Thursday, December 1 2022

As the housing market has heated up during the pandemic, many potential homeowners have found themselves unable to buy despite multiple offers or waiver of inspections. Now, rising mortgage rates and low inventories may depress them. In May, consumer sentiment toward home buying hit an all-time low. And yet, if you can afford it, now might be a good time to consider buying a home.

It may seem surprising. House prices have skyrocketed since 2020 and mortgage rates have risen steadily in 2022 – the average rate for a 30-year fixed mortgage was around 3% in January 2022, but is now about 7.08%. Inflation is eating away at purchasing power, real household incomes have stagnated since 2019. The National Association of Realtors’ latest figures on housing affordability, measured roughly as the ratio of an average mortgage payment to average incomes, will not be published until November. 10, 2022. But the August report was grim, and I doubt November’s accessibility numbers are any better.

Here is the good news. Prices are starting to fall in 98 of the 148 major regional housing markets. Buying an asset when the price drops is usually a good thing. Buying a home now when mortgage rates are high and house prices are falling means that as mortgage rates stabilize or even fall, the value of your home is more likely to rise than if prices were rising rapidly and prices were falling. mortgage rates were rising.

Rising mortgage interest rates and a potential recession may sound like bad news, but these trends could benefit potential buyers by cooling demand and driving prices down further, especially if buyers are confident they won’t lose. not their job and income.

Of course, a potential buyer must consider other important criteria than the price of housing before buying a house. Other important decision factors include having at least 20% for a down payment; if you will live in the property for more than five years; and if your monthly payment will be less than 30% of your gross income.

Another important factor is whether you will be able to pay off the property in 15 to 20 years. I advise a 15 to 20 year mortgage, rather than a 30 year mortgage, especially when rates are high. A shorter mortgage helps reduce home expenses over time. On a $500,000 loan, a 30-year mortgage at 7.08% would cost you over $707,000 in interest. The same amount borrowed on a 6.28% 15-year loan would only cost you about $273,000, or about $434,000 less. Put that in your retirement fund instead!

Of course, there are situations where it might be better to rent. One of the best ways to find out if you want to buy or rent is to compare the cost of a home in your area to what it would cost to rent a similar property. The rule of thumb says if the ratio of ownership costs to annual rental expenses is less than 16, definitely buy. If the ratio is above 20, the house is probably too expensive and renting is the best option. Online calculators can help you determine the house price to rent ratio; one of my favorite calculators comes from Dinkytown.net.

You also need to predict how much you could earn if, instead of buying a house, you chose to invest the money used for your down payment. I recommend starting with the assumption that the money would return 4-5% over the life of the mortgage. In comparison, I recommend that you assume that the value of the house will not appreciate more than 1% over inflation. This may sound conservative, but I bought in August 2007 in New York, and the appreciation averaged 0 for the next 8 years.

Be lucid about how much property maintenance you will need to pay – many first-time home buyers forget this. Assume maybe 1% of the purchase price each year. A $1 million home might require $10,000 in annual maintenance.

So should you buy a house now? If you can meet the above criteria, I suggest you go ahead despite the high interest rates. After all, if rates go down, you can always refinance.

More from Bloomberg Opinion:

• Some Unsolicited Recession Survival Advice for Gen Z: Erin Lowry

• Savers, now is the time to choose an online bank: Alexis Leondis

• Take advantage of the Social Security bump now. You’ll Pay Later: Allison Schrager

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Teresa Ghilarducci is Schwartz Professor of Economics at the New School for Social Research. She is a co-author of “Rescuing Retirement” and a board member of the Economic Policy Institute.

More stories like this are available at bloomberg.com/opinion

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