Is now a good time to buy a house?
Q - Is now a good time to buy a house?
A - This question comes from an investment podcaster I follow, Steve Eisman, who recently gave a brief response to the question during one of his shows. I agreed with his analysis that higher interest rates, a frozen seller’s market, and rising insurance costs make it likely that, if you buy, you should only expect to get your money back rather than see the house increase in value as it has in the past. He said that if you’re going to buy a place you love, plan to stay for a long time. His conclusion was that the era when owning a home is better than renting is probably over. I disagree with that last point.
There are 2 big financial factors that come with homeownership versus renting. First, paying a mortgage is forced savings as a result of paying down the loan balance. It starts small, but after a few years the amount going toward the principal increases, thus growing your equity faster. By the 5-year point, the mortgage payment’s interest may be less than the local rent. Even if there is no price appreciation, after 3 to 5 years you’re likely at break-even on the transaction. And at 10 years, you have increased your initial equity by 50% because you have paid down the balance.
The second big difference between owning and renting is inflation. Your mortgage payment is fixed for 15 or 30 years, and if you stay beyond the mortgage term, inflation affects your housing costs much less. Of course, inflation affects insurance, property taxes, and maintenance, but those won’t affect the cost of the roof over your head. On the other hand, rent can go up every year and will incorporate the effect of inflation on the landlord’s insurance, property taxes, and maintenance (which, of course, you’ll pay for in the rent). Renting for 10 years vs. owning means a higher monthly housing expense and no equity to take with you.
That said, owning a house is riskier and takes more effort. It can bring unexpected, large maintenance expenses and significant transaction costs when moving. There’s also the risk of natural disasters or unwanted development next door that could lower your property value. With homeownership, you are the landlord and must handle urgent and long-term maintenance. As I wrote in Volume 1 of “What Would Dad Do?” you have to be ready and want to be a homeowner. If not, or if you’re not going to stay in one place very long, then don’t buy. Real estate can be an expensive mistake or the path to long-term wealth. As with so many other money decisions, everyone’s situation is different, and blanket yes/no answers aren’t possible.
Finally, a lesser factor is the leverage from borrowing to purchase the home. If you put 20% down, you start with 5X leverage (i.e., 1/0.2), meaning a 1% increase in the house’s value is like earning 5% on your “down payment” investment. However, leverage decreases over time as the loan is paid off. The risk to you is that a 1% decline in the house’s value becomes a -5% loss (but only on paper). This is another reason to stay in a home for at least 3, if not 5, years to minimize the risk that, if you have to sell, you won't lose money on the transaction.
As for whether it’s a good or bad time, it’s not great to be a home buyer right now. The run-up in home prices since 2020 shows no sign of easing enough to make a home affordable at current interest rates. And rates are not likely to go down much in the foreseeable future. In fact, the 3% mortgage may not be seen again for decades. But if you believe that the long-term history of rising real estate prices will continue - because it is an asset class with limited supply and prices tied to inflation - then, as long as you’re not trying to buy during a “seller’s market” when people frantically try to outbid each other to win the property, it is as good a time as any to buy. If you want to game out scenarios of buying now, next year, or in two years, use a detailed mortgage calculator (like the one in the Real Estate Calculator available here) to evaluate your payments and equity growth over time. Pick a date, say 7 years from now, and see where you’ll be - total payments, growth in equity vs. rent if you buy today or wait 2 years. You can evaluate equity build-up with no price appreciation or a typical 2% annually.
As I said at the start, the podcaster was correct in assessing the current real estate market, but I think he missed the deeper discussion about how real estate, as an asset, has a place in our financial journey.
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