When should I buy a Home?

Buying a home is an exciting prospect for all individuals who work hard and save their money.  Having land, property, and a dwelling that you can call yours is an opportunity many outside this wonderful country cannot afford to have.

But when should you buy?  People are often afraid to buy a home when prices are too high.  Others are nervous that their home prospects are too expensive for what they could get.  There is a lot of anxiety in such a monumental decision.

Let’s ensure you have a pulse on the current housing environment, so you know you’re in a position to make an informed decision.

Interest Rates Effect

Rates Rates Rates.  You always hear about them on the news.  Interest rates are set by the Federal Reserve, which helps regulate the supply of money in the economy to combat things like inflation and other rapidly rising prices of goods, such as housing.

High interest rates deter people from buying homes they otherwise couldn’t afford. This raises the supply of homes naturally, which then brings demand back down, and subsequently lowers the prices of homes as people try to sell their properties.  If a house is on the market for too long and the owner needs to sell, then the buyer will likely get a better deal.

This is actually where we are now. Housing has remained flat over the last year, and in some cases, it has even decreased, as shown in the chart. However, interest rates are still currently in the high 6s, which is vastly different from 5 years ago when rates were in the mid 2s. This makes it more difficult for people to buy homes, as it would be difficult to afford the monthly payment with a higher rate.

When an interest rate is assigned to a home, that directly impacts your monthly payment.  The lower the rate, the lower your payment. The lower the rate, the more people can afford a house payment, which means demand for housing increases, and therefore, sellers can raise prices. It is a continuous dance of mediation by the Federal Reserve to help keep the playing field level.

Financial Situation - Baby Steps

When saving for a home, ensure you have been following the baby steps properly.  Here is a reminder if you’re asking, “What are Dave Ramsey’s Baby Steps?”:

Step 1: Save $1,000 for your starter emergency fund

Step 2: Pay off all debt (except the mortgage) using the debt snowball method

Step 3: Save 3–6 months of expenses in a fully funded emergency fund

Step 4: Invest 15% of your household income in retirement

Step 5: Save for your children’s college fund

Step 6: Pay off your home early

Step 7: Build wealth and give

Dave Ramsey has a concept called “Baby Step 3b,” where you save for a down payment on a home. This caveat exists so people can pause saving for retirement for a little bit in order to purchase a house. They can then be comfortable making house payments and get their 15% on track toward retirement savings.

Having no debt allows your cash flow to increase significantly - with this freed-up cash flow, you can now aggressively save. Paying yourself first will enable you to take advantage of current interest rates and utilize savings vehicles, such as high-yield savings accounts, CDs, or money market accounts. These are all vehicles that pay a guaranteed interest rate, while not allowing your principal investment to drop, which is perfect for a housing fund.

Housing Price Environment

The chart above shows the median sales prices of homes. I included this attachment for a couple of reasons:

1. The prices of homes typically trend up.

2. Prices of homes can rise and fall. Even during the 2007-2009 financial crisis, home prices dropped by only roughly 20%.

The price of homes fluctuates just like the stock market. When you buy a home, you are committing to a 30-year relationship, typically. (Or – as the Ramsey Solutions Team suggests, a 15-year relationship.)  Like most relationships, it’s all about the right time, right place, and the right situation - the same goes for buying a home.

So, when is the best time to buy?

I wanted to write this because, when buying a home, there is never really a perfect time to buy. You can consider the housing price environment of today, as well as your interest rates.  The bottom line is that when buying a home, ensure you are financially and mentally prepared for the long-term commitment it entails.

Ensure you are in a position to ride out life events that could impact your ability to make mortgage payments.  Utilize your emergency fund and consider refinancing when rates drop.  Lastly, consider the financial freedom you’d have when paying off your home.

If you have questions and would like to discuss your financial situation with a financial advisor, please reach out to a member of our team today. They take a holistic approach to reviewing your financial situation to help you reach your financial goals.