Millennials have been slow to enter the home buying world; many carry huge debts from their college education. Others are still recovering from the Great Recession. Their hesitancy has confused the markets for new and previously-owned homes.
The economics of the housing markets have not followed legacy patterns of supply and demand. Young people are investing in condos and renovating properties to reshape long-damaged neighborhoods. So, it’s a good time to research the right time to buy a house and the options available.
What’s the right time to buy?
At Investopedia, they say, “There’s a saying on Wall Street: ‘Don’t try to time the market.’ This also applies to real estate.” And, that’s very true. The huge home real estate collapse that triggered the Great Recession was not a market issue; it was a corruption issue over which only a few criminals had control.
But it was a sign of how many things impact the supply and demand market. Everything from the economy to shifting demographics will influence pricing. But within all these macro-influences, you can still determine what is the right time to buy a house.
- Affordability: It’s the buyers’ job to firmly assess their ability to assume the largest debt they will probably every take on. Banks, salespeople, and others will tell you how much housing debt you can handle. Only you can figure that out, and you should be very conservative in your calculations.
The monthly payment may sound affordable, for instance, but you must also add mortgage insurance, homeowner’s insurance, school and property taxes, utilities, water and sewerage, waste disposal, homeowner association fees, and more.
Most pros suggest you cannot handle a monthly payment exceeding 25% of your total monthly income PLUS those necessary expenses and fees.
- Season: The best time to buy is when affordability and availability meet. In ideal markets, there is some correlation with the seasons of the year. But there is no certainty there. For example, winter and spring vary greatly region to region.
Nonetheless, you can consider some generalizations. People don’t tend to sell in December. With everyone tied up in their holidays, traveling, or hosting, sellers avoid listing their homes. Those who do list their sales clearly want out and may price the property lower to make it move.
Potential buyers with school-age children look or homes from May through August with the intent of transferring their children to new schools seamlessly in the fall. That demand tends to increase prices that hold fast through those months. Where the weather is not a negative factor, shopping in March and April could save you money and still have the kids in place by the start of school.
- Information: Some people are pressed to buy quickly. A divorce, job transfer, and other motivators can force you into an unexpected move. However, other buyers are in no hurry. In either case, the buyer should take advantage of the informative data available.
Dozens of websites describe homes in detail along with photographs of interiors which are especially helpful when you are buying from a distance. These databases disclose pricing, taxes, the price per square foot, the history of purchase prices, estimated monthly payments, and more. They identify local schools along with quality ratings, and they describe area shopping, attractions, and transportation.
Importantly, the sites list the current price and the percentage of the latest increase and decrease. This information helps even first time buyers to get a better feel for the market. It helps a buyer leverage the information into a better negotiating position.
- Interest Rate: Buyers can estimate a good time to buy if they know what interest rates are and where they may be moving. The Federal Reserve Bank has increased interest rates sightly several times in recent years. These increases have been small increments, but because their rates determine bank rates, even a .25% increase will impact your monthly payment. However, the Fed does not give advanced warning.
Nonetheless, you can follow the Fed’s calendar of meetings, and you can study the economic advisories on their anticipated decisions. The information is readily accessible but may be difficult to follow for many buyers who want to time their purchase in advance of the next interest rate increase.
- Availability: Just because you are a buyer in the market, the house of your dreams may not be on the market. If you are looking for a home in a new development, you may find your best price if you are among the first buyers.
If there are many homes available in a defined area, buyers have more negotiating leverage though you may wonder why there are so many houses available. The inventory of housing stock will have a significant effect on price. The inventory also indicates how long sellers’ homes have been on the market and how long they were on the market before sale. All this information is public and accessible online.
What’s the right time? The price paid is what the buyer agrees to, so you have more power than you know. But your power is a function of the information you research and use.
What are your purchasing options?
Any decision to buy requires financing, and traditional fixed mortgages have put millions into the homes they own. But there are mortgage options that make a big difference in your ability to afford the home you need and want.
- Pay it off. You would if you could pay cash for a home. Paying cash will save you interest payments in the short- and long-term and relieve you of the stress of a lifetime of payments. Offering cash also improves your leverage in pricing the home. However, in some economic conditions, you could invest the cash into higher returns.
- Maximize the down payment. The more you can pay down, the lower your mortgage payment will be. Making a large down payment will immediately improve your equity. And, the savings are significant if you calculate the them over the length of the mortgage. However, it is difficult enough for most first-time buyers to come up with the down payment required. The idea of increasing the amount presents a challenge.
- Optimize your tax benefits. The Internal Revenue Service allows you to deduct the interest you pay on a mortgage. The tax break effectively increases your return on investment you will not enjoy if you buy a house with cash.
- Ask for an FHA loan. The standard Federal Housing Authority (FHA) mortgage helps homebuyers, even those with credit ratings as low at 580. They only have to come up with a 3.5% down payment. The low down payment requires applicants to purchase mortgage insurance which increases your monthly payment.
- Use a conventional mortgage. A conventional mortgage is an option offered by banks, and credit unions. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Company (Fannie Mac) offer mortgages that conform to a to $484,350 limit. Jumbo Mortgages cover amounts exceeding that cap. While Jumbo loans are conventional, they do not conform to Fannie Mae or Fannie Mac limits.
- Consider “Piggyback” loans. These loans invite people into the market who cannot come up with sizable down payments. The applicant puts 10% down on a primary mortgage covering 80% of the price. A secondary loan covers the remaining 10%. However, you must pay the settlement fees on both loans up front, and your monthly payment may increase because the second mortgage has a variable interest rate. These Piggy-back deals lured people into purchases they couldn’t afford and contributed to the mortgage collapse beginning in 2004.
- Check out a first-time home buyer assistance program. Each state sponsors a first-time buyer assistance program. They vary from state to state, but they offer below-market interest rates, breaks on closing costs, and forgivable loans. Only first-time buyers are eligible, and they must attend a course in financing and budgeting.
- Inquire about VA loans. Veterans of the United States military service as defined by the Veterans Administration are eligible for a VA Loan. The big advantage is you are not required to make a down payment. VA Loans are issued by banks or credit unions, but they are guaranteed up to a by the Federal government doing away with Private Mortgage Insurance (PMI). The loans are limited to purchase of a primary residence or refinancing a current mortgage.
- Investigate ARMs. An adjustable rate mortgage (ARM) empowers some people to enter mortgages with a discounted interest rate at the start. However, with the interest rate linked to the Federal Reserve Bank’s interest rate, your monthly payments will fluctuate.
Is there a best option?
As US News points out, “Finding the right mortgage loan is arguably just as important as finding the right property.” There could be a best mortgage option for your personal situation. The best option is the one you can afford and promises some return on your investment. But only you have the power to decide. You must evaluate your current financial situation and estimate your future earnings potential. This is not a decision the seller or realtor can make for you.
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