By Steven J. Spence

Or better yet, should I buy a house? This may be a long blog, but rightfully so, there are many things to consider when making the most important financial decision in your life. Writing about this topic came to mind with questions I ask of myself and many have asked me wondering what is the right thing to do. I have to share some stories of my own children and from personal discussions with friends and fellow real estate investors. I encourage you to read the entire blog and understand that I do not offer financial advice except for that you to learn more about any financial topic and make the decision that is best for you.

Unless you have been under a rock over the past year, you probably noticed that home prices have gone up almost 20%. This puts the U.S. median home price at $375,000. On the surface this amount is intimidating to folks and causes the concern to not make a mistake. Unfortunately, these people stop right there and continue to rent.  Speaking of rent, the national average of rent is up nearly 20% as well, and has reached $1,789 per month. Another discouraging number to digest, especially when it is time to renew your lease and the landlord gives you a new lease with a 20% increase! So, what can us ordinary people do? Either way we may fear in making a mistake as we all have heard of the ‘coming crash’, right? So, do you wait and continue to rent, while you watch the home prices continue to climb out of reach or do you just go for it and buy a house? These are solid questions, so let me give you some thoughts to help you make your decision.

First off, you need the facts. Try to separate speculation from this equation. What I mean is over analyzing this stuff will paralyze you. When you have no where to turn for help, you will more than likely freeze. I call this syndrome ‘analysis paralyses’.

Fact #1: There is a shortage of housing (and it seemed to have come all of a sudden). You can speculate why there is a shortage, but then we leave the fact that there is a shortage.

Fact #2: Housing prices are increasing (and so is rent). We can speculate on the whys, but again, we stray from the facts here.

Fact #3: Mortgage rates are still low, despite of their recent rise (around 4%). Will they come back down or go up even more? More speculation!

Everyone’s needs are different, and it would be impossible to cover ever scenario. But, one can create a decision tree from the following information, plan and then execute their decision. I always say “You are your best sales person. You have been present for every decision you have made so far, good or bad. You have to know that you can talk yourself into anything.”

First is the desire for housing. Why do you want a house? Perhaps you moved and need a place to live, perhaps your lease for a rental unit is up and you want to move, etc, etc… Deciding the need or want will start your foundation for this process. Bottomline, we all need a place to live. Now, do you rent or buy?

Renting allows you to pick up and leave at the end of the lease. There should be no strings attached.

The benefits of renting

  1. You can get in at a low dollar amount. Usually, first month’s rent and a security deposit equal to one month’s rent.
  2. You will not pay for things that break.
  3. You are not responsible for property taxes.

The downside of renting

  1. You will have a landlord. This can be an interesting experience as you have to go through someone for issues of the property you are renting. More than likely improvements will be kept at a minimum during your occupancy.
  2. Any investment you make to the property (landscaping or painting for example), will not (normally) benefit you upon vacating.
  3. You will not enjoy any appreciation (or depreciation) of the property value that occurs over time (almost 20% last year).
  4. If you remain beyond your lease agreement, it is likely that your rent will increase (almost 20% last year).
  5. Anyone that you allow to live with you normally must be approved by the landlord. Some property management companies will do a background check on all adults that will be on the lease.
  6. You may not be able to have pets, if you are, there is usually an increase of rent in the form of a ‘pet fee’.

These are the major things that go with renting. If this doesn’t suit you, then there is the buying option. Perhaps buying will meet your needs.

The benefits of buying

  1. You will normally get more in quality of life property for the price of rent.
  2. Any appreciation (or depreciation) of the property will be yours to claim.
  3. You can make improvements to the home and they could increase the value of the property.
  4. You will never get an increase on the loan if you entered a fixed rate mortgage.
    1. If taxes and insurance are escrowed, then your payment to the lender may increase.
  5. You as the owner, approves who dwells in your home.
  6. You should be able to have a pet or two.
  7. You will never have a landlord terminating your lease.
  8. Having a mortgage, as long as you have the means to repay can benefit you through a federal tax deduction.
  9. Having a mortgage that has an interest rate lower than the rate of inflation is a smart inflationary hedge position.

The downside of buying

  1. It normally is not a good short-term option. You risk losing if you had to sell within a year or two even if the property appreciated.
  2. Not all improvements you make will increase the value of the property.
  3. You are responsible for the property taxes.
  4. If the property depreciates, you will have that cost to bear.
  5. Any repairs needed, are up to you. Anything from a leaky roof to a broken furnace will be done at your expense.

Now we are through the pros and cons of renting versus buying. Let’s take a look at the next piece: Home prices! Where are they going? Will they crash? These questions are legitimate, but in today’s market they can also steer you in the wrong direction. This is what I mean; my daughter asked me a few years ago about buying a house. I told her, that everything I see (indicators) points to a real estate market crash. I advised her not to buy as she will risk losing a lot, by buying at the top of the market (then). I look back at that and realize, regardless of the indicators, the market had gone the opposite direction! She did not listen to me and bought anyway (as she and my son-in-law needed a home). Now look, despite all the negative indicators, she is enjoying a ‘win’ and around 30-40% increase in their property value. My point is, and I write this in my book, the market is manipulated and indicators/trends are not today’s driving factors. There are no guarantees that property values will go up, but they took the chance and it did for them. If they heeded my advice, they would still be renting three years later.

Back to the housing prices…let’s take a stab at why they are running away.

  1. Supply and demand. This is the most obvious and should be recognized first. When demand is greater than supply, prices go up. When supply is greater than demand, then the prices will go down. Inflation plays an important role in this as starter homes are becoming less profitable to build new due to rising material and labor costs. Builders need to make profit and are focusing on the larger and luxurious homes. The profit margins there are still attractive to them. This doesn’t help you out, does it?
  2. Interest rates. Mortgage lenders have been providing loans at very low rates over the past year. The result is higher property prices. Why is this? In today’s economy, you normally don’t buy the house any more, you buy the payments. And, the lower the interest rate equals to a lower payment. If a payment can increase, then a more expensive property can be afforded. This begins the cycle that ultimately increases the prices of properties. If rates begin to go up, it could be deduced that price increases may slow down or even reverse.
  3. Real Estate agents fondly call this ‘comps’. And simply put, a price of any property will be compared to recent and nearby sales of comparable homes to determine the over-all value of a property. This will also help you make a decision of whether you are over-paying or possibly getting a discount on a property.

The bottom line about the pricing is that the market can go either way or just stall out. Can you stomach paying rent another year and see home values go up? How about if you bought and home prices declined or even crashed? I will state this, your property value will never go to zero.

One last thing, and we’ll be finished. What is going to happen in the economy, more so, the interest rates for mortgages? I explained in the previous section the relationship that interest rates have on the price of the home. One can predict as interest rates rise; the payments will become more expensive. Will this affect home prices? It should, but there’s always the supply and demand thing. Now, why did I mention the economy? Okay, it is important to know how the Federal Reserve Bank counters inflation. When inflation is getting too high, they raise interest rates. Home mortgage rates should follow this trend.

Is inflation high right now? I believe we can all say without a doubt, yes! What will be the response? Higher interest rates. Will they continue to raise the rates? The Fed is planning to raise rates several times over the rest of 2022. What does this mean to you? The payment for a mortgage will be more expensive. Pretty easy to see now, right?

Here is an example of how a mortgage will play out and we’ll use the national home price average of $375,000. Also, the figures provided are calculated at a 4% interest rate.

A typical mortgage is usually an 80/20 split. This means that the lender will provide 80% of the loan (of the appraised value) and the borrower will provide the remaining 20% as the down payment.

$375,000 requires a $75,000 down payment. Then there will be a monthly payment due of $1,432.25 per month (not including property taxes and insurance).

The problem here, and many just stop here is because who has $75,000 laying around for a down payment?

Not to worry, there are many programs (like FHA, VA-Military) that can help with this. Check with your lender to see if you qualify for one of these programs as you can possibly purchase a home with only 3.5% down. This is what that would look like.

$375,000 requires a $13,125 down payment. This is more doable, right? Of course, you will be borrowing more which makes the monthly payment more. You can expect $1,727.65 per month (not including property taxes and insurance).

There is one more option to help you as you may not be able to come up with the $13,125 down payment and that is PMI or Private Mortgage Insurance. This is an insurance that you will pay to cover the missing down payment. This rate will vary based on credit scores that you have achieved. This is not the ‘go-to’ way, but it is a way. If you do choose this path, you should plan to get out of it as quickly as possible as it is an added expense that has very little, if any, return. But it may equip you to purchase a home with no money down.

If you have come to a decision to buy, find a lender first. Talk with them and figure out the plans they have available and how much you can qualify for. What they will do, is give you a ‘pre-qual’ letter. Then go shopping for that price range! I will advise that only get what you need as far as a home size. Never forget, you are the one that has to pay to fix things when things go wrong. A bigger house, means a bigger roof, a bigger roof means more money! Also, know what the property taxes are. These vary from state to state and county to county. This will impact your bottom line if the tax is high. Also, pay attention to the home owner insurance as the lender will demand coverage on their loan. You may be seeking in Florida and additional ‘wind’ insurance is required for most of the state. That can be a sticker shock. And there is flood insurance; you may never use it but if the property is zoned as a risk, you will have to pay this as well. That too can be a little surprise. Once you get the lending part sorted, a good real estate agent will guide you to finding that perfect home.

Final Thoughts; If you are concerned about a market crash, but you still decided to buy, purchase something a little less expensive. The market will eventual correct and you can sell or rent down the road and buy a better house. Thank goodness you are not a tree! You always can move so don’t put too much pressure on yourself about making a mistake. Just make an informed decision using these tips to guide you. If we can predict the future, we would never make any mistakes!

Get a plain and simple understanding from my book Money Plain and Simple; What the Institutions and the Elite Don’t Want You to Know

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