As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
The prospect of homeownership should look very attractive as 2018 begins. I’m aware that a mortgage lender has a built-in incentive to say that, but if you’re in the market for your next place soon, buying does have a lot of advantages over renting.
Now that the calendar has turned over, we thought we’d take a look at why buying a home could be the right move for you this year.
More Money in Your Pocket
Renting can be expensive. In most cases, from a monthly savings perspective, you’re better off buying. According to Zillow, the average home in the United States costs $206,300 as of November 2017. If you do the math with an amortization calculator, that comes out to a mortgage payment of $1,014.87 on a loan with a 30-year term at a 4.25% interest rate.
Also according to Zillow, the average payment for monthly rent in December was $1,439. Compared with that average mortgage payment, this would mean a monthly savings of more than $400 per month for buying over renting. Among other options, that’s a nice chunk of change to put into retirement or college fund savings.
Finally, when you look at it as a percentage of income, buying makes a ton of sense. Zillow’s data shows people spend 29.1% of their income on rent, as compared to 15.4% of income spent on a mortgage. The gap is also widening when put up against historical averages.
Buying could make a ton of financial sense. If saving money is or has been an obstacle, there are many low down payment options. The conventional wisdom that you need to put 20% down has become a myth.
Depending on the loan type you qualify for, you could get into a primary home with anywhere between 3% – 5% down.
Rising Interest Rates
Interest rates have been on the rise in recent years. There are several factors at play here, but one of the big ones involves the federal funds rate, the rate at which banks borrow money from each other overnight.
One of the primary functions of the Federal Reserve is to control the money supply. This sounds a little bit counterintuitive, but policymakers view a little bit of inflation as a good thing. The theory is that if people expect prices to rise in the near future, they’re more likely to buy whatever they’re shopping for now. This helps keep people employed and has a major impact on the growth of the economy.
If the Federal Reserve Board thinks prices are rising too quickly, they can raise interest rates which makes the cost to borrow money more expensive, but the money you do have is worth more.
In an effort to stimulate the economy in response to the 2008 recession, the Federal Reserve lowered the federal funds rate to essentially 0%. This lowered interest rates, boosting the economy by encouraging Americans to borrow funds for things like cars and homes.
Interest rates can’t stay this low forever because inflation would eventually go through the roof if the cost to borrow money were too low. Because of this, Fed officials have raised the short-term funds rate five times in the last three years.
A variety of factors impact mortgage rates, including movements in the stock and bond markets. However, the short-term funds rate does play a big role.
When the Fed makes policy announcements, they also release something called the dot plot on a periodic basis. The dot plot is a projection of where Federal Reserve members anticipate short-term interest rates being in the next few years.
In 2018, the majority of members anticipate three further rate hikes. This would put the federal funds rate at 2.1% by the end of the year. In general, the higher the funds rate, the higher you can expect mortgage rates to be.
If the market has done a good job of anticipating the Fed’s mood regarding interest rates, the uptick will be built into the rate sheet already, but it’s not unreasonable to expect higher rates along with the Fed moves.
Interest rates are holding in the low 4% range for now and if you’re in the market, it’s a good time to take advantage before rates go up.
Higher Home Prices
According to data gathered from Quicken Loans appraisals in major metropolitan areas, home prices have risen 6.17% on the year across the country.
Rising prices are great if you’re a homeowner. The faster the value of your home rises, the more equity builds in addition to the gains you make when you make payments.
Home price rises aren’t as great if you’re in the market to buy a home because it means spending more. Some good news is that Javier Vivas, director of economic research for Realtor.com, says that he expects home prices to continue to rise, but at a slower pace of around 3%. This should help with affordability.
However, if you’re in the market for a home, it might be a good idea to get preapproved and start shopping as soon as possible before prices go up.
New Starter Homes on the Market
Housing starts are expected to increase 3% over the next year. However, of particular interest to first-time home buyers may be the fact that single-family home construction will increase at a rate of 7% over the next year.
This helps address an inventory mismatch. Many home buyers are young and looking for starter homes. The inventory in recent years has been increasing in higher-priced homes that don’t always match the needs of the market. The good news is an increase in single-family home construction helps address this problem.
It’s Your Home
A big reason to buy a home at any point in time is just the fact that it would be yours. When you have your own home, it opens up all sorts of options for you, both financially and aesthetically, that you wouldn’t have if you were renting.
To begin with, each time you make a payment on your home, you gain equity and come closer to full ownership as you pay off the loan. That’s something you don’t get with a landlord.
Since the property is yours, you also see the benefits of any gains in value due to market conditions as well as any renovations you’ve made.
Not only do you gain ownership, but your house is an investment. You can take cash out for things like renovations or to boost a retirement or college fund. The more equity you have, the more you can turn into cash.
Beyond the financial stuff, you can simply do a lot more with your own house over a rental. Whether you want to paint the bedroom a nice shade of lavender or yellow with polka dots, it’s really up to you. If you want to remodel a bedroom into a tricked-out man cave, you can go for it. The world is your oyster.
If you’re in the market, rates are still low. It remains a great time to buy. If you’d like to get started online, you can get your preapproval in as few as eight minutes through Rocket Mortgage® by Quicken Loans. If you have any questions, we’ll be happy to answer them in the comments below.
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