What I’m Telling My Clients Who Want to Buy a Home This Spring
A couple weeks ago, a client asked me, “Given the Fed’s plan to cut rates three times in 2024, is this the worst time to buy a house?”
Less than a week later, new inflation data came out showing prices rose more than expected.
So much for “the Fed’s plan” to bring down rates and make mortgages more affordable.
Which is why when I had answered my client, I said, “As with anything else, we don’t advise timing the market.”
If you’re also considering whether you should get a mortgage this spring (or not), here’s what to think through as you go house hunting.
Your Personal Financial Situation Matters More Than Market Conditions
If you need to buy a new home, you want to buy a new home, and your financial situation supports buying a new home…
You should probably buy a new home.
We can’t time the market. We can’t control macroeconomic conditions. We can’t predict what the Fed will do or how that impacts mortgage rates.
We will only ever have 100% certainty on what the “best” timing is for buying or selling in any market with hindsight. So to make decisions in the present, we have to focus on what we can know and control.
That means doing your financial planning to understand what kind of cost from getting a mortgage your income and assets will support.
Know What You Can Afford (Which, Yes, Might Mean “Less House” Than Before)
When determining affordability for clients, we look at total annual costs of homeownership. That includes the obvious: mortgage principal and interest payments, property taxes, and homeowner’s insurance.
Then we factor in any HOA or condo fees. Most crucially, we include an estimate for home maintenance and upkeep.
You have to include the general cost of homeownership in your housing budget. Yes, even as high interest rates make buying a home with a mortgage more expensive!
Believe me, this hurts. When you compare what your budget could have bought you 3 years ago to what it will buy now, that is painful.
No one denies that. At the same time, you cannot deny your financial reality or a very expensive reality of homeownership:
There will always be some form of repair or improvement that you need to make to a property you own. You have to account for that in your budget.
We suggest using 2 percent of a home’s value as your estimated annual run rate for maintenance or repairs.
If a home’s value is $750,000, for example, it’s reasonable to assume, on average, you’ll spend $15,000 per year taking care of it.
For us to call a home “affordable,” its total annual cost should not exceed 20–25 percent of your gross annual income.
Consider the Conditions in Your Specific Location
National news headlines about U.S. aggregates and averages aren’t so helpful for local buyers.
Where we are in Boston, for example, one could easily make a sound argument for both buying ASAP or waiting it out.
On one hand, it’s not unreasonable to think interest rates will drop at some point. When that does happen, whether it’s now or later in the year, buying a home with a mortgage becomes more affordable… so maybe it’s best to wait.
Or we could say there’s still massive demand in the Boston market despite the jump in interest rates. Whatever interest rates are doing, there’s still massive pent-up demand and exceedingly little inventory to meet it.
If mortgage rates do drop, it may only be harder — and more expensive — to buy a home in Boston due to even more intense competition for that limited inventory.
The point is not that one of these takes is better than the other.
The point is from where we’re standing in the present trying to forecast the future, we simply have no reliable way of knowing which one turns out to be true until we have hindsight.
In other words, until it’s too late to do anything about it, because it already happened!
This again speaks to the risks of trying to time the market… but it also underlines the fact that real estate is hyperlocal.
Even as we’re seeing headlines like “spring housing marketing showing signs of thawing as more homes come on the market,” that generic news piece may or may not reflect conditions where you want to buy.
Considering your specific community may help you determine if you feel comfortable getting a mortgage now or waiting.
Get Proactive About Securing the Lowest Interest Rate Available
Pretty obvious advice if you want to get a mortgage now, right? Here’s how to actually do that:
Consider an ARM: Adjustable-rate loans usually have lower rates than conventional fixed-rate mortgages. You’d likely get an ARM assuming you could refinance to a lower rate within 5 years. The risk is that:
- for whatever reason you can’t refinance when you need to, or
- when it’s time to refinance, rates are even higher than they are today.
Shop lenders: Get rate quotes from at least 3 different lenders. When rates are higher, you’ll see more variability across institutions. It’s worth talking with multiple banks or mortgage brokers.
Negotiate for seller credits: Talk to your realtor about asking sellers for credit you can use to buy down points on a loan.
Whether this is a good strategy often depends on the motivations of the seller. If you’re buying new construction from a developer, they might be happy to do this if you accept their list price.
An individual family might not feel the same because they’re more likely to care about the net proceeds in their pocket, which a credit lowers.
Or… Don’t Get a Mortgage At All!
Owning a home is not the end-all, be-all, especially when the market is so unfriendly to buyers.
Renting can be a great choice and even the financially-optimal way to go.
What are the signs that this may be the case for you? If you can:
- secure a rental you love for the same price as a monthly mortgage payment or less, AND
- take the money you save with lower rent and/or avoiding additional costs of homeownership and invest it in a globally diversified portfolio
…you could net out ahead of homeowners who save and invest less of their income, because more of their earnings are going toward the cost of ownership.
Whatever you decide about getting a mortgage in the near future, don’t make your choice by trying to time the market or guess at what the Fed will do next.
Events are often non-linear, and only hindsight makes it seem like whatever happened was obviously the only thing that could have happened.
Want professional financial advice for your specific financial situation? Request a complimentary consultation and one-page financial plan here: www.beyondyourhammock.com/schedule
