All real estate is local. You hear that a lot when you’re out shopping for a home, usually when your agent wants to put to rest some fear you have about the broader real estate market. Don’t worry, the nation may have inflated home values but not here!
A tough question facing millions of young Americans is whether to bite the bullet and buy now or wait? Unfortunately, no one can answer that for you. I can tell you that, because of low mortgage interest rates, that home prices are seriously inflated right now. But, it’s not so much because houses are more expensive on a square footage basis but that they’re bigger overall. Because people can afford bigger houses because of low interest rates, builders are building bigger houses. Americans are stretching to make payments on homes that are, by historical standards, colossal even though family size is shrinking.
Homes Are Seriously Expensive Right Now
Any way you slice the national trend right now, houses are expensive. These charts show that home prices, adjusted for inflation, are seriously over historical averages. In fact, even during the great real estate crash in 2007, housing prices barely touched historical averages before starting a new bubble. 2011 to 2014 were great years to buy a house but not so much today. Even recognizing that another housing bubble is forming, it’s not as bad as the last one. In some circumstances buying still might be the right choice.
House Payment vs Rent
Check out the second chart. That shows nominal housing prices compared to rents. You can see that home price increases are outsized compared to rent. So, evaluating your local real estate market means comparing house payments and rents. But many people err on this simple task by not calculating realistic house payments. Your house payment should include PMI, if you have to pay it, insurance and taxes, not just the portion of the payment going to the actual mortgage.
Job Stability
Depending upon your age and gender, the average person changes jobs roughly every five years. According to Zillow the average homeowner sells their home every seven years. Those numbers being that close is likely not coincidental. We live in a mobile world and mobility is a tactical financial advantage. Being nailed to the ground with a mortgage restricts your ability to move to where there may be better job opportunities.
Are You Reaching Financially?
For many people their own finances dictate whether they can buy or rent. The basic question to ask is, realistically, whether you could afford your house payment and bills on one income? If the answer is no, then you’ll need an emergency fund of ready cash in case of a job loss. And a credit card is not an emergency fund! If you can’t pay your bills and don’t have enough savings, then buying a house is a potential financial death sentence.
Buying versus renting tends to become an emotional decision and it’s tempting to cut corners when doing the calculations. I get not liking to rent. Even the best landlords can be difficult and regular rent increases are as annoying as they are burdensome. Just don’t let being annoyed at your landlord push you into a financial corner. It’s easier to find a better apartment and landlord than it is slogging through bankruptcy court.