Ought to I purchase a home now?
With 10.1 million unemployed people, why is the real estate market hotter than in recent years?
In December 2020, the median sales price of an existing single family home was $ 314,300. This corresponds to an increase of 13.5% compared to December and is also the highest mean price range for a registered December.
With so many people unemployed in the financial crisis of the Covid-19 pandemic, how can others afford to buy a house?
Answer: low interest rates. The average annual interest rate for a 30-year fixed-rate mortgage has been between 2.8% and 2.9% since the beginning of the year.
Just because the real estate market is hot doesn't mean you should call a real estate agent and look at homes. Here's why.
Questions to Ask Before Buying
Asking, researching, exploring, calculating: Ramit has a simplified checklist of questions to ask yourself when considering buying a home:
- Will I live here for more than 10 years?
- Are my total monthly housing costs less than 28% of my gross monthly income?
- Have I saved a 20% deposit?
- Am I okay if my home's value goes down?
- Am I excited about the purchase?
If the answer to any of these questions is a heavy no, it may be worth reconsidering buying a home. It may not be your time to buy.
On the second question about total monthly housing costs, many consider this to be simply a mortgage on their own. However, the monthly cost can be much higher. Think of it as TCO (Total Cost of Ownership). Additional “phantom costs” in the form of upkeep, taxes, HOA fees, personal mortgage insurance, and inflation must be factored into this monthly payment. For example, you might have to spend $ 20,000 to replace the roof in six years. Do your homework on upfront costs, estimated annual or multi-year maintenance costs and spread these costs over your monthly payment. You will be surprised how much these monthly costs go up.
In addition, the 20% deposit is becoming increasingly unreachable for many first-time buyers. While people may find ways to save more money and strengthen their finances, they may not be able to keep up with the skyrocketing prices in the current market.
If a 20% deposit is not within reach, it might be better to keep renting and wait for property prices to cool down a bit.
Beware of the propaganda
Ramit advises wary of an industry that praises home ownership and shames renters, pointing out two myths the industry is trying to tell tenants so they can buy a home:
You only pay your landlord's mortgage.
Possibly, but most likely not. Some landlords sit back and transfer your rental payments – the mortgage has been repaid and your money is the landlord's income. Other landlords break even and others actually lose money every month because your rental payment doesn't come close to the monthly mortgage and the expenses they have to bear.
Your landlord can only charge you for what the market can carry.
When you pay rent you are just throwing away money.
Of course this is not true. There is a roof over your head. a kitchen where food can be prepared; A place to sleep. With so many people working from home, you can think of your rent payment as part of an office rental agreement. So if you pay rent, you can even go to work.
People often overlook the "value in use" of this rental payment. When you enjoy your space and derive value from it, no money is thrown away. For more information, see our article Buy vs. Rent: Which is the Best Option for You?
What About Credit Scores?
Low mortgage rates are not enough to take out a mortgage. There is also the issue of the credit rating that lenders rely on to set your mortgage rate.
However, something strange happened during the pandemic: credit ratings skyrocketed. If people were struggling to pay bills, missed payments, or possibly maxed out credit cards, how could that be? The FICO average credit score hit a record high of 711 in July 2020?
It was likely federal aid packages, including stimulus payments, student loan indulgence programs, and expanded unemployment benefits, that helped people stay afloat financially.
It's worth noting that this may be temporary and part of the propaganda the home ownership industry is using to get people to buy when they don't want to.
While achieving a high credit score is an important part of your financial health, you should understand that a high score alone should not be a motivation to buy a home now.
How to let the numbers run
When you are deeply contemplating buying a home and ready to buy it, enter as many numbers as you can. You can get started by using a purchase / rental calculator (like this fantastic one from the NYT) for home 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 them for rent – just to see which are higher – you should consider what you could do with the "extra" funds you would normally find for one House. The total cost of ownership above includes so much additional cost that could be better used for an income-generating investment.
It helps to think of your home as part of your home Rich life. With that perspective, you can make decisions like buying a home for the right reasons.
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