Buying a home is often the largest single purchase in a person’s life, so it is safe to say it is a big deal. Along with this, the last few years have seen some remarkable changes in the housing market. Home sales have exploded despite a pandemic that forced the nation into a recession. From September 2020 to September 2021, homeowner equity increased by 31%, a whopping $3.2 trillion (CoreLogic.com). Because of this, many homeowners (and potential homeowners) are asking two questions right now:
1. Why have home prices appreciated so much recently?
2. When is the right time for me to buy a home?
To answer our first question, let’s discuss what has happened to the housing market over the last couple of years. A few factors are: low mortgage rates, working from home, and demand from millennials.
Low mortgage rates
In March 2020, the Federal Reserve lowered the federal funds rate to encourage investing and stimulate economic growth in response to the pandemic. This, in turn, indirectly lowered mortgage rates, which are closely tied to the federal funds rate. In fact, 30-year mortgage rates reached a record low of 2.65% in January 2021 (Freddie Mac).
With lower rates, many of those on the fence about buying leaped into the market whether they were first-time buyers or investing in a second home. Since both of those groups were taking a home off the market without putting one up for sale, the result was more pressure applied to the market. This increase in demand led to higher prices.
Working from home
As we all know, the pandemic resulted in most Americans spending much more time at home. Remote work became the norm.
Even after the initial mandates began to lift, many workers chose not to return to an office setting. A National Bureau of Economic Research paper published in June 2021 estimated that 37% of jobs, many of which not remote prior to the pandemic, can be performed entirely remotely.
Add to that the impact of widespread remote learning for students, and you had many families in 2021 searching for more space – often in the form of a new home.
Millennials buying in large numbers
Millennials represent the largest generation in American history, surpassing Boomers in 2019, totaling 72 million (Pew Research.) Now reaching their prime homebuying years, millennials accounted for just over half of all home purchase loan applications in 2020, with that number steadily growing. The cohort represented 67% of first-time home mortgage applications and 37% of repeat purchase applications from January-August 2021. With the largest percentage of millennials just reaching the age of 30, those numbers will likely continue to grow.
That brings us to our second question: when is the right time to buy a home?
For anyone wondering if the time is right for their own home purchase, there are a few questions that can help you make the right decision.
Are you ready to stay put for a while?
One good indication that you’re ready to become a homeowner is that you’re prepared to put down roots — at least for a while. While there are always exceptions to the rule, conventional wisdom generally dictates that you should plan on remaining in the house for at least three to five years for a home purchase to make financial sense. If you sell sooner than that, you may run a higher risk of selling for less than you paid for it.
Can you afford it?
Gauging the affordability of a home is about far more than just managing the down payment and monthly mortgage. There are also closing costs, homeowners insurance, property taxes and home maintenance — not to mention mortgage insurance if you happen to put down less than 20%. And even if your budget can easily absorb these costs, there are still important factors to consider.
A mortgage is the single largest debt most consumers will accrue in their lifetime. Which is one of the reasons it’s wise to pay off as much other debt as possible before buying a home. By eliminating other expensive debt – from credit cards, student loans, or other sources – you’re clearing the path toward a more comfortable and responsible home purchase.
An emergency fund of three to six months of expenses is also a priority before purchasing a home. Not only does owning a home go hand-in-hand with unexpected costs – a burst pipe, a faulty HVAC system, the list is literally endless – but life has a way of throwing other financial curveballs when we can least afford it. What if you lose your job? Or add members to your household?
Are you ready for the responsibility?
It’s easy to get caught up with the romantic aspects of homeownership – like designing your dream kitchen or picking out beautiful flooring. But remember that as the owner of a property, you’re the one responsible for its upkeep. Unlike renting, if there’s a problem, you can’t simply call the landlord or superintendent. Being a homeowner means handling issues as they arise. (That doesn’t mean you have to be a skilled handyman, but it might be a good idea to have one on speed-dial.) If you’ve never owned a home before, you can take time to learn the basics about the more common household maintenance tasks.
There’s no one-size-fits-all standard that dictates the right time to buy a home. While there will always be an element of risk with home values, taking the time to fully understand your financial situation and your overall mental preparedness will help you make the best decision for the long term.
Hunter Yarbrough, CPA, CFP, is a vice president and financial adviser with CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.