You’ve had your eye on a home of your own for months, or even years, but it never seems like the timing is right to buy. Rates are dropping, rates are rising, prices are a confusion — it’s hard to know when it’s the right time to finally take the plunge. Maybe you’re thinking about upgrading your starter home to get a better school district or bigger house for the kids you’ve had since you moved in, but are worried about being able to sell. Either way there’s just one question on your mind: Is now a good time to be in the real estate market?
Your Realtor, undoubtedly, will always tell you yes — and you can’t blame them, if people don’t buy houses, they’re sunk. But it’s not always a good time to buy, just like it’s not always a good time to sell. There are many factors that figure into a healthy market and the right time for home buying, from your own financial situation to larger economic indicators. Instead of telling you it is, without any uncertainty, the right time to buy, let me walk you through some of the signposts that will help you decide for yourself.
Look At Your Own Finances First
No matter how low interest rates and prices are, if you’re not in a good position to buy, it’s not a good time. Your personal finances should be the first place you look to determine if it’s time to take the leap into homeownership. There are lots of good reasons to own a home, but it can also be costly — if you’re not prepared financially, one major repair could send you spiraling toward foreclosure.
Before you set foot inside your first Open House or visit Realtor.com, make sure you’re really ready to buy. Here are some signs you’re on the right track:
Your work is stable. Today’s market is a different beast from the market only a decade ago. Depending on where you are, it may take some time to sell if you’re relocated or have to take a job in another city. Make sure that your job is reasonably stable before you start thinking about buying a home, otherwise you may find yourself with an unintended rental property or making double housing payments until your home sells.
You’ve got a decently large savings account or emergency credit line. Sure, you’ve got homeowner’s insurance in case the really big stuff happens: fires, tornadoes and floods can be insured against, but no one is going to give you sewer line coverage. I know cash is hard to come by these days, but at least make sure you have an empty emergency credit line with a reasonable interest rate before you look to buy.
There’s money left at the end of each month. You’re budgeting like a master and all your bills are paid on time each and every month — nothing has to wait until next month or next week because you can’t quite cover all your expenses. In fact, you’ve got a few dollars left over at the end of each month and could cut back to just three fancy coffees a week to save a few more. This is a great position to be in if you want to buy, not only for practical purposes, but for the fun stuff, too. After all, you’re going to want to accessorize your new pad.
You’ve got a sizeable down payment. It’s true that you can still buy a house with a three percent down payment, and for some people it may still be a better idea than renting if local rents are extremely high and home prices are extremely low, but in general, you’re going to get a better deal if you put more money down. Not only will you save money on interest payments, your mortgage insurance payments will be lower and end sooner — an FHA loan with less than 10 percent down now carries mortgage insurance for the life of the loan and that can add up to big money.
You’re ready to get your hands dirty. Owning a house is not tidy business, even if you buy one that has just been built — there’s always something that needs fixing or cleaning or improving. If you can’t be bothered to change your apartment’s furnace filter, think seriously before you consider buying a home. It’s your job to maintain all the pieces and parts of your house, and although you can hire help for any one particular job, hiring all the work out on your home will become a costly proposition.
You have a five year plan. You shouldn’t be buying a home on a whim in the post-bubble market, period. Even though prices are improving and overall resellability is increasing, we’re no where near a mark where selling your home in a reasonable amount of time is guaranteed. Plan ahead and buy the house you’re going to want to be in five or ten years from now, not the one that will get you from this Christmas to the next. Do you want to get married and have kids? Spend a little more now to buy a bigger house in a better neighborhood with a smaller interest rate — you’ll save a ton in the long run.
What About the Wider Economy?
Once you’ve got your own finances in order, you can take a meaningful look at the wider economy and real estate markets to try to divine whether buying now seems like a good move. You’ve probably heard terms like “buyer’s market” and “seller’s market” getting tossed around, but these phrases are really pretty meaningless. There aren’t very many cases where the market clearly favors buyers or sellers — usually any market will be mixed, and possibly even vary widely by neighborhood or price range.
However, there are some signs you can look to for a better indication as to the health of the housing market from a buyer’s perspective — some are fairly obvious, others not as much.
Interest Rates. Right now, interest rates are at lows like we’ve never seen in this country and they’ve been hovering between four and five percent for a while. When you hear someone complaining that rates are rising, remember that the 1980s saw interest rates close to 20 percent, but people still bought homes. Of course, low interest rates are better incentive to buy, but as long as buying is a better overall deal than renting, lots of people will be looking for a home. Remember that the bubble took place during a period when interest rates were between six and eight percent — it was the relative ease of getting a loan that drove home sales, not interest rates.
It can be tempting to finger interest rates as a cause of a lagging housing market, but higher rates actually tend to point to a healthier market. Lower interest rates are a way for the Feds to help jumpstart the housing market — as buyers flock to use these low interest products, the rate slowly creeps upward with demand. A low interest rate market is a good time to buy, if you’re ready and willing to stay parked for a while.
Housing Prices. This one is pretty easy: if housing prices are plummeting, wait to buy. The very best time to purchase in the housing price cycle is right as the tide starts to turn. So, when prices begin to rise and look like they’re going to continue the trend, grab yourself a Realtor and get a house under contract right away.
The advantages to buying in a rising market are two-fold. First, if you wait for the market to bottom out, you’re going to drive yourself crazy. There’s no reliable way to predict where the bottom is, I don’t care who tells you otherwise. However, if the market has just started to rebound, and prices are on the way up, you can feel confident that your home is still going to gain some value pretty quickly. You miss out on all the anguish and can focus better on finding a good house if you buy when prices start to rise.
New Home Starts. Lots of new home starts indicate that contractors feel like it’s safe to start building again. These construction professionals aren’t just meat heads with hammers, they’re generally pretty level headed, practical businesspeople. That’s why so many people look to home starts when they’re trying to figure out what’s going on with the housing market.
Even if you’re not looking for a new home, housing starts can be a gauge into the public’s confidence in the market. Builders don’t want to sit on homes, so they’re not going to start houses they don’t believe they can sell. When starts are up year over year, you can bet that prices are going to start rising and existing homes will start moving again. If housing starts drop dramatically year over year for very long, watch out because there may be trouble brewing. Then again, this is sometimes the best time to buy a new home because builders are ready to deal in order to keep from getting hung with lots of construction loans on finished homes.
Existing Home Sales. Existing home sales can be a little tricky if you want to use it as an indicator. Certainly, you can take it at face value and declare that the market is doing much better because existing housing sales are up, but it’s about more than just sales. Existing home sales are affected by the current inventory — after all, you can’t just throw up an existing home — and the confidence of sellers can sometimes be extrapolated from the data.
If existing home sales are down, but there’s plenty of inventory, that’s bad news for sellers, but good news for buyers. Many home sellers may be ready to make you a good deal so they can move on to their next purchase. However, if sales are down because of lack of inventory, expect to pay every nickel your future home is worth the day you close.
When sales are up, you may have to pay a little more than you’d like, but sellers aren’t so stressed and feel confident they can easily sell their homes — you can also be reasonably confident that you can turn around and sell the home you bought if your situation changes, too. That’s a good place to be if you’re not as secure in your job or family size.
Monthly National Housing Survey. Produced by Fannie Mae, the Monthly National Housing Survey examines consumer attitudes about the housing market. Although the people being surveyed are just plain Joes, the data that comes from this report is important to buyers and sellers equally. Respondents are quizzed about their expectations for home prices and mortgage rates, as well as whether or not it’s a good time to buy or sell, among other things, including how easily they believe they could secure a new mortgage.
Now, keep in mind that expectations don’t necessarily mirror reality, they actually are far more powerful than that. If buyers start to believe it’s going to be too hard to get a mortgage and rates will be too high to comfortably afford to buy a home, they’re not going to buy — and if they don’t buy, housing prices may fall, along with rates. This is a complex issue if you’re looking to hop into the market using it as an indicator.
On one hand, you have low confidence in the market, which leads to depressed prices and lower interest rates (in general) — that’s good for you as a buyer — but low market confidence also causes the supply of houses to dry up, making it harder to secure the home you really need. When confidence is high, you’re going to pay more, but you can also reasonably expect to be able to sell as prices climb.
Unemployment Rate. When unemployment rates get high, people start to panic and hold on to their money. They’re not buying much of anything, and housing isn’t especially immune. Although there will always someone in the housing market, high unemployment leads to low confidence and few sales at lower prices. Until unemployment turns around, people are nervous about buying a home because the next layoff might be them, it’s an understandable fear.
Be cautious about taking low unemployment at face value in today’s economy, though. Unemployment figures are based on how many people are drawing unemployment insurance, not how many people are actually not working. Today we’ve got a situation where many people have drawn their maximum benefit and been taken off the unemployment rolls, even if they didn’t find a new job. It’s hard to get an actual idea of the number of unemployed in a financial picture like this, so job creation may be a more helpful indicator.
U.S. Retail Sales. Like it or not, our economy runs by feeding itself money like a waterwheel. Workers do their jobs to get money, and the money they earn goes to buy products and services. The profits from those products and services go, in part, to pay the salary of workers… and on and on it goes. This vicious cycle is a big reason why the U.S. Retail Sales numbers are so important. When consumers stop feeding the machine, it grinds to a violent halt.
We saw some of this during the bubble years, the reluctance of consumers to spend their hard-earned money affected the economy in ways you’d think not buying an extra cup of coffee or jar of peanut butter wouldn’t be able to — but as sales of everything slowed, the income of those people making and selling the stuff we weren’t buying diminished. They, in turn, couldn’t spend as much money and the whole economy sort of came off its rails (this is an extremely simplified explanation of how this works and what happened).
You want to buy a home when consumer confidence and retail sales are up, otherwise you may find yourself with a house that has rapidly declining values. When consumers are spending on little things, they’re also spending on big things, like houses. It takes a little while for increasing numbers on the U.S. Retail Sales reports to start affecting the real estate market, but you can bet your Gap khakis they do. The more money circulating, the more people are spending, the more momentum the housing market sees.
Consumer Price Index. Generally speaking, the Consumer Price Index is only a minor indicator for the housing market, but if buyers are getting edgy about sales, you’ll be able to see why by taking a quick look here. The Consumer Price Index is a metric used to gauge the cost of living — it includes the costs of necessities of modern life like food and energy, as well as commodities including vehicles, clothing and prescription drugs.
As long as the change in the CPI is small, consumers aren’t likely to feel too pinched or have pockets that feel extra deep, but when the CPI increases, consumers begin to notice. An annually adjusted CPI of more than a few percentage points to the positive spells trouble for home sellers, people will be cutting back and saving more. When the CPI drops by a few percentage points, well, that’s more like it. Consumers feel more secure about spending money and the market can spring back to life.
The Bottom Line: To Buy or Not to Buy
If you skipped everything and came right down to this section, you’re looking for a quick answer I can’t really provide for you. The real estate industry is made up of local markets, so some can be improving at the same time others are failing and everything still looks peachy nationally. But, I will say that, based on the fact that job creation is increasing, starts are up, buyers are increasingly more confident, interest rates are still low and housing prices are just starting to rebound, if I were considering a purchase, I’d move now.
That being said, I bought a primary residence in 2006, at the height of the bubble in my area — so even those of us who know what we’re looking at can make seriously big mistakes sometimes. Even back then, though, we knew something was coming, we just didn’t think the bubble was about to burst on our own doorstep — we thought we had more time.
Today’s market isn’t anything like that market, it’s cool and slow and as it should be. This is a very good thing for buyers, and will soon be a reasonably good thing for sellers. I think in the next year or two, we’re going to find that the market has finally reached a balanced point, where both sellers and buyers are happy and neither has the other in a chokehold. We bought an existing home in November 2011, so I’m not in the market, but if I were, I’d not hesitate to buy the house I wanted today.