There is a growing feeling among Americans that the housing market is getting worse.
A survey released by Fannie Mae in October 2022 shows that the share of people who think now is a good time to buy a home fell to an all-time low of 16%. Despite only tracking data since 2010, that’s the lowest percentage Fannie Mae has ever recorded.
What’s more, another survey found that 80% of 1,000 respondents believe that now is not a good time to buy a home. According to a similar Fannie Mae survey conducted in February, 70% of Americans said it was a bad time to buy, while 25% said it was a good time.
To put that in perspective, back in October 2020, 60% of people said now was a good time to buy and 35% said now was a bad time to buy.
We shouldn’t be surprised by the recent pessimism. Most people can’t afford mortgage rates near 7%. In fact, 67% of survey respondents anticipate higher mortgage rates, and there are rising concerns about job security.
Despite that, Redfin data shows home prices are still 5% higher than a year ago. However, prices aren’t growing as fast as they used to.
Consequently, if you’re planning on moving in the next year, you may be asking, “Is now a good time to buy a house? ” The answer to this question is more complex than you might expect.
There is no doubt that housing market trends provide an important context. However, you also need to take into account your financial situation, life goals, and readiness to become a homeowner before deciding whether this is a good time for you to purchase a house.
In this article, we review some of the most important factors you should consider before purchasing a home.
Is Right Now a Good Time To Buy a House?
It’s impossible to pick the perfect time to buy a house. No matter what the market is doing, it’s challenging. Ultimately, your personal situation determines whether you should buy a home.
In general, your credit score, your budget, and how much you have saved for a down payment all have a significant effect on whether you’re ready to buy a house.
Taking a look at your financial situation and the housing market in your area will help you decide if it’s a good time to purchase a home. For example, it may be a good idea to buy now if you have enough money for a down payment and your mortgage payment is the same or less than your monthly rent.
Also, don’t forget to make your offer competitive with what sellers might get. Getting a Verified Approval letter from your lender before looking for houses is the best way to accomplish this. The seller will take your offer more seriously if you’ve got this letter in hand.
At the same time, there are also external factors that can influence your decision. Most significantly, the current and fluctuating real estate market conditions. For some home buyers, the process is easier due to these conditions, and for others, it is difficult.
The following are some of the most important factors to consider.
The mortgage rate.
Mortgage rates are interest rates charged on mortgages. Lenders determine mortgage rates and they can be either:
- Fixed. This means during the mortgage term, the interest rate stays the same
- Variable. An interest rate that fluctuates with the benchmark rate.
Depending on the credit profile of the borrower, mortgage rates vary. Average mortgage rates can also rise and fall with interest rate cycles, which can have a significant impact on the housing market.
As of this writing, 30-year fixed-rate mortgages are at a double-digit interest rate, largely due to the highest inflation in 40 years. Inflation has already caused the Federal Reserve to increase its key interest rate multiple times this year as a result of that.
Even as home prices in many areas have dropped, those big changes mean higher monthly payments for homebuyers, notes NextAdvisor. Again, affordability is the most important factor when buying a house. Consider price changes and mortgage rates when determining whether the monthly payment is manageable.
The current average mortgage rate is as follows:
- Average 30-year fixed mortgage rate is 6.63%
- 20-year fixed mortgage rate is 6.53%
- 15-year fixed mortgage rate is 6.01%
- 10-year mortgage rate: 6.11%
- 5/1 ARM rates are averaging 5.50%
Mortgage rate forecast.
As a result of the highest inflation in four decades, mortgage rates have increased. According to the consumer price index, prices rose 7.7% from September to October. Despite rising inflation in October, it appeared to be slowing down.
As a result of that high inflation, the Federal Reserve has raised its short-term interest rate. For the fourth time in a row, the federal funds rate was raised by 75 basis points in November. Since mortgage rates are also affected by inflation, the Fed’s changes don’t directly affect mortgage rates.
“Inflation is absolutely in the driver’s seat, particularly as it pertains to mortgage rates. Until we get some sustained evidence that inflation is beginning to recede, the upward pressure on mortgage rates will remain,” says Odeta Kushi, deputy chief economist at First American Financial Corporation.
Home inventory.
A property is counted as inventory when it is listed by a seller. It becomes a pending sale when it goes under contract. As of the last day of the month, inventory is calculated by counting active listings and pending sales.
Since fewer homes are available, the laws of supply and demand will cause housing prices to rise. When there is little inventory on the market, demand for those homes on the market increases. The fewer options buyers have, the higher the seller’s asking price can be.
Altos Research reports that homes for sale decreased 2.5 percent post-Thanksgiving to 550,000. In addition, inventory is expected to drop another five percent in the new year, according to the group.
The number of new properties listed for sale is also declining.
The number of homes for sale each week is thirty percent lower than last year, with about one out of ten selling within seven days. There should be a fifty percent drop in new listings before January 1, and homes should be appropriately priced when they go on the market. As such, it is less common for sellers to lower their prices.
Home price.
A home price refers to the price at which a property is agreed to be sold. It is useful for prospective home buyers to understand home prices in order to get the best value as well as determine what types of homes they can afford within their budgets.
Currently, home price increases are slowing year-over-year.
According to the NAR, the national median price for existing homes sold in October was $379,100. Compared with June, when the median price hit a record high of $413,800, that was down more than 8%. Before going on the market, existing homes were owned and occupied.
After the peak spring homebuying season, prices typically drop.
It’s more telling that price gains have slowed over the last few months. Compared with a year ago, October’s median price was 6.6% higher than spring’s double-digit gains.
To make a competitive offer without overpaying, talk to your real estate agent about home values in your area.
First-time buyer discount.
In late 2022, the FHFA launched its First-Time Home Buyer Mortgage Rate Discount program.
For eligible first-time homebuyers, the interest rate-cutting program eliminates mortgage rate add-ons up to 1.75%.
In order to qualify for the FHFA mortgage rate discount, home buyers must meet the following requirements:
- You’re a first-time home buyer
- The home is their primary/main residence
- Obtain conventional mortgage financing
- After closing, move in within 60 days
- Household income is low or moderate
Whether buying a single-family home or a multi-unit property, you can take advantage of the FHFA’s mortgage rate discount. It is important to note, however, that the discount program is only available for a limited time
However, if you don’t meet the requirement or miss the timeframe, you may be eligible for the following discounts:
- HomeReady. To support affordable homeownership, HomeReady mortgage rates are LLPA-limited, like the FHFA First-Time Buyer Mortgage Rate Discount. A minimum FICO score of 620 is required for HomeReady.
- Home Possible. Low- and middle-income wage earners can apply for this Freddie Mac-backed mortgage program. Keeping mortgage rates low, Home Possible relaxes mortgage approval standards. A minimum FICO score of 660 is required.
- USDA loans. For buyers of modest means in suburban and rural areas, USDA mortgages are no-down-payment loans. There are often lower USDA mortgage rates than on comparable, fixed-rate loans. In addition, mortgage insurance premiums are lower.
- VA loans. Department of Veterans Affairs mortgage loans is guaranteed by the federal government. In addition to ultra-low mortgage rates, veterans and active duty military may qualify for 100% financing through VA loans. A FICO score of 580 is required.
- The Downpayment Toward Equity Act. This provides up to $25,000 in cash to first-time, first-generation home buyers for a down payment, mortgage, and other closing costs, as well as state and government expenses. Legislation establishing the program is still pending in Congress.
- $15,000 tax credit. For first-time home buyers, the First-Time Home Buyer Tax Credit Act gives them up to $15,000 in federal income tax credits.
Why Waiting To Buy A House May Be A Good Idea
A home purchase right now won’t be suitable for everyone. You may be unable to buy a home due to the following factors.
It’s harder to buy in seller’s markets.
The past couple of years has seen strong seller’s markets for home buyers. In other words, there are more homes in demand than there are homes available. Because of this, buyers compete for available houses.
As a result, home buyers face high prices and stiff competition. As housing options are limited, some potential home buyers are forced to go above and beyond in order to obtain a property.
A large down payment or an all-cash offer are two examples of these strategies. This may not be the best option for buyers, but it might be the only way to get a home in these hot markets.
The market may be less competitive or have more homes available if you wait to purchase a home.
The interest rate is higher.
Buying a new home while selling an old one at the same time poses a challenge for existing homeowners. There may be mortgages with lower interest rates available to these homeowners.
They risk significantly increasing their monthly expenses by buying a new home. In this case, waiting until it makes more sense financially for you to buy a new house may be a better option if you do not have a hard date in mind.
Determining Your Readiness to Buy a Home
When considering whether to buy a home, ask yourself these questions.
Are you ready to settle down?
You should consider whether you plan to make any major life changes in the near future before buying a house since it’s a long-term commitment. Depending on what major life events you are planning, you may want to delay purchasing a home, since your needs will typically change when you switch jobs, get married, or have kids.
In the event that you do end up purchasing a home, you should stay long enough to offset the costs of the transaction, such as closing costs and your selling agent’s commission. It usually takes around five years for that to happen.
Though it’s not the end of the world, it would be a shame if you bought a house and found out shortly after that you had to move for a new job. In order to take on a big asset, as well as a potential liability, you should feel stable and be ready to settle down.
How’s your job security?
After a job loss, owning a home can be a stressful commitment, so buying a home isn’t a good idea if you’re worried about losing your job.
Before thinking about buying a house, wait until your employment situation is stable.
Do you know what you can afford from your budget?
Mortgages aren’t the only expense associated with owning a home. Consider these factors when determining your budget and what it costs to own a home:
- Property tax
- Insurance
- Homeowners’ association dues
- Additional maintenance costs, such as home repairs and lawn care
- Larger utility costs, like the cost of heating and cooling a large home.
Generally, lenders require that principal, interest, taxes, and insurance expenses are less than 28% of your gross monthly income if you’re trying to determine how much you should spend on housing. You may want to talk with a financial adviser about the purchase, who can help guide your decision and ensure everything is covered.
Are you financially prepared?
The following three ingredients should be evaluated:
Savings.
After you buy the home, you’ll need money from your savings for a down payment, mortgage closing costs, and moving expenses. The down payment requirement varies by mortgage type and lender. Your monthly mortgage payment will be lower the more you put down.
Credit
Mortgage lenders generally offer the best mortgage rates and terms to borrowers with credit scores of 740 or higher. You can still qualify for a mortgage with a score of 600 or lower. Generally, with a credit score in the 500s, options are slimmer and loan costs can be higher.
You might want to postpone buying a house if your credit is marginal and work on building it during that time. When applying for a conventional loan, you should have a credit score of 620 or higher.
If your credit score isn’t where you’d like it to be, paying your credit card bills on time will improve it. Set up automatic payments to keep you from missing payments when you’re busy. And, you want to keep your credit usage low — usually a ratio below 30 percent.
Debt
To determine whether you qualify for a mortgage, lenders look at your debt-to-income ratio or DTI. The debt-to-income ratio is a measure of how much of your gross income is devoted to debt payments, such as mortgage, car, student loan, and credit card payments.
A DTI under 36% is often preferred by lenders, although a higher ratio can be approved. If your DTI is low, you are more likely to qualify for a mortgage and get the lowest interest rate.
Bottom Line: Buying a house depends on your circumstances
Every prospective buyer will have a different idea of when is the best time to buy a house. It’s important to understand how buying will affect your monthly bottom line and your financial situation.
[Related: Understanding inflation’s impact on home buying and investing]
FAQs
1. When buying a home, what’s the first step?
The short answer? The Mortgage Pre-Approval.
Unless you are paying cash for a house, you will need a mortgage. The first step in determining how much home you can afford is to obtain a loan pre-approval. In order to buy a home, this is the first step.
2. What are my total costs?
There is a difference between the sticker price of a house and what you actually pay. It is important to consider ongoing costs when buying a home, even if you are paying cash.
The final cost will usually not be known upfront due to the many unknowns involved. However, you can get a ballpark estimate.
Typically, a house’s “total” cost includes:
- The property itself
- An appraisal
- An inspection
- Mortgage interest
- Mortgage Insurance
- Homeowners Insurance
- Property taxes
3. How much money do I need for a down payment?
It depends on the type of loan. However, 3% to 5% is the most common answer.
The FHA has lowered its 3.5% down payment requirement to 3.0%..There is a reduction in the FHA’s 3.5% down payment requirement to 3.0%. Some conventional loans require a 3% down. A VA loan does not require a down payment. A USDA loan may be available for properties in rural areas, which also requires no money down.
All of these options will be explained to you by a good loan officer.
4. How long has the house been on the market?
As a house sits on the market for a longer period of time, the seller will be more motivated to negotiate. When it comes to replacing outdated carpets or other visible problems, you may have flexibility in terms of price, contingencies, and terms and credits.
In many cases, a home can languish on the market for a long time after being overpriced at the beginning. This requires multiple price reductions. Buyers may perceive something wrong when they see multiple price cuts and a listing that has been on the market for too long. However, this gives you a great opportunity to negotiate.
5. What is the average sale price of nearby homes?
In answering this question, you will be able to gauge how your house compares to those around it. It’s probably better to buy the cheapest house in a nice neighborhood than the nicest one in a questionable neighborhood if you want your home’s value to increase. In this case, you may want to ask some questions about the price of your home if it is the most expensive on the block.
You can find recently sold homes around you by searching Zillow, Redfin, or Realtor.com. If you have a real estate agent, you can also ask them.
[Related: The 12 Best Books for Buying a Home]
