The housing market is on fire, and neither a pandemic nor soaring property prices will be able to put it out. Since May, the number of people applying for mortgages to buy a home has been going up every year. This is because real estate prices across the country are going up.
The constantly lower mortgage rates, which, according to Freddie Mac, reached another record low this week, are balancing these rising prices. A 30-year fixed-rate mortgage now has an average interest rate of 2.72 percent.This time last year, it was 3.66 percent.
But here’s the big question: Is it crazy for Americans to pursue the dream of homeownership in an unstable economy and an expensive market, or is it a wise long-term investment?
This question was sent to over two dozen financial and real estate specialists by Forbes Advisor. The majority of respondents (57%) believe that buying a home is a good investment, while 38% believe that it depends on a number of conditions, and only 5% believe that buying a home is a bad investment.
Homeowners have a 40-fold higher net worth than renters.
According to the Federal Reserve’s 2020 Survey of Consumer Finances, if you own a home, you’re likely worth substantially more than someone who rents.
Homeowners have a net worth that is more than 40 times that of renters, reinforcing the notion that owning a home is a wise financial decision. In 2019, homeowners had a median net worth of $255,000, while renters only had a net worth of $6,300.
The benefit of homeownership, however, is not simply the house you own (or are mortgaged, in the case of many individuals), but also the financial mindset that got you there.
To put it another way, to buy a home, you must be financially responsible: you must save for a down payment, qualify for a mortgage, and budget for homeownership expenditures such as taxes and insurance.
Sean Wilson, the senior director of product and portfolio solutions and distribution at the financial services company TIAA, says that having a wealth-building mindset affects other financial decisions, like how much money you save, how much money you spend, and how much money you invest.
Once you’ve acquired a property, you’ll accumulate equity through forced savings, and you’ll be an investor. “Those are some wealth-building patterns from a behavioral standpoint,” Wilson explains. “Real estate aids in the development of a well-structured and disciplined investing strategy.”
In this article, we’ll look at when it’s a good idea to buy and when it’s generally better to wait.
Your financial situation is in good shape.
Experts agree that prospective homeowners should be financially stable before purchasing a property. That involves having enough money set aside for unexpected expenses, as well as some retirement savings, as well as a low debt-to-income ratio and a steady income.
Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors, says “Purchasing a home makes sense if a homebuyer is financially solid, capable of managing monthly mortgage costs, and can handle the accompanying household maintenance needs.”
The Costs of Closing Are Crucial
It’s also important to think about closing costs, which can range from 2% to more than 6% of the purchase price depending on the type of financing, how much money you’re borrowing, where the property is, and other things.
For instance, a $350,000 home with 5% closing fees will cost the buyer $17,500. This means that homeowners must remain in their homes long enough to recoup their expenses. The common consensus is five years, but this varies depending on the market. Some markets’ prices rise quickly, while others may fall owing to unforeseen causes.
“The five-year rule has exceptions,” explains Jackie Boies, senior director of housing services at Money Management International, a credit counseling organization. “The five-year rule may not apply to you if you were able to get into your property with very minimal upfront expenditures, an incredibly low loan rate, or if you live in a market with increasing rental costs.”
A house can force you to save if you’re a spender.
Some people see property ownership as a form of compulsory savings account. If you have a habit of wasting money, buying a house can be a good way to put that money into something that will appreciate over time.
According to Holmes Osborne, principal at Osborne Global Investors, “in general, a person will make the most money by investing their money in these three things: private businesses and ventures; private real estate; or mutual funds and publicly listed securities.” You can make money in a hot real estate market by investing in a home. However, once you factor in taxes, insurance, and home maintenance, it’s the least appealing option. Of course, it’s preferable than investing in depreciating things like cars and recreational equipment. ”
Renters who have paid off their mortgage have a significant edge over retirees who have never owned a home. They still have homeownership costs (property taxes and maintenance), but they also have major advantages like equity and the ability to leverage this asset in a variety of ways, such as renting out space, taking out a home equity loan, or downsizing into a less expensive house and pocketing the profit.
According to Brad Lookabaugh, vice president of portfolio management at Unison House Ownership Investors in San Francisco, “financing a home purchase with a mortgage affords an opportunity to constantly save for the future by paying down the mortgage each month.” “Owning a property also gives you the opportunity to make a return on your investment.”
When Purchasing Real Estate Is A Bad Idea
Although owning a home has numerous advantages, if you are not financially prepared, it can be disastrous. For example, if you exceed your budget or deplete your resources to purchase a property and then lose it due to job loss or other circumstances, this can have a long-term impact on your credit and budget.
Borrowers should buy a home that is well within their budget, according to experts. Couples with two incomes may want to look into securing a mortgage that is still manageable on one income. This frees up funds in your budget in the event that someone loses their employment.
“Purchasing a home makes little financial sense if you’re already renting and having trouble paying your expenses or have very little extra disposable income,” says Joseph J. Zoppi, managing partner of Templar Real Estate Enterprises in New Jersey. “Owning a home costs a lot of money; you have to consider your mortgage, property taxes, insurance, utilities, and house maintenance.”
Finally, if you move frequently, buying a property can equate to paying a lot of money you don’t have to (on broker’s fees and closing charges).