Is Now A Good Time To Buy A Home
Are you interested in buying a new home but aren’t sure whether it’s a good time? The market is affected by many factors outside your control, including fluctuating interest rates and housing prices as well as the local economy, and trying to time your purchase to take best advantage of current conditions requires research, flexibility and some luck.
There’s a lot to learn, but here’s an assessment of where the market stands now and a breakdown of factors you should consider. With this information, you can make an informed decision about whether the time is right for you.
2017 housing market conditions
The U.S. housing market, at large, is currently more of a sellers market as prices are rising and inventory is tight. With this being said, it’s important to note that some of the data presented here is composed of national averages and conditions can vary greatly depending on which region you live in and the current economic climate there.
Supply and demand
Nationally, recently-sold homes were on the market for a median of four weeks, NAR reports, a rather quick turnover when compared historically. Furthermore, in NAR’s latest report on existing home sales in March 2017, sales reached their highest pace in more than 10 years, resulting in a severe supply shortage.
This NAR report sheds some light on where prices currently stand. Here are the highlights.
There was a decrease in the affordability index over the last year, which means housing is getting more expensive. In February of this year, the fixed affordability index for the U.S. was 159.9, while in February 2016 it was 174.8. Regionally, the West had an index of 114, the South was at 162, the Northeast at 169 and the Midwest at 211. While the figures vary greatly, all regions saw a decrease in affordability from the previous year.
There was also a rise in the percentage of a homeowners’ income that is going toward their mortgage payment. In February 2017, it was 15.6% while in February 2016 it was 14.2%. The Midwest had the lowest percentage at 11.9%, while the Northeast reported 14.7%, the South 15.8% and the West 22.1%.
Lastly, there was a rise in the median cost of a pre-existing single family home. It was $229,900 in 2017, up from $213,600 in 2016. In the Midwest the average was $172,500, in the South it was $209,000, in the Northeast it was $251,200 and in the West it was $343,100.
In summary, prices are moving up in the U.S. as a whole which is a natural result of a limited supply and rising demand.
Now for a look at interest rates.
According to the NAR report, which looked at median-priced existing single-family homes in the U.S., fixed interest rates have hovered at 3.74% to 4.43% since February of 2016. However, rates have steadily increased since August hitting a high of 4.43% in February. Regionally, the Midwest saw the highest rate at 4.53%, followed by the South at 4.48%, the West at 4.40% and the Northeast at 4.27%. Rates are expected to continue to rise, making now a decently good time to buy before they do.
Another point to note is that the Federal Reserve has made interest rate increases in December 2016 and March of this year, each a .25% hike, putting the current level at .75% to 1%. While the rate was as high as 5.25% in June of 2006, it hasn’t reached 1% since December 2008.
The changing winds in D.C. are also playing a role in the housing market. After President Trump’s win, Republicans reportedly had a renewed sense of confidence about the housing market while Democrats felt less confident, according to the Harris Poll conducted by Trulia. In addition to the survey, Trulia predicts the housing inventory will increase as homebuilders ramp up supply and homeowners trade up because of rising incomes and home prices.
They also said that if President Trump follows through with the Dodd-Frank reform he has hinted at, it would loosen up credit, increasing accessibility to financing for homeownership and boosting demand. This could further drive prices up, but Trulia also notes the new administration may offer tax breaks to encourage new supply.
When Colorado real estate agent Sarah Bowles was asked whether she thought now was a good time to buy a house in the U.S., says, “Yes, the market may seem challenging, but rates are still low and prices are not headed down. With patience, know-how, a good agent and a dash of resilience, one can navigate this market.”
Factors that determine a good time to buy
Now that you have an understanding of where the current market stands, here’s an overview of the factors to consider when analyzing the housing market.
Low demand, high supply
As the law of supply and demand goes, the more supply is available, the lower the price is for buyers because there is less competition. As demand goes up and supply goes down, competition among buyers increases, which means prices also increase. So the best time to buy, which is also known as a “buyers market,” is when many houses are on the market and not many people are buying. You will have more room to negotiate and are likely to get a better price.
You can identify a buyer’s market by looking at how many homes are on the market and how long they have been up for sale. If most have been for sale for more than six months, demand is likely low. However, if they are being bought within a few weeks or months, it’s likely the market is leaning in favor of the seller. Your local real estate agent is a good person to ask about the current conditions in your area. Furthermore, you can gain an understanding of trends on a larger scale by reading the reports published by authorities in the housing market, such as the National Association of Realtors (NAR).
Low interest rates
Interest rates play a critical factor in how much you will pay on your mortgage. The lower the rate you can get, the less you’ll pay for your house over the course of your mortgage. Rates will always be fluctuating, so it’s important to look at the activity over the last 10 years, five years and one year to understand whether current rates are good relative to past activity. You can also look to predictions in the industry to find out whether rates are expected to go up or down in the future.
Yes, house shopping is affected by the season and from spring to summer is the busiest time. When the weather gets nicer after a cold winter and the holiday season is long gone, people begin not only shopping for homes but also putting homes on the market. While you may be able to find more homes, there also will be more shoppers, which boosts the competition and demand.
With this in mind, it’s a good idea to get in early in the season as winter is turning to spring. Also, keep an eye out year-around as a homeowner may be ready to sell in winter or fall when demand is low and you can score a good deal.
Rental vs. owning costs
If you are renting and your rent payment is lower than your mortgage would be, it makes sense to rent until you are ready to pay more each month. However, if your mortgage payments will be equal or less than your rent, you could be building equity each month. Furthermore, you could be getting a tax deduction for the total interest you pay on your mortgage loan each year. So if rental costs are equal to or more than mortgage costs, it’s a good time to buy.
Qualifying debt-to-income ratio
Aside from the changing market conditions, there are personal factors that determine whether it is a good time to buy a house. First, where are you financially? Are you ready to commit to a 30-year mortgage and will you be able to afford the monthly payments? Shop around, get estimates and run the numbers to ensure it will fit your budget.
According to the Consumer Financial Protection Bureau, if your debt-to-income ratio will surpass 43%, including your mortgage, you can’t get approved for a Qualified Mortgage (a category of loans with stable features to increase affordability and protect borrowers). Calculate your debt-to-income ratio by adding up the total amount you pay to your debts each month and dividing it by your total monthly gross income.
Next, do you have a down payment? Conventional mortgages will require a minimum 20% down, which will help to lower your monthly payments.
However, there are various programs you can take advantage of that have lower down payment requirements. The Federal Housing Administration FHA program is a popular one that asks for 3.5% down, the Veteran Affairs (VA) program allows 0% down and the Conventional 97 program also allows 3% down.
While these programs enable a lower price of entry to home ownership, a mortgage which is initiated with less than 20% down will require private mortgage insurance (PMI) to protect the lender if you default. This, plus the increased amount being financed will result in a higher monthly payment. You’ll want to figure out which approach you want to take to ensure you can come up with the down payment required.
Good credit score
Lastly, how’s your credit score? Is it in good shape? It will be a large factor in the interest rate you are given by a mortgage lender and if you qualify at all. For example, FHA loans require at least a 580 credit score.
If it is low, it may be more cost-effective to spend a year or two building your credit so you can get a better rate. Check your credit score, get a few quotes from mortgage lenders and weigh whether it would be good to get a mortgage now or wait until later.
Is it a good time to buy? Overall, the current market conditions aren’t ideal but they also aren’t bad. A key takeaway is that industry professionals are predicting a rise in interest rates, which means 2017 may provide better conditions than in the years to come.
If everything lines up and you’re ready to buy a home, be sure to shop around before deciding on a mortgage lender. There are many companies to choose from and some will be better for certain situations than others.