Buying your first home, or perhaps your second or third, is an exciting and daunting endeavor. With the varying and occasionally ill-tempered market, it can be both difficult and overwhelming to tread the water of home-buying. The brokerage jargon can sometimes feel like it goes right over your head, and it can be difficult to know who to trust. Buying can feel like a risk far greater than the reward.
If you are expecting to buy some time in the future but are “just going to wait,” for now at least, you are, without a doubt, actively betting on the odds. And those odds may not be in your favor. Waiting to see how the market settles is not simply waiting to observe how the pieces fall but choosing to wait based upon the following assumptions:
- Interest rates will drop,
- Asking prices on houses will surely decrease,
- You will absolutely have more saved at that time, or
- The ratio of buyers to sellers will settle in your favor.
There are major pitfalls to each of these strategies. Let’s test each assumption.
YOU CHOOSE TO WAIT FOR INTEREST RATES TO DROP
How many others have you interacted with who are waiting for the same? If the rate does decrease, you will not be the only one jumping at the opportunity. The moment you’ve been waiting for is realized, and the market is suddenly out of your favor (again). Asking prices on homes will increase as demand climbs, making your low-interest rate almost irrelevant. Now you need enough cash for a large down payment to ensure affordability and compete with others.
Say you approach a house listed for $500,000. The bank approves the loan, and you plan to put 5% down at $25,000. Buyer #2 is also approved for $500,000 but has $75,000 on hand. Not only can they match your $25,000 down payment, but can offer $550,000 and ensure the purchase in the event of a low appraisal. So, now you need $75,000 on hand just to match the competitor, let alone set you apart.
Perhaps you feel as though you missed the ideal interest rates of 6 months ago – feeling overwhelmed and disheartened by rates spanning from 6-7% as opposed to 3-4% rates. Even if interest rates have increased, the market is in your favor!
Let’s say you want to buy in the spring. You attempt to buy the home listed for $450,000, but with other competing buyers fighting over the same home, you end up needing to offer $50,000 over the asking price, making the home a $500,000 purchase. Not only will you need to have $22,500 on hand for a 5% down payment, but you will also need an extra $50,000 lying around to potentially compensate for the appraisal gap… the lending company will not give you more than the appraisal amount (in our case, $450,000).
If you were to approach that same home today, it may be listed at $500,000, but you are not competing with other eager and ardent buyers. So, you can offer $450,000 with 5% ($22,500) down. Not only are you saving $50,000 in principle, but you are saving an additional $2,500 in down payment.
||6 Months Ago
|Down Payment (10%)
In terms of affordability, the payment in the current market is $200 greater per month. However, it is worth noting that you have saved $50,000 in principle with an opportunity to refinance the interest rate down the road. You can always alter the interest rate: never the principle. In addition, the $2,500 you saved in your down payment will cover the additional cost of the higher monthly payment for almost a year.
YOU ARE WAITING FOR HOME VALUES AND ASKING PRICE TO DECREASE
Without any other factors in play, this may be the least dangerous bet. Although houses have never depreciated more than 12%, even in the worst economic climates. This includes the housing crisis of 2008, where from the high in September of 2006 to the low of March 2009, the Denver Home Price Index only dropped around 9%, just to have appreciated 157% since 2009, and still would have appreciated by 130%, had the housing crisis never happened.
That may just happen within the next few years. But let’s take a look at the opportunity cost.
You are looking at the same $500,000 home as before. The market takes a (history-making) 12% blow and is now worth $440,000, so you buy it. That seems ideal, right? But let’s assume it takes five years for that market drop to occur. That $500,000 home you have been keeping your eye on has appreciated around 4% per year, as market trends indicate is a very reasonable bet. That original $500,000 home is now worth $608,326. The market takes a 12% downturn and is now worth $535,327.
That is $35,321 over the original asking price from five years earlier and a supplying 7% return. Not to mention, you may have been paying rent over those 5 years, waiting for another opportunity to arise. In your 2-bedroom, single-bath apartment in the Denver metro area, you have thrown away $120,000 in rent (assuming you can find a 2-bedroom apartment in Denver for a five-year fixed $2,000).
YOU ARE WAITING TO SAVE FOR A MORE SIGNIFICANT DOWNPAYMENT
I do not want to assume what your saving diligence could be, but let’s just throw around some numbers to see if you can outrun the odds.
Let’s say you are going for that same $500,000 home and want to have 10% down. Perhaps you can save $25,000 a year. If market standards hold true, that same home will be $540,000, appreciating at 4% within those two years. So, you save the $50,000, but now you only have a 9.25% down payment. So, you save another year. Now the home is worth $561,600, and you have $75,000 for your down payment. That’s 13% down, so you hit your goal for a sufficient down payment, but you are paying $61,600 extra for the same home, just for a slightly more affordable payment! And you have been paying your other housing costs in the meantime – either losing money on rent or losing the opportunities that arise if you had leveraged your current home.
While on the subject of opportunity cost, as you save for a down payment, you are not only attempting to outrun the appreciation of the real estate market, but you also need to beat inflation. These last several months have given us an acute understanding of the inflationary high; your money doesn’t go as far and is rapidly losing value. While the inflation rate is currently more severe in a recessionary economy, the inflationary increase is not a stranger, historically. If the inflation rate is increasing at 8% and your savings account gives you a 0.2% return, you are taking a loss at 7.8% in terms of your asset’s purchasing value. So, you try to invest to either have an investment return that offsets inflation or makes you money in the meantime. Real-estate, tangible investing is by far the most sure-safe way to accomplish this.
Since early 1970, inflation has increased by 644%. This may sound astounding, but in contrast, the price of homes has increased 2.5 times that, increasing 1,608%. In fact, “if home prices grew at the same rate of inflation since 1970, the median home price today would be just $177.788 – rather than $408,100.”
Want an investment that is not only practical (as it gives you somewhere to live or supplies a passive income) but gives you the best return while outrunning even the highest inflationary costs? Buy a home.
YOU ARE WAITING FOR A COMPLETE BUYERS MARKET
Your hope is that sellers will so far outnumber those hoping to buy that prices will drop and competition for closing on a home will no longer be a factor. In other markets, this may be the case. However, in Colorado’s market, this is far from reality. Living in Colorado is coveted. Our population has grown drastically in the last couple of decades, estimated as the second fastest-growing population in the nation. We have seen a 34% population growth since 2000, with an average growth of 1.3% per year. As demand increases, the market price follows. You want to be on the end of that growth where your equity compounds rather than your rent.
If you find yourself in any of these camps, the odds are not in your favor, and that assumes the other three factors are also not at play! Imagine the increase in risk if you are waiting for housing prices to drop and interest rates to drop. It all boils down to affordability. Can you make the payment? Or can you make the payment long enough to acquire at least 20% equity, then no longer need to pay for mortgage insurance? Or until rates drop, and you can refinance?
Here are some practical ways to assist in affordability:
- Cut down unnecessary costs. Alter your budget to allow for the payment; sacrifice going out for dinner – if need be, eat rice and beans or beans and rice for variety, at least for these next few months.
- Get a roommate! Many homeowners opt to purchase houses with separate living spaces or rentable rooms. It is not as daunting as you may think. Open your home to a college student, a young couple just getting started, or an individual who will not intrude on your way of living but help with the mortgage payment for the time being. You can even purchase an investment property for the sole purpose of renting out rooms. In the Denver market, you would be surprised at how many young (and old) individuals will gladly pay more than their fair share for a reasonable place to live and for the opportunity to live in a home rather than a cramped
- Pick up a side hustle. There are many ways you can leverage your skills for a little extra income every month. The smallest amounts can make a world of difference.
Join the group that says, “I am so glad I bought when I did.” You will thank yourself later.