Many people have been putting off buying a new home either out of necessity or by choice because of the availability of inventory or pricing or interest rates but the window might be closing for opportunities to be a homeowner. It’s possible that the way the real estate market has evolved over the last 18 to 24 months has changed the ability of a normal consumer to buy a home. In fact, the pricing of a house is just one factor in being able to buy a home. Interest rates or other mortgage availabilities are also factors, but the inventory is shrinking. Not as many new homes are being built as are needed by home buyers. There’s a great article by Money-Wise that said Did You Buy A House Before 2022? If The Answer Is No You Will Likely Be On The Wrong End Of Financial Inequity Over The Next Decade.
Here’s the reason why. If you don’t own a home, you’re at the mercy of landlords raising your rent every year by 5-10%, some areas 15-30% increases in rates even if it’s only 5% a year. Over 10 years that’s a doubling of rent. So whatever you’re paying now for rent, if you do not own a home you might be paying twice that in 10 years. You might think 10 years is a long time, but think back 10 years ago, 10 years ago was let’s say 2012 or 2013. What were you doing in 2012? What was your rent like in 2012? It wasn’t half what it is now. So it’s not that far away. So if you don’t get into a home now you might be paying double for rent in 2023, which isn’t that far away. Matter of fact you might hit double before the end of the decade. Why is this happening? Why is there a shortage of inventory?
Well, the prices aren’t going to go down. Why is that? Because billionaires are buying up available real estate. Any excess property that’s on the market, investors are buying to rent out because they know it’s a great investment. They can raise the rent by 5-10% per year. They lock in a price today even at 7% or 8% interest, they’re making out like a bandit. So you might look at buying a home today as being unaffordable or out of reach, but that’s based on the home you think you want to buy. If you’re looking at a $400,000 or $600,000 house because that’s the kind of house you want, you might not be able to afford that house. Getting into a different house that you can afford might be a good way to go, even if it’s not your dream house. How do you do that?
Well, look at the rent that you’re paying right now. Let’s say you’re paying $2,500 a month. Back into the numbers on what kind of mortgage that would equal if you’re paying 2,500, that might buy you a house, that’s a $250,000 house. And you might say well $250,000, I don’t want that house. Maybe you don’t but would you rather have that house or have an apartment that’s going to be $4,000/month in six years at the same apartment you’re living in now? You might be better off getting into a house because again financial inequality means that you’re going to be giving all your money to the landlord. And in seven years, you’ll be paying double for the same property, where if you buy a cheaper house than really what you think you want to get, you might be in better shape.
Here’s another reason why now might be a good time. Interest rates have hit 7%. They’re going to be at 8% soon and it’s going to be harder to qualify for a home loan because what happens is when interest rates go up your buying power goes down. They do what’s called a debt-to-income ratio. So whatever your income is, a certain percentage of that can be used towards the home cost, your monthly housing bill. If the interest rate goes up. Your debt-to-income ratio will allow you to buy less of a house. So if the interest rate goes from 6.5-7% up to 8%, you can only qualify for cheaper houses. If it goes up to 9%, you’ll only be able to buy an even cheaper house. So now might be a time to get in where you can at least buy something that’s acceptable rather than having to be out in the cold. Because that’s what’s going to happen to a lot of home wanters. Not home buyers, not homeowners, home wanters if you don’t buy a house while the interest rates are still low and you might not think 7% is low. Historically, it is low and the prices have gone up but they’re not making any more real estate. They’re not making any more properties. Builders have shut down construction so prices might seem high compared to three or four years ago and they might seem crazy in terms of budget. But it’s possible that buying a house now even at a high price could be the best financial move that you make. People are waiting for a housing crash because one happened in 2008, but even the housing crash of 2008 didn’t last long by 2011 or 2012, the prices were right back up where they were before the crash within three years and they didn’t go down that much. The people who are buying homes right now are paying cash with large down payments and good credit, they’re not buying interest-only loans and they also can’t afford to walk away from their home because they have a low-interest rate.
So again nobody can predict the market. House prices crashing might be wishful thinking. It might not, house prices could crash 20% tomorrow but even if they did, that would take a $600,000 house and bring it down to about $500,000. It would take a $500,000 house and bring it down to $400,000. It’s not going to cut the price in half. And that crash so to speak, might not last long and when it does investors are going to come in and buy up all these houses. You have to bid against them and if you wait for that crash in a year and a half, you might pay an extra point and a half or interest that might erase all of the payments you made on that house. So where you live is an important decision. In almost every case owning is better than renting because you can build wealth You can accumulate equity over time and you’re not giving your money to a landlord who can raise the rent. Once you have a mortgage, that payment stays the same forever. Actually, that’s not true. At some point, it goes to zero. After 20 or 30 years depending on how long your mortgage is, your payment goes from $2,500 a month to $0 a month. You have a free house. Which is a good goal to get to. And you might think well 25 years is a long time and it is a long time. But again rewind the clock 25 years. It’s not that far. At some point you will be 25 years older than you are today. Would you rather have that birthday be a day when you can start paying zero for a mortgage or still paying rent to a landlord?