with the purchase. I know this may sound like a very simple answer, but I find it difficult to time the housing market.
This time last year there was a plethora of advice about the housing market. There were people saying it was the best time to buy a home almost regardless of the price because interest rates were historically low and prices would continue to go up. There were also people saying that when interest rates go up, the housing market would collapse, and then it would be a perfect time to buy. Who was right?
The only certainty in the housing market is change. While it is easy to look back and see that people who bought homes in 2020 and 2021 had almost instant appreciation of their properties, you must be careful about making risky moves like depleting retirement savings or choosing to go into more expensive forms of debt like credit cards to maintain a home purchase. Deciding on whether to buy a home now is more of a factor of fit and affordability than whether you can time it perfectly.
While there have been some indications of the market cooling, prices are still anticipated to rise according to some surveys. If you own a home for the long-term, market conditions like interest rates can be remedied by refinancing when rates are more reasonable. The biggest key is balancing not rushing into a home that is too much of a burden or waiting too long and missing the opportunity to own the home that suits your needs.