The Best Time to Buy a Home

money.jpg
 

1. Fiinances

Prior to a home purchase, it's critical to be financially prepared for it. While it's true that homeowners' net worth is dozens of times higher than renters on average, it's also true that the highest regret of homeowners about their purchase is that the "maintenance, other costs more expensive than expected" (1). To see what you need to buy a home, go to my page on the subject here. There are various ways to reduce home maintenance and other costs.

RealEstate_Buyers_Remorse_2019_Bankrate.

Reducing initial costs:

Certain loans (i.e. NACA) have minimal fees/closing costs, sometimes certain costs can be waived or wrapped into the loan (i.e. the VA funding fee), some loans have no down payment requirement, certain programs to reduce home cost are able to take care of down payment and closing costs, & sometimes the seller is able to help out with closing costs. For those looking to buy a fixer upper without the capital or know how for it, fixer upper loans are a way to wrap the costs into the mortgage, and are available with VA, FHA, conventional, & some other loans (i.e. NACA). While some wait until they have 20% down, when I purchased my first home, I personally substantially boosted my credit for only a few hundred dollars and my own education on credit, used a program to reduce home cost (which amounted to 3.5% of the contract price, though much more is available depending on the circumstances), a 5% conventional fixer upper loan, received 3% closing cost assistance from the seller, did some minor work myself, & otherwise to reduce my initial costs. 

NACA.jpg

See current offering for pictured program above including current rates here. Keep in mind that for the resource above, above average income borrowers (adjusted for family size) for their area have limitations on the areas where they are able to buy. Also NACA is a non-profit, so while the #'s provided for many are unmatched, it's a bit like a crowded DMV & the process isn't for the faint of heart.

Another way to reduce initial costs in a very competitive market is to offer a price that is above asking price while requesting 3% closing costs on a home that you expect will go fast. While in a multiple offer situation it may not work, some homes are still being sold with only 1 offer. In a densely populated city in a hot market (Portsmouth in Summer 2021) I closed on a home where the buyers got 3% closing costs because we went up in price above list price by slightly under 3%. The closer said it was the first time in a while where a buyer was getting 3% closing cost assistance or more. That's not always necessary even in a hot market, as evidenced by another property I closed on in the Spring of 2021 that the buyer got for slightly below asking price while still getting around 3.5% in closing cost assistance agreed to by the seller in a contract.

Reducing ongoing costs:

Home warranties can be a very helpful way to reduce ongoing costs, especially in your first year of homeownership & especially if you don't have the liquid capital needed to cover systems when they break down. Home insurance is another very helpful asset to reduce your ongoing costs from things like storms.

One way to reduce ongoing costs is to target homes in your home search that will have low maintenance costs. For instance, that's almost a given with a new construction property that's built by a reputable builder. In Aug 2021 my wife & I purchased a new construction property with no yard maintenance (covered by the relatively low association fee for what was included). Homes that are brick or hardiplank also have reduced exterior maintenance required. Some homes have roofs built for >50 years, even if they're older homes, such as those with a slate or steel roof. Even a standard 30 year roof is great if it was installed well & was recently put on. Sometimes even older homes have updated systems like HVAC, AC, and water heater. The life of an HVAC & AC unit(s) can be extended by regularly changing out filters & a regular maintenance agreement like I have on my rental property on a system that isn't old. Buying a home that uses more exterior composite than wood is also a way to reduce maintenance. A home with no trees that can fall on it that is not in a flood zone is another way to reduce costs. Low or no HOA fees is another way to reduce costs. To reduce my lawn care time/$, I went through at least 4 or 5 lawncare people before settling on one who does an excellent job at a low price on my rental property, and the amount of times per month (during the time when grass grows) he does work I reduce based on the tenant's preferences. While I haven't purchased a robotic landscape option yet, that's a heavy consideration of mine.

Another way to reduce costs that most wouldn't consider but that I did while a bachelor is to rent out rooms of my house. While I did a lot of research on the subject prior to it in order to do it well, & know that some have horror stories, I had an excellent experience. My rent received was about the same as my mortgage amount during the month or 2 when I tested renting out 2 rooms at once soon before I got married. 

For those not wanting to rent out rooms of their house but wanting something similar, duplex, triplex, & quadplex purchases are an option. 

See more on reducing costs below in the financial assistance section

2. Your credit (unless buying in $ or using a loan where credit score is not considered)

While some loans have a flat rate after meeting minimum requirements, most loans will have different interest rates depending on your credit. If you're able to quickly improve your credit in order to get a much better loan rate, it might be worth waiting, though if the interest rates, which fluctuate over time, move up faster than you, it could be a net loss to wait, so there is that element of risk. To see more on credit, go to my page on the subject here.

 
score%20w%20most%20negative%20factor%20o

3. Your living needs

If you're about to be stationed in Hampton Roads coming from Germany, it's critical that you get either a rental or a purchase soon. If you do a rental first, then expect to be stationed somewhere else in 4 years, you'll likely be losing out some financially if the market appreciates in the next year (it typically does but to see 1 year projections of appreciation by zipcode, go here in Zillow. It could be a lot less costly to do an extended stay with temporary housing for a month or 2 here than to rent for a year. Some buyers opt to purchase before ever coming to the area, and I have plenty of digital options for that as well as a great camera phone for live video.

Some prospective buyers need a unique home that might not be available for rent because the inventory for rent is much lower than for purchase in and around Hampton Roads & because landlords won't allow certain things often. For instance, in the past 24 hrs at the time of this writing I spoke to someone where one of the reasons they wanted to buy was because they had 3 dogs and a cat, were getting work in a rural area, and knew that their options for rent would be limited.

Lease terms is another factor to consider. If you are renting a property and don't have lease terms up front within your lease regarding breaking your lease, you could be in a tough position if looking to break your lease before a purchase. While in some cases, it would be worth it to break your lease, in other cases, such as if the market is expected to go down between now and then due to seasonal fluctuation & the interest rates were expected to go down in the meantime as well, it could be better to ride out the lease.

 

4. The rental alternative

Whenever considering a purchase, it's best to run the numbers on renting out a home (or a room in some cases, especially with singles). I have a page dedicated to the subject here.

Some tenants are grossly underpaying rental fees because their landlords are people they know and the landlords may not be making a decision primarily based on profits or could be overly concerned about bad tenants. I recently saw a property in decent shape sell where they only rented it out to people they knew for $1000-$1200/month while the rental Zestimate at the time of sale was $1650. Especially if you'll only be in the area for short term, & if in a time when appreciation projections are low, an option like that could be superior to buying.

 

5. The market in your considered area in consideration of seasonal trends and appreciation projections.

To see this aspect of things, I suggest my page on the subject.

 

In the below example (link to current info), a home buyer in March planning on purchasing in August might be better off paying $3,000 extra to break their lease early if buying & if the Zillow appreciation projections are even remotely accurate unless purchasing a home of so low value (i.e. $25k) that the 5.7% ($174k/$164,689= 1.0565) appreciation (apx $1400 on $25k) wouldn't exceed the lease-breaking fee of $3,000. Conversely, on a $100,000 purchase, that projected appreciation amount would be apx $5650 (far in excess of $3k), & if $1,000,000, the projected appreciation would be $56,500. Lease-breaking amounts & policies do vary, so it's important to get the terms when considering a purchase & comparing that to the projected appreciation while considering other factors. Keep in mind as well the principal payments that would be made between now and when your lease would be up if you were to break your lease early.

appreciation forecastb.jpg

6. Interest rate projections/history (unless buying in $)

History

I'm writing this section on 3/18/21. Covid-19 is an example where the interest rates went very low over time in order to stimulate the economy to recover. In February/March 0f 2021 they started rapidly going up and I wouldn't be surprised at all if they went up significantly over the next year, to the degree that I may choose an interest rate .25% higher and spend extra for an extended lock (up to 180 days). While the other rate would initially be a lower interest rate, I can't lock until 60 days out from my July closing. I expect rates to be >.25% higher by then and they will be if even higher than that if the rates keep doing what they've done in the past 5 weeks. According to an article published by Kiplinger on March 18, 2021, "The rise in the 10-year rate will also push up mortgage rates, from 3.1% currently to 3.5% by the end of the year." The 10 year rate has risen from .555% on 8/5/2020 to 1.704% as of 3/19/21.

 
interest rates.jpg

7. The kind of loan/financial assistance you'll be using if applicable

Programs to reduce home cost can produce massive savings at times, especially for those who haven't owned a home in the past 3 years of below 80% of median income for their household size or buying in below median income areas. Down payment assistance is available in Hampton Roads for up to $40,000, government subsidized literally half off homes are possible (without income caps!), and interest rates with programs are as low as 0%. 

Some programs can takes months or as much as a year to qualify for. Often that time is worth it, but it does depend on factors like market trends. If you save $5,000 by using a program, but the market appreciates more than $5000 in that time for the home that you would buy, you just lost money and wasted time when you could have been getting equity and paying down your mortgage with your standard principal payments during that time.

In some cases, buyers gradually start making too much money in order to be eligible for a program to reduce home cost (the majority of programs have income caps). In other cases, I've seen where they don't make enough to be eligible for a program (i.e. Habitat for Humanity's 0% interest loans in our area that have income minimums & maximums). Some programs have asset limits as well, often with certain exceptions like vehicles. It's important to buy before you phase out with programs like that. Some programs are only available for a limited time, like the program that I used (no longer available) for $4,000 in down payment assistance on a conventional fixer upper loan with no penalties for me turning it into a rental property a few years later (whereas most programs to reduce home cost are not possible with a rehab loan and some have certain amounts of years that you need to live there to maximize the assistance).

 

8. The home you currently live in

If you're able to get free rent (i.e. some situations living with parents), or heavily subsidized rent (i.e. section 8), that's an important factor to consider.

In some cases, owning a home can be even better than free rent (i.e. if renting out rooms successfully with good tenants that cover or exceed the mortgage while still getting equity gains from appreciation & rental amounts that increase faster than mortgage amounts). That said, many don't want to rent out rooms. While my wife would never let me rent out rooms of our house, while a bachelor I was able to get rent from renting out rooms while living there that exceeded my mortgage in a test run I did 1 month. If I had remained a bachelor, I would have probably kept doing it, but I got married months later.

If you're getting free rent and investing the amount you'd be paying for rent into Roth IRA's, IRA's, & other investments where you've had a history of getting strong returns (vs not investing/saving the money you'd be paying like many with free rent don't do because of the difficulty of self-discipline), free rent is working out well for you if you don't want to be renting out rooms if you bought a home.

If you are receiving subsidies through the  Housing Choice Voucher (HCV) https://www.hud.gov/program_offices/public_indian_housing/programs/hcv/homeownership "The... (HCV) homeownership program allows families that are assisted under the HCV program to use their voucher to buy a home and receive monthly assistance in meeting homeownership expenses." That said, it's critical to get any down payment or ongoing assistance with a mortgage confirmed prior to looking at homes or making an offer.

 

9. The home you'll choose

Some of the main regrets of homeowners boil down to the house that they chose. As shared above, higher than perceived maintenance & other costs is the #1 buyer regret. Some homes will be high maintenance, and others, even at the same price, low maintenance. A large, wooden siding, 100-year-old house in disrepair surrounded by tall trees with branches over the roof for $500,000 sitting on 10 acres will be much higher maintenance than a small, rural, $150,000 home sitting on .25 acres with no trees overhanging that wasn't built so long ago and used materials like brick siding, a steel roof, & composite deck that can last a long time.

When considering home choice, location matters a lot.

Different areas have different laws (firearms example; renting out rooms example), different tax rates, different school districts, different population densities, & more. 

Commute time alone can have a major qualitative and quantitative difference.

 

9. Dispelling Myths

I hope that by now you've been able to gain more knowledge about the best time to buy. I've shared many aspects to consider. While some are not personally ready to buy, my own purchase under contract at the time of writing this section (7/2/21) is evidence that from a market perspective, I believe that now (7/2/21) is a relatively good time to buy a home.

 

Myth: The Bubble is going to pop any time!

Fact: The 1 year out projections in SE VA are strong, the longer out projections are even stronger. The factors that contributed to the 2008 crash aren't around. We have a housing shortage, much better restrictions on loans, & residential prices going up while commercial prices have gone down due to Covid-19, with many businesses that would never have previously considered remote workers now considering it in the long run as they've seen the cost effectiveness of it and the unneccessary nature of some of their previous office space.

Myth: The only buyers who can compete in this market are cash buyers

Fact: While there's a higher percentage of cash buyers than usual, most of my buyers aren't buying in cash.

 

Myth: Sellers aren't making any concessions & I'll need a lot of $ in hand to buy

Fact: As I shared in section 1, some sellers are still paying some closing costs & some homes are still going after only 1 offer. While an appraisal guarantee is helpful in a multiple offer scenario, it's not always necessary, & I typically don't recommend it in a 1 offer scenario. There are still programs that can reduce many buyers' home costs. 

Myth: The only place home sales are going is up:

Fact: While new construction doesn't tend to go down in price seasonally, resale does, so if choosing between buying in the Summer and buying in December, you'll typically find lower prices and less competition in December, with January almost always being the lowest prices of any given year even though in a quickly appreciating market January is typically going to be higher the next year than the prior March.