Every month we have about 30 home buyers come through our home buying class and after we have shown graphs of inventory numbers and interest rates and population growths over time, the two reasons we hear the most for waiting to buy is that they don’t feel that they have enough money saved up, and they are worried that they will have to pay a lot of money to break their lease.
Not having enough money saved up is a viewpoint that differs for everyone’s needs. If you have talked with a few lenders and the loan amount you qualify for is not enough for you to buy a house in the size and area you need, then you should probably save up more. Most people that are first-time home buyers don’t need as much house as they think they want to start. Also, most buyers (especially if they don’t have school-aged children) don’t need to buy in a very specific neighborhood. Being open to a two-bedroom home rather than a three-beds, and increasing your commute to work from 10 minutes to 20 minutes, usually allows home buyers to find a home that they can get in sooner.
What is the rush? Why not wait another year to save and buy a home later? The answer is that there are many costs to consider with waiting.
First, there is the cost of paying rent for another year. The math is pretty simple… your monthly rent is multiplied by the number of months you continue to rent. The average rent in Portland, Oregon right now is about $1,800 per month. Waiting one more year would be paying your landlord $21,600 rather than paying yourself that money. How much you can save in addition to your ongoing living costs depends on what monthly costs you can cut back on, if your landlord raises your rent on you, and if you expect a bump in pay at work.
The average increase in home values in the Portland Metropolitan Area is about 5% year or year. The last few years it was double-digits with it being well over 15% in 2021. The average worker makes a 3% increase in salary each year, which means what you expect to make this next year most likely is not keeping up with rate at which home values are increasing each year. You may get a nice big bonus during the year of say $10,000 after taxes, but that money will just go to your down payment, not the monthly costs of the larger mortgage.
Let’s do some math on typical real estate deals we’ve seen this year:
Buying Today
Income = $80,000
House = $400,000
5% Down Payment = $20,000
Loan Amount = $380,000
Monthly Payment = maybe about $2,000 (with a 6.5% interest rate)
Buying In 12 Months
Income = $82,400
House = $420,000
7% Down Payment = $30,000
Loan Amount = $390,000
Monthly Payment = Payment increases by about $30 per month.
This is assuming that home values don’t increase more than 5% (very likely when looking at the last several recent years with inventory only getting worse), you still get the same interest rate as today (who knows, but the Federal Reserve Chair just said he expects to do two more rate bumps this year), and we haven’t addressed the Rule of 1 in 10.
The quick math for paying a 7% interest rate on our example home that goes up 7% in value is that you would be paying about $60 more per month or $720 per year… or $21,600 over the life of a 30-year loan. So far waiting another year could cost you $43,200.
Let’s talk about the Rule of 1 in 10. This rule says that for every 1% increase in interest rates, the buyer loses 10% of buying power. So if your max budget today allows you to pay $2,000 per month on a home, and today that affords you a $400,000 home; if interest rates go up 1% you will only be able to afford a home for $360,000 and keep your monthly payments at $2,000. This can be a big deal for someone that is already having to compete for homes with many other buyers at the $400,000 level. Having to buy a smaller home in a less desirable area just because interest rates went up is not fun for anyone. As you can imagine, a lot of people at this point just put buying a home aside entirely, praying for interest rates to come down and the buyer demand to stop pushing home prices higher. Neither of those things are going to happen any time soon according to real estate economists. All you have to do is look at the inventory and buyer demand numbers.
So the moral of the story is that waiting to buy a home only leads to you paying more money, no matter how much more you think you can save up. Having more money for a down payment isn’t going to move the financial needle as much as you hope. You are making a smarter financial decision to buy a home in a seller’s market as soon as you can so that you start paying yourself rather than a landlord, realizing the increase in your home’s valuation year over year, and taking advantage of lower interest rates (if they go down you just refinance and lock in the lower rate!).
If you want to get more information on the process of buying a home in our current market please contact us here.