Before home buyers can get to the part when the seller’s agent hands over the keys to their new home, they probably start their home buying journey with one question: Is now a good time to buy a house?
While the question might look simple – the answer isn’t.
From your personal goals and finances to the housing market, interest rates and the broader economy, you must consider several factors before you start home shopping seriously.
The right time to buy a house will look different for each home buyer, but the housing market will play a significant role in every buyer’s decision.
Is Now a Good Time To Buy a House?
To help answer the question, “Is it a good time to buy a house?” you’ll need to ask questions about the housing market.
What are the current mortgage interest rates?
The mortgage interest rate is the price you pay to borrow money to buy a home.
Because you pay interest every time you make a monthly mortgage payment, your rate will have a significant impact on your mortgage payment. Depending on the size of your loan, a rate increase of a half or quarter percent can add hundreds of dollars to your monthly mortgage payment.
If rates are high, it may price you out of homes you may have been able to afford at a lower interest rate.
How have home prices been year over year?
Tracking home sales over time can help you determine whether it’s a good time to buy a house. Is it a buyer’s market or a seller’s market? Are home prices rising as buyer demand increases? Or are they level or dropping because there are more sellers than buyers in the market?
No one knows how real estate prices will shift, but looking at trends over time can give you a general idea of whether home prices are higher, lower or fairly stable.
How does demand affect the housing market?
Housing demand ultimately determines home prices. If there is a lot of demand in an area, competing offers from buyers will drive up prices. If buyer demand is low, sellers may be more inclined to accept lower offers. Housing demand dictates which direction home prices will take and determines whether the buyer or the seller has the advantage over the negotiation of the final sales price.
Are You Ready To Buy a House?
No matter what’s happening in the real estate market or the economy, a solid indication of your readiness to buy a home will be your readiness to assume the responsibility of homeownership.
You’re responsible for more than mortgage payments when you own a home. You’re also responsible for paying property taxes and maintaining the home.
Ask yourself these questions to help determine whether you’re ready to buy a house:
Are you ready to move in for the long term?
For many of us, buying a home is a long-term commitment that means setting down roots and living on the property for at least 2 – 5 years. If you’re a digital nomad or a globe-trotting adventurer, chances are that now isn’t the right time to buy a home.
According to the National Association of REALTORS®, home buyers are expected to stay in their homes for a median of 15 years.
Of course, you aren’t obligated to live in a home for 15 years. But if you move within the first 2 years of purchasing the home, there’s you’re less likely to profit on the sale of your property. Even if you can sell your home for a profit, you won’t be eligible for the capital gains tax exclusion on the first $250,000 of the sale if you’re single and $500,000 if you’re married.
One of the many benefits of owning a home is building equity – and building equity takes time. If you want to build wealth through your home, it’s best to commit to living there for at least 5 years.
Are your finances ready?
Unless you’re planning to buy a home with cash, you’ll need a lender to approve you for a mortgage loan. Mortgage lenders will take a close look at your finances to verify how much money you have and your creditworthiness. Some of the factors lenders commonly review include your:
- Credit score: You may have the income and enough money saved, but you’ll need a solid credit score to get approved for a mortgage. Most lenders prefer a credit score of at least 620, though certain loan types and lenders will have lower or higher credit score requirements.
- Income: Do you have a steady income? Do you have enough money coming in to afford your monthly payments? If you’re not sure, use the 28% rule. The rule is that you spend no more than 28% of your gross income on your monthly housing payment.
- Savings on hand: Do you have enough savings set aside for your down payment, closing costs, maintenance and moving expenses? Even if you’re going to make a smaller down payment, plan on saving at least 5% of the home’s purchase price before you buy a home.
- Debt-to-income (DTI) ratio: Lenders will look at your DTI ratio as part of your loan application. DTI ratio maximums can vary, but for conventional loans, you’ll need a DTI ratio that isn’t higher than 45%.
Is there a right mortgage for you?
From conventional loans to jumbo loans to government-backed loans, there are many different mortgage types. Each mortgage type may offer different benefits to different home buyers, so it’s worth taking the time to review all the requirements for the mortgages you’re interested in.
Is your budget ready?
Buying a home is expensive. You can take out a mortgage to help you purchase a home, but you’ll be on the hook for the upfront costs (down payment, closing costs, etc.) and the long-term costs (monthly payments, property taxes, home repairs, etc.).
A good indicator that it might be the right time to buy a house is having a solid budget and enough money saved to help ensure that your home purchase is a long-term success. To know how much you’ll need to budget for your home purchase, you should figure out how much home you can afford. Fortunately, you can use our mortgage calculator to help you estimate the cost of homeownership and your monthly mortgage payments.
Should You Wait To Buy a House?
Sometimes everything you need to buy a home is perfectly lined up. You’re mentally prepared to take on the responsibilities of homeownership. You’ve saved up enough money for a solid down payment, and you know what neighborhood you want to live in.
But the right time to buy a home isn’t completely within your control. In some cases, it may make sense to wait.
Is it a buyer’s market or a seller’s market?
When the housing market favors buyers, it’s a buyer’s market. Buyers typically have the upper hand because sellers may find it more difficult to sell their homes. A buyer’s market is usually the result of a recession or weakened economy, resulting in less competition among buyers and more competition among sellers.
On the other hand, a seller’s market typically features bidding wars among eager buyers willing to waive contingencies and multiple offers well above a home’s list price.
If there is a limited supply of homes and buyers are competing to buy houses, it may make sense to wait until the market cools down before buying. If it’s a buyer’s market, you may want to move quickly to score a great deal from a motivated seller.
Are home prices going up or down?
Rising home prices are indicative of a strong housing market. Rising prices can also make homeownership less affordable. If prices are increasing and your budget is tight, you may be priced out of certain homes.
On the other hand, if prices are rising, it may indicate that your home will also gain value in the future. That can help you build equity faster and possibly make a larger profit if you decide to sell later.
When home prices are falling, it can indicate a weaker housing market. This could be good for you because you may be able to buy a home for less. On the other hand, if prices continue to fall, you risk buying a home that could be valued for less than you paid for it.
Are interest rates high or low?
Mortgage rates are constantly changing based on economic factors. Consider the market interest rate when you’re deciding whether it’s the right time to buy a home.
While there are no guarantees that interest rates will decrease, there may be times when waiting for interest rates to drop is best for your home buying budget.
Are you dealing with unpredictable income?
To make sure you’re ready to take on the financial obligations of owning a home, your income should be steady enough to help you qualify for a mortgage.
If your income is unstable, you may want to wait until you have a more reliable source of income to buy a home.
You must be ready to make your monthly mortgage payments. They won’t stop coming until you pay off the loan or sell your house.
When Preparedness Meets Opportunity
For most of us, buying a home is a long-term investment. To better meet the possibility of owning a home, you’ll need to save money, plan for the long term and be prepared the moment opportunity strikes in the housing market.
National Association of REALTORS®. “Highlights From the Profile of Home Buyers and Sellers.” Retrieved November 2022 from https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-sellers
Internal Revenue Service. “Topic No. 701 Sale of Your Home.” Retrieved November 2022 from https://www.irs.gov/taxtopics/tc701
Fannie Mae. “Selling Guide.” Retrieved November 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-6-Liability-Assessment/1032992131/B3-6-02-Debt-to-Income-Ratios-02-05-2020.htm#DTI.20Ratios