Recently, a number of young renters have been in touch with me to discuss re-starting their home buying journeys.
These soon-to-be first-timers were encouraged by the recent reduction in mortgage interest rates and the ability to finally find a house that they really want. As a bonus, the past two years of renting has allowed them to accumulate a larger down payment, making the plunge more realistic.
The unscientific uptick in activity begs the question, is now the right time to buy?
The answer is an annoying, it depends.
Let’s start with the case for buying. Even though home prices have soared, if you have run the numbers and buying a home will not prevent you from funding other important financial goals, like saving for retirement or paying down debt, then go for it.
Yes, mortgage interest rates have more than doubled from a few years ago, but it is highly likely that you will be able to refinance to a lower interest rate at some point over the next five years or so, which should make the longer-term cost of carrying a home more affordable.
But please do not buy just because you think that a home purchase is a good long-term investment. In fact, after factoring in the costs of home ownership, which include mortgage principal and interest, homeowners’ insurance, property taxes and maintenance (1 to 3 percent of the purchase price annually), not to mention the opportunity cost for the money that you use as your down payment, you might find that renting is a better deal.
I know that we don’t usually think of housing as a lost investment opportunity, but given that housing affordability is awful right now, the question of whether you could be doing better things with your money has to factor into your decision.
According to Michael Strain, professor of economics at Georgetown University, “$10,000 invested in equities in June 1974 would today be worth $2.4 million. (If invested in housing, it would be worth $139,000 today.)”
Of course, owning a house is not just an investment, but because it is a massive purchase, we need to have a clear vision of what the decision to buy will mean for other financial goals.
Is the desire to nest in a place that you own more important than your ability to save for retirement or your kid’s education? This summer I attended three weddings, where I asked this specific question to a bunch of the guests who were under the age of 35. Only two of them were lucky enough to have purchased a home prior to the pandemic and they were clear about one thing: They would not give up their rock-bottom fixed mortgage rates (2.75% and 3.125%), even if they had to stay in their starter homes for a lot longer than they had imagined.
The rest of the crowd had made peace with the fact that renting would be their likely route for the foreseeable future. They liked the flexibility of using their cash not just to save for the future, but also to have some fun today. “Do I want to buy a home eventually? Sure, but that’s just not possible today, based on my income.”
Some of the parents of those kids told me that they wanted to help their kids buy a house, which is a lovely idea, but one that should be carefully considered.
Just like the decision to buy a home requires number-crunching, so too does intergenerational help. We don’t want the older generation putting their own financial security at risk by lending a hand to the younger one.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.