Does It Make Sense to Buy a House Now?

Yes, mortgage rates are low, but that’s not the only factor to consider. See if you are the type of person who should jump into the housing market now, or whether it would be smarter to wait.

A young woman celebrates inside her new home.
(Image credit: Getty Images)

With the U.S. vaccine rollout progressing nicely, we are finally able to take a collective sigh of relief and begin thinking about a post-pandemic future. The housing market is hotter than ever, despite millions of Americans losing their jobs in 2020. The April 2021 unemployment rate (opens in new tab), at 6.1%, is significantly lower than it was at its peak of 14.8% last April.

Has the COVID pandemic served as a wake-up call in your life? Are you thinking about moving to a different home? Although national mortgage rates (opens in new tab) remain historically low — at 3.2% for a 30-year fixed mortgage and 2.5% for a 15-year fixed mortgage —housing prices have risen substantially. Demand for homes far outpaces supply, and this trend may not reverse for another few years.

New home construction (opens in new tab) has increased, yet construction firms face myriad issues, including limited supplies and skilled labor, higher lumber costs and zoning restrictions.

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In light of current market conditions, does it still make sense to buy a home? There is no clear-cut answer. Rather, let’s separate potential homebuyers into three groups:

  1. No brainer to buy
  2. Better to wait
  3. Neutral

It’s a No Brainer to Buy (or Sell)

Empty nesters who currently own a home and are looking to downsize are the best positioned to take advantage of the current real estate market. Suppose you and your spouse have a home you purchased for $400,000 several years ago and local Realtors believe you can easily get $600,000 for the home if you sell it now. Your youngest child is in college or a young adult, and you don’t need all the space anymore. You’re searching for a 2,000-square-foot home instead of 3,000-square-foot home.

Assuming you meet the rules for primary residence gain exclusion, this would be the PERFECT time to downsize, lock in your gain and buy a less expensive, smaller home in your desired area.

Another group who could benefit from the current housing market are those who currently own but would prefer to rent. For example, say you do not like the house upkeep. You get frustrated when yet another home system fails and you’re on the hook financially. Your existing home is located in a desirable area and you can get top dollar for your home today.

Finally, here’s another case where it could be a no brainer to buy. Say you are eyeing a new construction home that will take a year to build. You own a home that’s comparably priced to the new construction one, but you need to replace the roof and HVAC system soon. Rather than incurring that large expense, put your existing home on the market. Move into an apartment and sign the contract for the new construction home of your dreams.

It’s Better to Wait

With millennials at the forefront of the housing purchases (opens in new tab), it begs the question: What kind of down payment have they saved? It’s hard in your 20s and early 30s to earn enough to stash away enough for a 20% or more down payment. Lenders will often allow you to put down less and either pay for private mortgage insurance (PMI) or take out a second line of credit to meet the shortfall, but this isn’t a great long-term strategy. I bought my first home as a single young woman in 2006 and only put 10% down. It was one of my biggest financial mistakes. (opens in new tab)

If you’re a newlywed or soon-to-be-married and have not previously lived together, it is strange that first year of marriage to acclimate yourself to living with your spouse. You’ve done enough wedding planning and could probably use a break. Buying a home is stressful, especially as a newly married couple. Instead, focus on joint budgeting and saving. Aim to save 20% for a down payment and buy into a real estate market where the levels of supply and demand are in relative alignment.

Let’s suppose instead that you have kids and an existing home but are maxed out on space. You want to upgrade into a larger home in a better school district. That comes at a cost. You have the financial strength to buy a more expensive home but are flexible on the timing of the move. Given the average 10% run-up in home prices last year, it’s better to wait on your home purchase until the market has stabilized a bit and you aren’t one of 10 competing offers.

The Outlook Is Neutral

The last group of people see the advantage of this low interest rate environment but also recognize the competitiveness of submitting an offer that gets accepted on an existing home. I’ve heard of a home priced at $250,000 going for $50,000 over asking price or a $425,000 home going for $450,000 ($25K over asking). Even an offer well above asking price won’t necessarily be accepted. You may have to “sweeten the deal” for a seller by waiving the appraisal or eliminating the typical negotiation that is done after a home inspection.

There is a trade-off to be made, and it carries substantial financial implications. You may find the monthly payment to be manageable because you are locking in a super low interest rate on the mortgage, but you could be overpaying for a house by $25,000 or more. Everyone intends to stay in their home long term; in actuality, many first-time home buyers stay in their homes five years or less. As the National Association for Realtors indicates, homeownership duration (opens in new tab) is largely determined by the metro area in which you reside. Shorter durations exist in areas where new residents are flocking.

Suppose you currently own a home valued at $400,000 but you want to move to the other side of town and are targeting a similar purchase price. Your new, lower-interest rate monthly mortgage payment will decrease if you locked in a higher interest rate a few years ago on your existing home. However, the moving costs and transactions costs to buy/sell may offset any mortgage savings over the long run. Think about the long-term benefits of moving to your desired area and consider whether the benefits outweigh the costs. If not, you may want to wait and pursue a refinance on your existing home.

We’re Here to Help

Buying a home is a big decision with both emotional and financial implications. I hope this offered some perspective, regardless of life stage, on key considerations in the home-buying journey.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Deborah L. Meyer, CFP®, CPA/PFS, CEPA and AFCPE® Member, is the award-winning author (opens in new tab) of Redefining Family Wealth: A Parent’s Guide to Purposeful Living. Deb is the CEO of WorthyNest (opens in new tab)®, a fee-only, fiduciary wealth management firm that helps Christian parents and Christian entrepreneurs across the U.S. integrate faith and family into financial decision-making. She also provides accounting, exit planning and tax strategies to family-owned businesses through SV CPA Services (opens in new tab)