โ
๐ Should You Wait to Buy a House?
โ
โ
This one is a hard one to swallow if youโve been in the market for a new home. But when interest rates rise, one of the biggest categories of borrowing that it impacts is the housing market.
โ
Changes in interest rates ultimately affect homeownersโ monthly payments.
โ
When you run the numbers between different interest rates you will notice that higher interest rates can add hundreds, if not even thousands of dollars to monthly payments. And it doesnโt help that starter homes are harder to find across the country.
โ
In last week's newsletter, I showed you how much the market has changed in the last 4 years. In fact, the numbers are so staggering that it makes complete sense why most Millenials can not afford a house. If you missed it here is the shorter twitter (or X?) version.
โ
โ
For funsies, I looked at the difference in principal and interest on a $400,000 house and wanted to see what would happen if you invested that money over the lifespan of the loan. Opportunity cost is wild.
The results will make your jaw drop. Oh yeah, and this is to own the same exact house.
โ
Here they are at a 10% return:
For my 8% return purists:
โ
โ
Opportunity cost is wild. We have a podcast episode (here) that talks all about it if you have not heard it yet.
โ
โ
But the question then becomes, should you wait?
โ
I consider high-interest debt anything above a 6% interest rate. Which makes this interest rate environment at 7%+ technically high-interest debt.
โ
There are some reasons not to buy a house in high-interest rate environments:
โ
Higher Mortgage Payments: The most direct impact of high-interest rates is that they increase the cost of borrowing. This means that your mortgage payments will be higher, which could potentially strain your budget.
โ
Reduced Purchasing Power: High-interest rates can reduce your purchasing power. For example, if rates increase from 3% to 7%, the amount of loan you can afford may decrease significantly. This could limit your options when house hunting.
โ
A $400,000 mortgage at a 3%, 30-year fixed rate mortgage would have had a $1,686 monthly mortgage payment.
โ
Today the same mortgage at a 7% interest rate would cost you $1,000 more, a $2,661 monthly mortgage payment.
โ
And that is just the payment, when we compare the total interest paid it gets worse.
โ
For a 3% mortgage, you would have paid a total of $207,110 in interest. In todayโs interest rate environment, at a 7% mortgage, you would pay a total of $558,036 in interest.
โ
A difference of more than $300,000, just in interest. Talk about compounding working against you right?
โ
There are some other impacts to consider:
โ
- Potential for Decreased Home Values: High-interest rates can slow down the housing market as fewer people are able to afford homes. This could potentially lead to a decrease in home values. If you buy a house in a high-interest rate environment and then the rates drop, you could find yourself in a situation where you owe more on your mortgage than your home is worth.
- Increased Cost of Home Ownership: Beyond the mortgage payment, high-interest rates can also affect other aspects of home ownership. For example, if you need to borrow money for home improvements or if you have an adjustable-rate mortgage, the cost of these can increase with higher interest rates.
- Opportunity Cost: The higher interest rates are, the more attractive other investment opportunities might become. High-interest rates might make investments like bonds more attractive relative to real estate.
- Risk of Rate Increases: If you opt for an adjustable-rate mortgage because you can't afford the payments on a fixed-rate mortgage in a high-interest rate environment, you run the risk that rates could go even higher in the future. This could lead to even higher payments down the line.
โ
Think hard about a home purchase right now. Historically, your personal residence is not a great โinvestmentโ contrary to what your grandparents told you.
โ
People lose their mind when I say that because they just see the value going up and they think they are making money. You have to run the numbers.
โ
They have increased about 3.8% on average before you factor in TCO (total cost of ownership). Maintenance, repairs, updates, etc. Ramit explains TCO beautifully here. โ
โ
Delaying the homeownership process can hurt at first but it may give you additional time to save for a bigger down payment.
โ
And there is a chance home prices could also drop in the meantime. Of course, no one knows for sure, but a way to best navigate through a high-interest rate environment is to minimize risks in your life. We just donโt know how much higher interest rates will go and when they will turn around again.
โ
If you are really stretching your budget to make the 7% interest rate mortgage work in your finances, it may be time to step back a little and re-think that purchase.
โ
Now, there are way more reasons to buy a home other than financial:
โ
Stability: No more packing up your life every year or so. Your boxes and suitcases will thank you.
Freedom to Customize: Want a neon green bathroom or a jungle-themed living room? Go for it! Your house, your rules.
Privacy: Say goodbye to the days of hearing your upstairs neighbors' every footstep at 2 AM.
Community Ties: Get ready for neighborhood potlucks and the joy of knowing your mailman's name.
Emotional Satisfaction: Nothing says "I'm a responsible adult" like owning a piece of real estate.
Security: Even if the market crashes, you'll still have a roof over your head. It's like a really expensive, non-portable umbrella.
Legacy: Leave something behind for your kids other than your charming personality and good looks.
Pets: Want to start your own indoor zoo or have a house full of dogs? No landlord can stop you now!
Kids: More space, School districts, sense of security, home base you name it!
โ
โ
Whatever you decide to do, make sure you really run the numbers on the cost of owning a home in full vs renting. We are working on a spreadsheet to make that even easier.
โ
โ