Is Now a Good Time to Buy a Home?
I used to teach a class once a month about how to buy an apartment in NYC while at Google and in nearly every session, I got a question on whether it was a good time to buy a home.
So...is it?
You're Asking the Wrong Question
The truth is, neither your real estate agent nor anyone else can tell you whether now is the best time to buy a house so you can make a hefty profit in short order. If they could and were so confident in their predictions, they certainly wouldn't be giving you advice. Instead, they'd be acting on their own knowledge to become incredibly wealthy.
Kathy Braddock, a managing director at real estate brokerage William Raveis New York City, says, "The reality is, no one has a crystal ball. We only know what the right time was to buy or sell by looking at history, hindsight being 20/20."
What Are the Right Questions?
When people ask me this question, I don't think they're asking whether now is a good time to buy so they can sell in a year and make a huge profit.
I think what they're really asking is, does it make sense for me, in my current situation, to buy a home. That's a tougher question to answer broadly because everyone's specific situation is different and can vary based on a variety of factors, but let's try to break it down.
How Long Will You Stay?
One of the most important factors to take into account is your estimated time horizon. That is, how long do you plan to live or own the home. Elements such as job security, changing careers, or pursuing an advanced degree can have a big influence on this.
Your time frame matters because there are a fair amount of "frictional costs" involved when buying and selling real estate. A longer time horizon gives you more of an opportunity to realize price appreciation on the home, to offset any transactional costs.
Cary Carbonaro, financial planner and author of The Money Queen's Guide, says, "When we evaluate with a client if they should buy or rent, one of the most important factors is how long they plan to live in the area. It may make sense to rent if their time horizon is five years or less since they'll have to pay closing costs and agent fees twice through the process. Each situation and area is different, so we run the numbers to determine what makes sense."
Do You Have the Money?
Equally important is whether you have sufficient upfront and ongoing funds to pay for a place you would want to live in. Upfront costs include the downpayment and closing costs, but money should also be set aside for an emergency fund or post-transaction cash (for NYC co-ops).
On an ongoing basis, you'll need to know if your salary is enough to comfortably pay a mortgage, homeowners insurance, homeowners association fees (HOA fees), and taxes. Financial planners like to see ongoing housing costs less than 28% of gross income and total debt less than 36% of gross income.
Don't stress about figuring out these answers alone though. A quick call with a real estate agent or mortgage banker can give you a good understanding of if you have enough upfront and ongoing money to buy a home.
If it turns out you don't have sufficient funds currently, meeting with a financial planner could help you put a plan in place to save enough money for a future purchase.
Priya Malani, co-founder of financial planning firm Stash Wealth, says, "When we create a financial game plan for millennials, a home purchase is almost always the first thing we are helping them plan for. While a 20% downpayment is more standard, if a client is in good standing, we can usually employ a creative strategy, which includes the ability to put down 10% instead.
How's Your Financial Picture?
Aside from having the money to pay for a home, a strong financial position is also important to qualify for the best mortgage rates and appear as a more qualified buyer to sellers. At a high level, banks and sellers will be interested in your net worth, asset and liability profile, and credit score.
If you're in the beginning stages of deciding whether to buy a home, you may want to call a mortgage banker to get a pre-qualification. It's extremely quick and easy to get one and the estimated loan amount is based on your unverified financial information.
If you're more serious about buying a home, you may want to get a mortgage pre-approval, which is more involved than a pre-qualification - you typically complete a mortgage application, your personal information is verified with relevant documentation (e.g. paystubs, tax returns, bank statements), and your credit is checked.
No matter what type of mortgage pre-work you do, Bob Johnson, a Professor of Finance at Creighton University, says to be careful with how you use the estimated loan amount you're given.
"Too often, individuals get pre-qualified for a mortgage loan amount and then use that to determine the price range of homes to examine - or often they go a little beyond that price," explains Johnson. "That is, they anchor their expectations with the maximum house they can afford instead of the amount of house they need."
So What's the Answer?
Determining when the best time for you to buy may be much more important than deciding whether home prices are "on sale." As Braddock says, "we can't time the market, but we can time our needs."
Be sure to review your specific situation with subject matter experts to see if you are well-positioned to buy a home. Once you're ready, you can work with your real estate agent to look at local market trends and data, such as months of inventory, days on market, and asking vs. closing prices to see if your market is tilting in favor of buyers or sellers.