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What are some reasons why you shouldn’t buy a home now?
A real estate agent saying that now might not be the right time to buy a house? That’s a curveball, isn’t it? This isn’t an article that uses market statistics like average sales price or days on market to explain why now may or may not be the right time to buy. For the sake of this article, I’m going to assume we are talking about buying a home that will be a primary residence, not purely an investment property. When people are considering purchasing a primary residence, the current circumstances of the real estate market, such as price trends and whether it is a seller’s or buyer’s market, should take a secondary role to what is happening in your life. Instead of trying to ‘time’ the cycles in a real estate market when purchasing your primary residence, it is better to honestly appraise your current life circumstances and your plans for the next 5-10 years. Let’s look at some reasons why this might not be the right time to buy a home.
You expect to move in less than 5 years
When the time comes to sell the home, you will be faced with transaction costs, which may include transfer taxes, document preparation fees, lawyer fees, and commissions to real estate agents involved in the transaction. These transaction costs can amount to 8% of the sales price. Real estate tends to appreciate at a rate of 2.5% to 3% per year over the long term. This means that it would take about 3 years for the property to appreciate enough to cover these transaction costs. However, the real estate market is notoriously volatile over the short term, and swings of 15% or 20% up or down can occur in only a few years. The impact from volatility is lessened the longer the home is owned. I would recommend that you plan to stay in the house for at least 5 years. If that’s a commitment you find difficult to make, you may be better off waiting to buy.
However, there are some ways around this. First, for sellers that are buying up, I can represent you on both transactions while cutting the commission you pay from listing your current home in half. That could mean you receive a check that is $7500 more on the sale of a $250,000 home. Such a substantial reduction in the transaction costs could eliminate a net loss when selling the home in less than 5 years. Alternatively, if you do not need to sell this house before you buy the next one, you can keep the first house and rent it out as an investment. If the rent you receive can pay for more than the mortgage and upkeep of the home, you could delay the sale and reap the benefits of appreciation, renters paying off the mortgage, and perhaps even a little cashflow.
The down payment and closing costs will nearly exhaust your savings
Homeownership comes with a responsibility to maintain your home. A furnace may last 15 years. An air conditioner may function for 10-12 years. A roof typically lasts 25 years. These are just the ‘big ticket’ items. Then there are other financial hits like auto repairs and medical expenses. It is often recommended to maintain 3-6 months of living expenses in liquid savings. This is all that much more important when owning a home. If you cannot close on a home without maintaining a healthy savings account, now might not be the right time to buy.
Instead of delaying the purchase, it might make sense to put less than 20% down on your home purchase, even if you have the savings to cover 20%. An excellent loan originator will be able to present options for putting less than 20% down, and not all of them will require private mortgage insurance (PMI). If maintaining a healthy savings necessitates paying PMI, that may still be preferred to using credit cards to pay for unexpected bills instead of being able to tap into your savings.
If you are a home buyer who needs a low down payment mortgage option like FHA or Veterans Administration (VA) financing, then it is even more important to be sure you will be in the home for 5 or even 10 years. The following consideration is especially crucial for FHA/VA buyers as well.
The monthly mortgage payment will not allow you to save at least $200 each month
If your monthly expenses after buying a home will not allow you to save at least $200 per month, it might mean now is not the time to buy a home. This rule of thumb comes from the world of investing. Beginning investors thinking of buying single family rental homes are cautioned to budget $200-300 per month for capital expenses and maintenance on the homes. This should be applied after factoring in the full mortgage payment, e.g. principal, interest, property taxes, and homeowner’s insurance. This is all the more important if the down payment and closing costs leave less than the recommended minimum of 3-6 months of expenses in your savings.
If buying the home you have in mind means you won’t be able to save $200 per month, the answer might be to delay buying a home. Perhaps it means your budget should be adjusted. Ultimately, the true costs of home ownership extend beyond the mortgage payment, and one must have a plan in place for when home maintenance costs inevitably arise.
Is this the right time to buy for you?
If you are ready to make a long-term commitment that will not strain your reserve of savings and your monthly budget, then it’s the right time to buy for you. It doesn’t matter if it’s a seller’s market or a buyer’s market. It’s my responsibility to guide you through the process based on what is best for you and counsel you on what tactics will help you achieve your goals based on the current market conditions. So, what do you think? Is this the right time to buy for you?