Should You Buy a House with Inflation on the Rise?
If you're a first-time home buyer, the state of the economy might be putting a damper on your plans to become a homeowner. You’re probably asking yourself: Is it truly the right time to take out your first mortgage given the growing cost of living and rising housing prices? And if you hold off, can you end up being completely priced out of the market?
As you may know, home prices have been continuously increasing since the latter half of 2020, and for the past year and a half, they have been quite high. Nevertheless, buyers were given a little reprieve in the shape of competitive mortgage rates last year. This year, that hasn't been the case. Mortgage rates have significantly increased since the beginning of 2022. And while this hasn't yet resulted in a decrease in housing prices, it has had a noticeable decline in mortgage demand. Existing home sales dropped for the fourth consecutive month in May, which is the latest sign that rising interest rates have stifled sales in the housing market. However, prices still hit a record high above $400,000 in May as a result of low levels of housing inventory and supply chain constraints, which adds to the difficulty that prospective home buyers have in affording homes.
WHAT YOU NEED TO KNOW:
The National Association of Realtors released data showing that sales of existing homes dropped 3.4% from April to May, to a seasonally adjusted annual rate of 5.4 million. This is down from 5.9 million in May of last year. At the same time, the median price of an existing home hit a record high of $407,600, up nearly 15% from a year ago. Prices went up in all parts of the country, making this the longest streak of price increases on record. After two years of gangbuster performance, the number of homes sold has "essentially returned" to pre-pandemic levels. More sales drops should be expected in the coming months as rising mortgage rates make it harder for people to buy homes. Since the Federal Reserve has raised interest rates three times this year, mortgage rates have nearly doubled from a near-record low of 3 percent at the end of last year to a current rate of 6 percent. This has cut down on the number of people buying homes and made it more expensive to do so.
A report from real estate brokerage Redfin says that a home buyer with a $2,500 monthly budget has lost nearly $120,000 in spending power since the end of last year because of rising rates. At the same time, the average monthly mortgage payment has gone up by more than $500. The housing market is quickly and painfully adjusting to the rise in mortgage rates. And the low inventory of homes is still pushing prices up, even though sales are going down.
In the past, the average house in the U.S. cost about five times what a family made in a year. During the housing bubble of 2006, the ratio was higher than 7. This means that the average single-family home in the U.S. cost more than 7 times the average annual income of a U.S. household.
Let’s take a look at Home Price/Median Income Ratio below:
When interest rates go down, houses become more affordable, so more money is spent on them. Interest rates have been going down since 1981 when they reached a high of 15.32 percent (for a 10-year US treasury bond). The combination of record home prices and increased mortgage rates in May made it the most expensive month since 2006 to purchase a home. As a result, more buyers gave up and sellers were pressured to lower the prices they were asking for their homes. The home affordability index of the National Association of Realtors dropped to 102.5 in May. This is the lowest level since the index dropped to 100.5 in July of 2006, when it was reported that the index had fallen. It had not been so low since July of 1990, when the index stood at 100.2; it was very near to reaching that level. (The affordability index takes into account the median family income, the median price of an existing property, and the average interest rate on a mortgage.)
According to the Mortgage Bankers Association, total mortgage volume dropped to 50% of where it was a year ago. Even though demand for refinancing was high, demand for buying mortgages was 21 percent lower than it had been the year before. In fact, as a result of rising rates and skyrocketing housing prices, demand for mortgages is at its lowest point in 22 years. And if rates continue to rise and home prices remain stable, a steady reduction in borrowing volume this year won't come as a surprise.
The impact of inflation on the market:
I bet you recently raised an eyebrow at the grocery check-out since you were making the same weekly buy, but this time it was significantly more expensive. Gas costs have increased by 50% compared to last year (YOY). Used vehicles and utilities, among a variety of other goods, have done the same. Overall inflation has increased by at least 8.6 percent over the past year, and officials predict that it will continue to do so in the coming year as the effects of money printing spread across the economy.
The effects of inflation do not escape the housing market. Shelter, which accounts for both home sales and rent increases, has seen an average national increase of 4.4 percent in the past year due to inflation. YOY housing costs have increased significantly due to the 20 percent median home price increase from the previous year and the 17 percent increase in rent. Rising home prices and rents have also led to concerns about housing affordability.
So, should you postpone buying a house?
You might be dead set on purchasing a property in 2022. You might have even saved a substantial down payment for that purpose. However, waiting to buy can make more sense given the current state of the housing market and the cost of financing a home purchase. Homebuyers currently have the worst of both worlds: overpriced properties and exorbitant loan rates. Therefore, if you're currently in a secure, affordable housing position (for example, you just signed a one-year lease on an affordable rental), it could be wise to postpone your plans to buy until the market stabilizes. Even if you currently own a home and are looking to purchase another one, this is still true. What you gain from selling your home at a premium, unless you're going to downsize, you'll lose in the shape of a higher buying price on a new home. Plus, you might end up trading a mortgage with a lower interest rate for a home loan with a much higher one.
Will navigating the housing market be easier next year?
It's difficult to say. Buyers were advised to hold off and wait for the real estate market to stabilize in 2022 last year. However, it hasn't happened thus far, in large part due to the still extremely low housing inventory. More inventory may arrive later this year or early in the following year, but we cannot predict with surety. And if inventory continues to be low, 2023 may prove to be a similarly challenging year for homebuyers. However, given how difficult things are right now, it's reasonable to believe that things will improve eventually—if not in 2023, then perhaps in the year following.
All things considered, home ownership has a lot of advantages. But, purchasing one at the wrong time could prove to be a mistake. Unless you have a pressing need to escape a bad housing situation, you might want to put off your plans to become a homeowner for a little while!
Benefits and Drawbacks of Buying in the Present Market
Even while the data presented makes a compelling argument for not purchasing your first home in the current volatile housing market, you can use the following factors to determine whether your urge to purchase results in a sensible financial and emotional decision:
You should think about purchasing today if:
- Rent would be more expensive than a mortgage payment. Determine whether renting or buying makes more sense in your market by doing your research. You can do the math with a rent vs. buy calculator.
- You've saved up for a down payment. You've done your homework, are aware of the types of mortgages available to you, have the funds saved up in the bank, and know how much you want to put down.
- You have received mortgage pre-approval. A pre-approval lets sellers know that you are serious about making an offer and specifies the price range you can afford.
- You have the patience necessary. Before your offer is accepted, you might need to submit many offers on several properties. Your ability to shop without feeling hurried or under pressure can both prevent you from overspending and keep you calm.
Consider delaying your purchase if:
- Renting is still a fantastic deal, in your market. If renting can be more affordable than buying, think about putting the difference in monthly mortgage payments toward your down payment.
- You’re struggling to make your down payment. Building your savings and looking into down payment help programs might be better options if you want to have a little more money in the bank before you put a down payment on your first house.
- You could use some time to get your money in better shape. You may be able to get a lower interest rate in the future by making debt payments, improving your credit score, and increasing your emergency fund.
- You feel stressed out by home ownership and home buying. Putting the brakes on becoming a homeowner can actually make you feel better if you're having trouble sleeping at night due to the thought of purchasing in a rapidly changing market and then having to make that mortgage payment each month.
Three Tips For Purchasing A Home In The Present Inflationary Market
There is still a lot of preparation to be done for individuals looking to purchase a property in today's seller's market to ensure you make an informed choice. Here are three tips to assist you in finding the house of your dreams:
1. Be informed and aware of your limitations
If you haven't gone through the mortgage pre-approval process, you can receive a nasty shock when your dream home is out of your price range. You may save yourself the pain by doing market research in your area and figuring out your purchasing power before you start looking for a home. Utilize online real estate search engines to have a thorough understanding of the market in the area where you wish to purchase. Then, find a lender and be pre-approved for a mortgage before you start browsing. By evaluating your total financial condition and receiving a borrowing limit, pre-approval enables you to keep your home search within your means. In a competitive market, your real estate agent can also be required to submit your pre-approval letter together with any bids you submit.
2. Take into account new neighborhoods
Look at houses that need some work, especially in newer neighborhoods. You may move into a house at a good price, fix it up, and participate in community organizations with other homeowners. One underutilized potential for buyers to increase their home equity is neighborhood equity building. In essence, neighborhood equity measures how appealing a certain area is to homebuyers. A buyer's decision to buy a property can be made or broken by aspects including cleanliness, walkability, curb appeal, schools, accessibility to public transportation, and general safety.
3. Be Modular With Your Home Type
What tenant doesn't have their heart set on a single-family home without shared walls? But everyone else does, so you might have to pay more for the kind of house you want. Buyers are starting to consider alternatives like condos and townhomes since our market has seen a good amount of multiple-offer scenarios on single-family homes. Although condo association dues and shared walls may turn off buyers, these house styles frequently have reduced homeowners' insurance rates and a built-in community that may make home ownership enjoyable every day. Even though condos typically increase more slowly than single-family houses, they're still a wonderful option for first-time buyers to begin accumulating wealth.
And remember, it's not necessary for your first home to be your last. A condo allows you to accumulate equity that you can later use to purchase single-family homes!
If you have any questions, feel free to reach out to us here. We’d be happy to answer any burning questions you may have.