Looking to buy a house? It’s not the worst time

When the housing market heated up during the pandemic, many would-be homeowners were unable to afford one, despite making multiple offers or skipping inspections. Right now, rising mortgage rates and low savings can feel very depressing. In May, consumer sentiment about home buying hit an all-time low. And if you can afford it, this might actually be a good time to consider buying a home.

This may seem surprising. Home prices have increased since 2020 and mortgage rates are steadily increasing in 2022 – the average rate for a 30-year fixed mortgage was about 3% in January 2022, but it’s about 7.08% today. With inflation feeding into power, real household incomes have stagnated since 2019. The new numbers for housing affordability, measured as the ratio of average mortgage payments to median income, from the National Association of Realtors won’t be released until November. 10, 2022. But the August report was very disappointing and I doubt that the November equivalent will be any better.

Here’s the good news. Prices have started to decline in 98 of the 148 major regional housing markets. Buying property when the price is low is generally a good thing. When mortgage rates are high and home values ​​are falling, you’re more likely to be in a foreclosure if your home value is rising rapidly and your mortgage rate is rising when mortgage rates are stabilizing or even declining.

Rising mortgage interest rates and a potential recession may sound like bad news, but these trends can benefit homebuyers by slowing demand and lowering prices, especially if buyers are confident they won’t lose their jobs and income.

Of course, a home buyer needs to consider other important criteria before buying a home, in addition to the price of the home. Other important decision factors are having at least 20% for down payment; whether they have lived in the property for more than five years; And whether your monthly payments are less than 30% of your gross income.

Another important factor is whether you can pay off the property in 15-20 years. I recommend a 15- to 20-year mortgage, rather than a 30-year loan, especially when rates are high. A short mortgage can help reduce the cost of the home over time. On a $500,000 loan, a 30-year loan at 7.08% would cost you more than $707,000. Borrowing the same amount over a 15-year, 6.28% loan would cost you only about $273,000 — less than $434,000. Put it in your retirement fund instead!

Of course, there are situations where you may be better off renting. One of the best ways to get a feel for whether you want to buy or rent is to compare home prices in your area to the cost of renting a similar property. The rule of thumb is that if the ratio of home ownership costs to annual rental costs is less than 16, definitely buy. If the ratio is more than 20, the house is probably overpriced and renting is the best option. Online calculators can help determine the home’s price-to-rent ratio; One of my favorite calculators is Dinkytown.net.

If you choose to invest your down payment instead of buying a home, you need to predict how much you will earn. I recommend starting with the assumption that money will earn 4%–5% over the life of the bond. In comparison, I recommend assuming that the value of the house will not appreciate more than 1% of inflation. That may sound conservative, but I bought in New York City in August 2007, and appreciation averaged 0 for the next 8 years.

Be aware of how much property maintenance you have to pay – many first time home buyers forget about this. Maybe estimate 1% of the purchase price every year. A $1 million home may require $10,000 a year.

So, should you buy a house now? If you can meet the above criteria, I suggest you go ahead despite the high interest rates. After all, you can always refinance if rates drop.

More from Bloomberg Commentary:

• Some unsolicited recession survival advice for Gen Z: Erin Lowry

• Savers, it’s time to choose an online bank: Alexis Leonidis

• Now enjoy the hustle of Social Security. You’ll Pay Later: Alison Schrager

This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Teresa Gilarducci is the Schwartz Professor of Economics at the New School of Social Studies. She is the co-author of “Saving Retirement” and a member of the Board of Directors of the Economic Policy Institute.

More stories like this can be found at bloomberg.com/opinion

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