When is the right time to buy a home? - Michael Phillip

5/04/2022

When is the right time to buy a home? When speaking with people about buying a home, I often hear the same thing, “Home prices are too high now, I think I’m going to wait.” Or I may hear, “I’m waiting to save more for a down payment.” But do the numbers support these reasons in this market?

The first thing you need to understand when considering when is the right time to buy a home, is the current market. We have seen appreciation rates up in the double digits the past two years in the Denver Metro market, interest rates on mortgages hitting historic lows and now steadily climbing, and that mixed with a supply shortage that will not be able to catch up with the demand anytime soon. This crazy market has a lot of people saying they are going to wait for the bubble to burst, then buy. However, according to most industry and financial experts, this is not a bubble, and a “burst” is unlikely, as this is a supply and demand issue, vs a financial crisis seen in 2007. In the Denver metro area, pre 2020, we saw an average of You can read more about the fundamentals of a housing bubble, price predictions, and forecasts for 2022 in these articles by Forbes and Bankrate respectively:

Let’s Break Down The Numbers

Now that you have confidence that there is no “crash” coming. Let’s take a look at the numbers and see if buying now vs waiting to buy is going to save you money or cost you more:

Let’s say you find a great single family home for $400,000 today. You want to put 3.5% down and your lender is quoting you a 5.5% interest rate. Your monthly mortgage payment (excluding taxes and insurance) will be $2,191 per month.

Let’s now say you feel that $400,000 is overpaying, and so you decide to wait to buy this home. You wait 4 months and in that time the home value increased by 10%, and is now for sale at $440,000. With the same interest rate, and same down payment, your monthly payment will now be $2,498 per month.

However, let’s be more realistic and also account for the interest rates to rise as they currently are predicted to. So you decide to wait the same 4 months, but not only has the home price increased the 10%, but also the interest rates have increased to 6.5%. Not only will the higher price cause your down payment to be more, but with the higher interest rates, your monthly payment will now be $2,781 per month! In this scenario, you are now paying $283 dollars more per month for the same home, and over the life of the loan (30 year fixed) you will be paying almost $101,000 more for this same home! Wowza!

Okay, so you get out your personal crystal ball, and it tells you that home prices are going to flatten out in 2022-2023, or may be even fall a little, so you decide to wait. Let’s run those scenarios.

With that same $400,000 home NOT increasing in value, and the same 3.5% down, but the interest rates increase from 5.5% to 6.5%. You will go from a $2,271 payment, to a $2,528 payment (+$257) per month payment, and pay just over $92k more over the life of the new loan at that higher interest rate.

Okay, you have your crystal ball and it tells you that the housing market actually does take a little fall, and the home value drops from $400,000 to $380,000. That’s great news! However, if interest rates rise during that time from 5.5% to 6.5%, with the same 3.5% down, your payment would STILL increase from $2,157 per month to $2,402 per month, or $245 more per month, even with the home being $20,000 less! So even those waiting for prices to fall, a 1% increase in interest rates during that time period could offset any potential savings on the price of the home.

“I want to wait to save more money for a higher down payment”

This is also a common reason given to wait to buy a home, and of course a higher down payment can save you thousands of dollars by getting a better interest rate, lowering your monthly payment, eliminating your Private Mortgage Insurance (if 20% down), and lower your total loan amount. But how does waiting to accumulate this amount of savings account for factoring in rising interest rates and home values over that same period?

Let’s take a look at these scenarios:

The same situation. A single family home for sale at $400,000, you have saved just enough to put 3.5% down, and your lender is quoting you a 5.5% interest rate. Your monthly mortgage payment (excluding taxes and insurance) will be $2,271 per month, as in the example above.

However, now you decide to wait to save up 5% down. This will cost you an extra $6,000 out of pocket and, for our example, take you 12 months to save that additional cash. Let’s now say the home value increased 10% in those 12 months, but the lender was able to keep the interest rate at 5.5%. With you putting the 5% down now, but the home value increasing in that time to $440,000, your monthly mortgage payment will be $2,498 per month! In this scenario, you now waited 12 months to move in, spent $6,000 more out of pocket, AND your monthly payment are still $227 higher! And that’s with no interest rate hikes. If the interest rates also increase to 6.5% in those 12 months on the same $440,000 loan, you will now pay $2,781 per month, or $510 more per month!

As you can see, in some situations, even saving for a larger down payment can negate the affects of rising home prices and/or interest rates. Depending on your unique situation, goals, and the current market, saving for a larger down payment is not always a winning strategy. If you’d like to know the pros and cons of a larger vs smaller down payment, check out this article on The Mortgage Report’s website: Before Making a 20% Mortgage Down Payment, Read This

This article is not intended to be financial advice, and I am not a loan officer or financial advisor. Every situation is unique and interest rates, appreciation rates, and home price predictions are very difficult to determine as they can depend on personal situation, economic factors, and policy changes. I recommend you speak with your lender or financial advisor to determine what is best for your individual situation. Please reach out if you would like a recommendation!