Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question. Wendy from Waupaca, WI asks: Brian, It’s been tough but my husband and I have saved what we calculate to be enough for a down payment and closing costs on a moderate home. We are in our early 30s and this will be our first home. We are already pre-qualified, working with a realtor, and are comfortable that we understand what to expect. What I’m wondering is if there are any buyer nuances specific to the next several months that you can share with us?
Answer. Hi Wendy. I don’t think there will be a better time in the near future to buy than right now. If not 2020, then when? But the market for first time buyers hasn’t changed significantly over the past year and isn’t expected to change in the next several months. It’s still pretty tough. One thing you have going for you is that you are in the market right now – during the slower winter months. According to the National Association of Realtors and most other experts, home prices are expected to climb by about 3.6% this year. At the same time, apartment rents are expected to increase slightly higher at 3.8%. I don’t know what your future plans are but financially it looks logical for you to make your home purchase soon if you will be staying in the home for at least five years or longer. With home value appreciation and stable monthly mortgage costs (no more rent increases), you should come out financially ahead by purchasing. Just as importantly, building that equity means you won’t have to struggle for a down payment when you decide to move or buy a bigger home. Like I started with, if not 2020, then when?
With that said, you shouldn’t try to time the market but all things considered, doing some serious housing hunting during the winter months can work in your favor. If nothing else, home prices tend to be the most stable during the winter and can be expected to take a jump when the spring market heats up. Also, interest rates remain near historic lows and although interest rates aren’t expected to rise in 2020, you can never be sure. I also think that inventory (listings) will hit a new low in 2020 meaning you’ll have fewer houses to view during the spring and summer. Conversely, in the spring there will be more buyers looking at possibly a few additional listings. Either way, inventory will be tight. Lastly, there is plenty of nervousness that a recession or economic downturn is overdue. Any hiccup could send new home construction into a downturn. With even less new construction, inventory levels will tighten even more.
Next, is figuring out what you can afford versus what you’d like to buy. Bigger and shinier isn’t always better. There’s an old adage in real estate that says don’t buy the biggest and best house in the neighborhood. There are several reasons for this with the two biggest being affordability and value appreciation. Regarding affordability, pay close attention to your debt-to-income ratio. Lenders prefer to see a debt-to-income ratio lower than 36%, with no more than 28% of that debt going towards your monthly mortgage. There are plenty of lenders that will accept 31% going towards your mortgage but that means you’ll have less money each month for discretionary spending. Wendy, you’ve worked hard at saving the down payment, do you want to still be on a tight budget after you buy your house? The other reason bigger isn’t better is the house value appreciation. When the time to sell comes, the biggest house on the block is going to have the fewest qualified buyers. The big house won’t go up in value as much as the average size or even the smallest house in the neighborhood. The biggest house almost always appreciates less in value than the others do.
And here is another important consideration for today’s tight market. You’re buying a house. You’re not marrying the house. Wendy, I’m sure that after all of your hard work at saving, you want to buy your dream home. But you’ll be better off in the future by looking at this as a financial decision rather than as an emotional decision. Look for the best house for the best value rather than the biggest dream you can get a loan for. In today’s market, you need to act quickly when you find a home that is the best value for you. You should make an offer sooner rather than continuing to look for a possibly better deal. Almost certainly, you’ll be buying up to a bigger house in a few years – and your dreams might have changed by then.
Wendy, that’s a lot to take in and a lot to consider. Still, make buying your first home buying experience fun and exciting. Make your house hunting a bit of an adventure into the neighborhoods you are considering. I know it’s cold outside in Wisconsin this time of the year but walk around the neighborhood and duck into one of the local restaurants or stores when you get chilly. Do your exploring both during the daytime and in the evening.
What tips can you add for buying during the winter or in 2020? Please leave your comments. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].