Buyers, First Time Homebuyers

You Want To Buy A Home, But Maybe You Should Wait?

February 7, 2018
by Michaela Gile

It’s the new year and we all sit down and re-evaluate things in our lives. We look back at last year and assess, what went well, what didn’t and what needs work. We are always on the look out on how we can save money. When we fill out that check to pay the rent, it really hurts doesn’t it? While you fill it out the check with tears in your eyes you are wondering if your landlord actually pays that much on his or her mortgage. It dawns on you that actually no, he doesn’t because you are paying it for your landlord! A crazy idea forms in your mind and you wonder if it just might be possible for you to buy your own house and pay your own mortgage? Crazy, right? But maybe not…… what if it would be possible? But then you think, nah, I better wait one more year and save money for a downpayment. That is the best thing to do, right?!

Maybe it isn’t though…

I have talked to many people and sometimes they would like to buy a house but then they think they should wait. I would like to share some facts about this with you and then you can make up your own mind, fair enough?

Lets start by looking at the percent difference between buying and rent home. Today you will have to calculate on average 29.2% of your income to pay for rent, but only 15.8% of your income if you buy. That is a 13.4% difference and that is huge! These are of course national averages and vary depending on where you life. Here in the Twin Cities the average rent for a 3 bedroom apartment is about $1500 and often you still don’t have even your own washmachine. Could you own a house for about $1200 (a pretty nice one at that)

Okay, so you might think, nice but I still want to wait and save money….. okay, fair enough, here is a quick view of what the difference in interest rate looks like.

You can see in the graphic below that the monthly mortgage amount stays pretty much the same, however the amount you have available to buy the house changes drastically! I guarantee that you will like the house for $200k better than the one for $100k (which honestly is really hard to even find here in the Twin Cities)

To break this further down, here is an example of what the difference is when the interest rates are going up. Though they have been fairly stable but we have seen a small up tick this year.

Taking the slide above as an example, waiting one year to buy a home could cost you about $ 1814.40 more per year, if that is multiplied by 30 years it could cost you as much as $54,432 more!

Now that was pretty depressing news. Lets look at this from another side. Say you bought a home two years ago, then your house would have earned you money on average 6% here in Minnesota. Take a look….

Of course the value of your home will not increase by 6% each year, but it will level out to normal increases which are projected to be about 3% for the year. That means that if you buy a house for $200,000 today it will have a projected value of $206,000 in just one year.

You can potentially grow your wealth just by being a home owner vs a renter.

I have one last thought for you. If you can make about $6000 this year and pay less than you pay in rent now, why do you want to wait?

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The Ultimate Truth about Housing Affordability

There have been many headlines decrying an “affordability crisis” in the residential real estate market. While it is true that buying a home is less affordable than it had been over the last ten years, we need to understand why and what that means.

On a monthly basis, the National Association of Realtors (NAR), produces a Housing Affordability Index. According to NAR, the index…

“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”

Their methodology states:

“To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”

So, the higher the index, the more affordable it is to purchase a home. Here is a graph of the index going back to 1990:

It is true that the index is lower today than any year from 2009 to 2017. However, we must realize the main reason homes were more affordable. That period of time immediately followed a housing crash and there were large numbers of distressed properties (foreclosures and short sales). Those properties were sold at large discounts.

Today, the index is higher than any year from 1990 to 2008. Based on historic home affordability data, that means homes are more affordable right now than any other time besides the time following the housing crisis.

With mortgage rates remaining low and wages finally increasing, we can see that it is MORE AFFORDABLE to purchase a home today than it was last year!

Bottom Line

With wages increasing, price appreciation moderating, and mortgage rates remaining near all-time lows, purchasing a home is a great move based on historic affordability numbers.

Obviously these are examples and I’d be happy to sit down with you and calculate your personal numbers, give me a call, text or email we talk about it and then you go home and think about your options. If you want to move forward, super! I’d be right there cheering for you and working hard for you. If you still decide nah, not now – that’s fine too. At least we got to meet and you have all the info you needed to make that decision.

Summary

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