With People Rushing out to the Suburbs, Is Now the Time to Buy?
It is an odd phenomenon for home sales to increase in the middle of a recession, but as can be seen from the chart above, they have this year, and quite drastically. For some perspective, the year to date increase in new home sales is less than 15%. While this is a big jump, it is not exactly an opening of the floodgates. Existing home sales have experienced a larger jump of over 20%, with significant price inflation. The theory that most people have accepted is that it is mostly explained by people moving out of the city for more space as more people believe they will be able to work from home for an extended period of time. If this is truly the explanation, the question is how much demand will this create and for how long? Understanding this could be consequential for your decision on whether to move out and claim your home or hold steady until you are truly ready to move.
Not only has the working from home trend accelerated the purchases of homes, but lower interest rates have made buying more affordable. Look at the example below for how drastically a one percent change in the mortgage rate can effect purchase economics.
It is safe to assume that some of the purchasing decisions being made this year represent a bit of a pull forward in demand. Part of the reason to assume this is that as people are working from home, they have more time to see homes and more seriously consider making a home purchase. Purchasing a home because you want to get in before prices go higher or you want to rush to get the home you want are not great reasons to make an immediate decision, mainly because no one can truly predict where the housing market will be in 3, 6 or 12 months. This is why the decision of whether or not to purchase a home should be made based on two primary factors: your living situation and affordability.
For the most part, if you are one or two people and not sure where you will plant roots for an extended period of time, it does not make sense to buy. This is because both buying and selling a home takes a lot of energy and there is no timing the housing market. Many people end up selling their homes for more than they purchased them for, but there are plenty of times when that is not the case. Additionally, when you go to sell your home, you will end up paying around 5% to the realtor. And if you customize your home to your tastes and those tastes do not align with what buyers are looking for at the time of sale, you may not get back what you put into the house. If on the other hand, you have a family and have no great reason to think you will be moving, it is probably time to purchase a home in order to plant roots for your children.
In terms of affordability, when you are deciding what kind of home you can afford, it could be time to contact a Certified Financial Planner because there are many things to be taken into consideration and the different factors to consider vary by the price of the home you are looking to purchase, among other things.
Basics to consider when calculating affordability:
· Property taxes
· Home insurance
· All home utilities
Things you may not have considered:
· Is the potential for home appreciation a consideration (it does not have to be)? If it is, does the house you are considering purchasing have qualities that will make it attractive to own over the long term? The questions below are important because these are items that cannot be changed upon purchase.
o Is the land flat? (plus)
o Does it have a functionally large backyard? (plus)
o Is it on a main road? (minus)
o Are the ceilings high? (plus)
· Your down payment will typically be a large sum of money. A financial planner should be able to run a spreadsheet for you on the opportunity cost of the down payment. For instance, if your down payment on a home will be $100,000 and your after tax return on investments each year is 4%, the first year opportunity cost of purchasing a home and putting down the payment is $4,000 or $333 per month. This amount will increase over the years as compounding interest takes effect. In this example, by the tenth year, the opportunity cost goes up to $5,500 per year or $458 per month.
· Maintenance costs may seem like an obvious expense to factor in, but people may want to leave them out to make the home seem more affordable that it truly is. When you move into a home, you should know how many years are left on the:
o Roof ($7,500-$20,000)
o Hot water heater ($750-$1,500)
o Air conditioner ($3,000-$6,000)
You should also know:
o When was the wiring installed?
o Has the plumbing been properly maintained?
o Have there been any floods in the home?
Having as many records as possible of all of this will help you to accurately calculate how much you need to put away for home repairs over time.
Finally, if you are comparing renting to owning, it helps to work with a CFP. They will be able to take multiple tax considerations into account when determining the true cost of each option.