The Secret to Decoding When to Buy a New Home

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The Secret to Deciding When to Buy a New Home | Los Angeles Real Estate Advice by Emily Emerson

If you’re a renter with a desire to become a homeowner or a homeowner who’s decided your current house no longer fits your needs, you may be hoping that waiting a year might mean better market conditions to purchase a home. I have a lot of people say the following:

  • I’m going to wait to buy until it’s more affordable
  • I’m going to hold off and save more money

Did you know that waiting to buy a home will not increase affordability? That’s because historically the longer you wait, the more costly buying becomes.

There is a measure of this called the Housing Affordability Index July 2021.  This index measures a families ability to qualify to buy a home based on price and income data compiled by the National Association of Realtors.

According to the index, affordability has been steadily declining over the years making it harder to become a homeowner. As home values and interest rates increase, your buying power decreases. Because of this, the notion of waiting, even for the benefit of saving more money for a down payment will end up working against you.

The secret questions to deciding if you should buy now or wait, you need to ask yourself:

  1. Where will mortgage rates be by the end of 2022?
  2. What will home prices be like in 2022?

Let’s explore the secret and shed some light on both of these questions.

What will home prices be like in 2022?

Major housing industry entities are projecting continued home price appreciation for 2022 and beyond. Here are their forecasts prices to increase in 2022:

  • Freddie Mac: 5.3%
  • Fannie Mae: 5.1%
  • Mortgage Bankers Association: 8.4%

Using the average of the three projections (6.27%), a home that sells for $1,000,000 today would be valued at $1,062,700 by the end of next year. That means, if you delay, it could cost you more than you think. As a prospective buyer, you could pay an additional $62,700 if you wait for 12 months and that doesn't factor in the changes to your financing. Next, let's look at financing a home now vs 2022.

Where will mortgage rates be by the end of 2022?

Over the last few months, the 30-year fixed mortgage rate has been hovering near historic lows. Freddie Mac’s current rate for a 30-year fixed mortgage is around 2.86% as of writing this. However, most experts believe rates will rise as the economy continues to recover.

Here are the forecasts for the fourth quarter of 2022 by the three major entities mentioned above:

Freddie Mac: 3.8%
Fannie Mae: 3.2%
Mortgage Bankers Association: 4.2%

That averages out to 3.7% if you include all three forecasts, and it’s nearly a full percentage point higher than today’s rates. Any increase in mortgage rates will increase your cost and decrease your purchase power.

What does it mean for you if both home values and mortgage rates rise?

You’ll pay more in mortgage payments each month if both variables increase and you’ll be looking at a lower price point of homes in order to have the monthly payment you desire.

Let’s assume you purchase a $1,000,000 home this year with a 30-year fixed-rate loan at 2.86% after making a 20% down payment. According to the mortgage calculator from SmartAsset, your monthly mortgage payment (including principal and interest payments, and estimated home insurance, taxes in your area, and other fees) would be approximately $4,017. That same home could cost $1,067,200 by the end of 2022, and the mortgage rate could be 3.7% (based on the industry forecasts mentioned above). Your monthly mortgage payment, after putting down 20%, would increase to $4,655.

The difference in your monthly mortgage payment would be $638 and an additional $12,540 down. That’s about $7,656 more per year and around $229,680 over the life of the loan.

If you consider that purchasing now will also let you take advantage of the equity you’ll build up over the next calendar year, which is approximately $62,000 for a house with a similar value, then the total net worth increase you could gain from buying this year is over $154,000.

Waiting to buy a home costs you more than you think

In addition to the increased cost of your monthly payment as a result of higher prices, loan amounts in proportion to the price you pay, and rising interest rates, there are other benefits you’re losing out on.

By waiting to buy you are missing out on these little beauties:

  • Home value appreciation – This is free money that comes with market gains. The longer you wait, the less appreciation you will realize which is money in the bank.
  • Principal payments – This is a form of forced savings. Each time you make a mortgage payment, a portion of that pays down the loan balance which becomes equity. As the years go by, the combination of principal payments and appreciation widens the gap between what you owe and what the value of the home becomes, creating a solid nest egg for future investments, and ultimately retirement.
  • Tax benefit – At the end of each year, you will have paid 12 months worth of interest and taxes. These may be fully deductible (consult your tax adviser for specifics) which reduces your tax burden and in turn, reduces the effective monthly cost of your housing expense.
    Capital Gains Exclusion – If you buy a primary residence and keep it for at least 2 years, you may qualify for significant capital gains exclusions, and even more if you’re married.
  • Buying can be cheaper than renting in many areas – The cost of rents have gone up substantially in many markets making it cheaper to buy a home than to rent one. Especially after taking into consideration the points above. Renting could actually cost you hundreds of dollars more each month, and with no long-term benefit.

Some more benefits of being a homeowner sooner vs. later

Moving is never fun and when you buy your own home you won’t have to keep buying pizza and beer for your friends to help move you every couple of years.

There is a feeling of security and accomplishment when you own a home.

You truly become a part of a community. You also realize social benefits as you make friends with people in your neighborhood.

I know there are more, but this should convince you to stop paying your landlord’s mortgage for them.

Bottom Line

When asking if you should buy a home, you probably think of the non-financial benefits of owning a home as a driving motivator. When asking when to buy, the financial benefits make it clear that doing so now is much more advantageous than waiting until next year.

Let’s talk to get your home search started today! 


Emily Emerson, REALTOR®

ePro + Certified Pricing Strategy Advisor

Coldwell Banker Realty - Serving LA County

M: 805-796-2590

CalDRE #01984010