Last week, we talked about being an informed seller; now we'll discuss what it means to be an informed buyer.
When you're thinking about buying a house, it's normal to question whether it's really the best time to jump into the market - or whether you should wait to get the best deal. But a house isn't like any other investment; you can't live inside a stock or bond, so it's not always wise (even though it's very natural) to compare buying a house to other possible investments you might make in your future.
So to determine whether it's really the right time for you to buy, it's important to assess both your own ability to buy and the overall market. Here are some of the personal and market considerations you should think about before you start shopping for a home of your own.
Your own financial profile
The biggest factor in whether or not it's a good time to buy is individual to every person or household. What kind of shape are your finances currently in, and will buying a house stretch you thin or save you money every month? Take a look at your monthly income and expenses, including what you're already spending on rent, and then think about the kind of home you'd want to buy and how much money you have saved up to use for a down payment.
Many online home portals have mortgage calculators on them, but be careful with those; they often make assumptions that might not be true in your case (such as the size of your down payment, for example). And you'll have to pay for more than just your mortgage loan: Most mortgage payments also include homeowners' insurance and taxes, which are pooled in an escrow account and then distributed to your insurance company and city or county on your behalf. So even though your mortgage loan amount and interest rate might be stable over time, depending on the market, it's possible that your insurance or tax rate could increase and you'll therefore spend a little more on your mortgage payment over the 15 or 30 years you're paying it.
The current mortgage interest rate
Mortgage interest rates were at all-time lows for more than a decade, and they're still relatively low compared to the double-digit rates that many buyers saw in the 1980s, but they are creeping up nonetheless. The mortgage interest rate definitely affects buyers because the higher it moves, the bigger the monthly mortgage payment will be on a house, even if the house itself hasn't increased at all in price. So for most buyers, higher mortgage interest rates mean they can't afford to spend as much on the house itself.
That said, if mortgage rates fall in the future, you can always refinance your mortgage loan at a lower rate, so it doesn't always make sense to wait to buy a house until rates are once again at all-time lows. Nobody knows when that will be, and in the meantime all of the money you spend on rent is going to pay your landlord's mortgage (or straight into their bank accounts), so a higher mortgage rate does not necessarily mean that you shouldn't buy a house today. It just means you might want to keep tabs on any refinance options that offer you a better rate - and that if you can improve your credit score at all, you should do it; a better credit score usually means that buyers can get the best possible rate from a mortgage lender.
The available inventory
"Inventory" is really just a fancy real-estate-related way to say "how many homes are currently on the market." More homes on the market tend to be better for buyers, while fewer homes on the market tend to be better for sellers - the usual economic rules of supply and demand also apply in real estate, of course. If there aren't very many homes on the market, buyers also need to be aware that it might take them a while to find a house that fits their needs and falls in their price range ... and when they find it, the competition from other buyers for the same house could be anywhere from mild to fierce.
But once again, low inventory doesn't necessarily mean that an aspiring buyer should wait until the market levels off. If your finances are in order and mortgage interest rates are where you want them, then it's smart to start looking even if inventory is low - it simply means that you're going to have to be ready to jump on any opportunities that look promising and possibly cancel your plans for the evening or weekend so you can go look at houses instead.
The average days on market
Another way to gauge how "hot" the real estate market is in your area is through days on market. The time it takes to close on a house can stretch to three or four weeks, between all the home inspections, appraisals, title due diligence, and other tasks that have to be completed to get from offer to close, so if the average days on market in your area is one month or less, that means the market is extremely competitive, and you'll have to move fast to get a seller's attention.
But even in markets with very low average days on market, you can use that information as a buyer to your advantage. If the average days on market in your area is closer to 30 and you're looking at a house that's been on the market for 20 or 30 days already, then it's likely that the seller is getting anxious and might be willing to accept some concessions or even consider a lower-than-asking-price offer. Whatever the case, knowing the average days on market in your area can help you determine whether now is a good time to buy, or whether it might be better to wait.
The school and crime ratings
You might not be personally concerned about school ratings or crime statistics in the area where you want to buy, and that's your prerogative - but don't forget that you probably aren't going to live in your new digs forever. It's never too early to start thinking about what it might be like to sell your house - yes, even before you put in an offer! - and even if good schools aren't very important to you, they might be extremely important to a large pool of buyers when the time comes for you to turn around and list your home.
Similarly, crime statistics might not be on your radar, and that's perfectly permissible, but it would be a mistake to buy a house in an area where you don't know or understand what the crime statistics are or what they mean. Some crime statistics are compiled on a county level, and if you're looking at houses in a sleepy county without much crime, then even one or two incidents can skew the statistics vastly. And if you're ever planning on renting the house in the future, crime is something that you and your possible future tenants should think about - a vacant property can be an invitation for burglary or squatting, and if crime is high in the area but there are still a lot of potential tenants who want to live there, then you can help sell them on your house by pointing out the state-of-the-art alarm system or any other safety features you've installed.
Evaluate the tax rates
As a property owner, you'll have to pay property taxes on your home, and recent changes to the tax law mean that these taxes aren't always entirely deductible because they're part of the state and local taxes, not federal taxes.
In addition, property taxes are typically collected by your mortgage loan servicer along with your insurance, interest, and loan principal, so a higher tax rate might mean you're spending more money every month on a mortgage payment than you anticipated. Whatever the case, you'll want to know what you could be getting into tax-wise before making the leap from renter to buyer.
Don't forget about utilities
If you already pay all of your utilities at your rental, then you might have a better handle on this than someone whose utilities are partially or completely packaged in with the rent, but don't assume that the new utility payments are going to be equivalent to the place where you rented. Depending on the size of your new purchase and whether you're moving from an apartment to a single-family home, it might take significantly more energy to heat and light up.
Some utility companies, like electric, water, and gas providers, can give you a ballpark range of what to expect to pay if you provide them with the square footage; some will even show you the past billing history of any address you're considering buying, if the seller agrees to give you access to that information.
Consider your commute
Another expense that might grow over time is the price of the gas you put in your car, which depends on all sorts of factors. So even though moving to a place on the outskirts of town or in the suburbs might be a better deal for your bottom line when it comes to housing, you could end up spending more money on gas than you anticipated, wiping out any savings you hoped to accrue. Before you decide on a house or even a neighborhood, think about how you'll get to work.
Those who spend a lot of time traveling will also have to think about the cost of getting to and from the airport, whether you're driving yourself or using a ride share. And if there aren't any grocery stores nearby the house you want to buy and you don't have a car, that could be something to consider before you put an offer on the place.
Factor in upkeep and homeownership costs
One of the best things about renting is that if a pipe bursts or your electricity fizzles out suddenly, you can call your landlord and then wait for the repairs. (Well, that part isn't so much fun - but you don't have to pay for it yourself.) But if the water heater breaks or your roof starts leaking in a house that you own, guess what? You're on the hook for fixing it, and that could wipe out your savings or mean you're going to be putting a big, sudden expense on your credit card.
Do you have the ability (or available credit) to handle one of those major expenses if it emerges? Some are obviously more urgent than others, of course; you might be able to live without hot water, even if you don't want to, but a leaky roof could cause a whole host of other problems that you'll also have to fix, so you can't always put every home repair off until you feel comfortable paying it.
Think about your future employment prospects
You may be extremely happy in your job today, but in this day and age, it's highly unusual for employees to stay at the same company for a decade or more. Of course, you can always sell your house whenever you're ready to move on to a new employer, but if you've been living in the house for less than two years, then you'll have to pay capital gains taxes on any sale, which could potentially wipe out any profit you might have otherwise made.
So even if you don't see yourself moving on from your current job anytime soon, it's a good idea to research the employment opportunities in the area before you commit to buying a house. That way your career will have room to stretch and grow while you continue to accrue equity in your house, and you can feel confident that you've got the options you need to be happy at work and at home.
Get details from the Chamber of Commerce
The local Chamber of Commerce can be a wealth of information about any community where you're thinking about buying a home, and it's definitely worth your time to do some research around local businesses in your area. Have there been a lot of businesses closing or opening in the area? Does the chamber seem healthy in general? Does it host community events and offer opportunities for businesses to sponsor things like little league teams?
And what's the mix of businesses in the area? Are there more restaurants than bars or vice versa? What kinds of retail stores are thriving? These little details can help you decide whether one neighborhood will be better-suited to your lifestyle than another, and can also give you an idea of the area's future growth opportunities.
Research future development
Some of the best real estate investments can be found in communities where development hasn't arrived yet - or perhaps where it's started but has yet to kick into full gear. To determine whether the area you're considering is growing, you can look at both the Chamber of Commerce or the local city and county permitting office. Ask if there have been any permit applications for new shopping centers or condo or apartment developments, and if you can, get a sense of the timeline for those additions. You might also discover that a new rec center or swimming pool is currently in the works and be able to get your foot in the door in an up-and-coming area before it really starts to boom.
Uncover any environmental issues
Thankfully, these tend to be rare in this day and age, but you definitely don't want to buy a house that's adjacent to a nuclear power plant or subject to landslides without knowing about it first, so you can negotiate the price. Whether it's a natural disaster like a wildfire, hurricane, earthquake, or flood (FEMA has some good data around where these have been most prevalent in the past), or whether it's a man-made issue like the water crisis in Flint, Michigan, or a waste spillage from a nearby plant, you definitely want to know what potential hazards exist near or around the house you might want to buy before you make an offer.
The decision to buy a house is a big one, and it should depend on many different factors. If you've done your research and you're still not sure whether it makes sense to start shopping, talk to some trained professionals and ask their advice. A good accountant and trustworthy real estate agent can give you a solid understanding of what a home purchase might mean for you, and can also help you navigate any pitfalls.
