It’s no secret that the housing market has been hot. Many are wondering if they should take advantage and want to know if now is the time to buy a house.

 

The more appropriate question is whether now is the right time for YOU to buy a home. 

 

 

While trends in the housing market and broader economy can, should, and will help inform your home buying strategy, ultimately the final decision of whether to buy is intimately personal and the answer will be unique to your situation.

 

“When I work with a client who is looking to buy a home, I understand that this is often the biggest financial decision of someone’s life,” said Chase Blackmon, an Alabama-based realtor. “Helping my client find the right home - the perfect one for them - and making sure they are fully informed and understand the process is critically important.”

The Housing Market in Late 2022

Mortgage rates have been climbing since the first quarter of 2022. Average mortgage rates are around 7% in October 2022. Compared to this time last year, it’s nearly double what it was. This is strongly influenced by actions taken by the Federal Reserve this year to curb inflation by increasing interest rates by three percentage points.

 

Rising rates from the Federal Reserve has the effect of increasing the cost of loans, making them more difficult and expensive to obtain. This has the effect of reducing the number of buyers in the market. While interest rates are higher, a market with fewer buyers means that those buyers who are in the market have more bargaining power.

 

Additionally, the rate that home prices are increasing is slowing. According to Nerd Wallet, the median home price is “up 7.7% from a year ago, compared with double-digit year-over-year gains in previous months.” This means that while home prices are still increasing, they are not shooting up as quickly as they have been recently. 

 

Please feel free to contact our team for help understanding the specifics of how the housing market is behaving in our area.

 

Sources indicate that the continually escalating mortgage rates likely reached their peak around Labor Day. According to homebuyer.com, we recently experienced our “15th-fastest mortgage rate increase in the last 50 years” and it is often the case that when rates shoot up quickly, they fall quickly too.

 

As a result of the factors playing out in the market we discussed above, fewer people are trying to buy homes right now and sellers are seeing the assessed price of their home stagnate increasing the likelihood that sellers will be more eager to accept offers. 

This means that buyers may be more likely to find themselves in more of a driver’s seat when it comes to buying a home.

 

But, it is important to remember that while the conditions of the market are important and influential, each individual buyer’s circumstances will have a greater impact on their home buying experience.

How to Decide if YOU are Ready to Buy

Considering the market conditions is only part of the evaluation a prospective homebuyer should make. It is often far more important to consider the personal circumstances an individual finds themself in than it is to worry too much about larger market trends that are out of any individual’s control.

 

As mentioned above, the decision to buy a home is a personal one. So, what questions should YOU ask yourself when you are considering whether now is the time for YOU to buy a home?

 

Are you ready to settle down?

Buying a home can be a long-term decision. It is important to consider where you are in your life. If you think you may need to move in a few years, understand that most mortgages are for fifteen or thirty year terms.

 

Is your job dependable?

Job security is a major factor to consider for a home buyer. Mortgage obligations can be a significant financial responsibility. If a buyer feels their job may be tenuous or volatile, the buyer should consider stabilizing their employment situation before buying a home.

 

How are your finances?

This is a major consideration to make when looking to buy a home. Mortgage terms can fluctuate greatly depending on your individual financial circumstances. A buyer’s savings, credit score, debt and down payment will all influence the buying experience.

 

Savings

Depending on a buyer’s individual circumstances, it is commonly reported that a prospective buyer should look to have at least 25% of their total sale value saved. For example, if a buyer was looking to purchase a home priced at $100,000, the buyer should target to have more than $25,000 in savings. 

 

Having 25% of the home’s price saved and available to spend on the property you want to buy will allow a prospective buyer to fully cover their down payment and any fees or costs associated with the purchase of their home.

 

Credit Score

Higher credit scores are preferred by lenders. There’s no way to get around this fact. The general rule of thumb is that prospective buyers with credit scores of 740 and higher will have access to the most favorable mortgage terms.

 

It is possible to obtain mortgages with a lower score, but the availability of mortgages lessens as credit scores fall to 500 and below.


Debt (Debt-to-Income Ratio)

The debt-to-income ratio assessment is often the part of the prospective home buyer’s experience that surprises the prospective buyer. If the prospective buyer’s income is low when compared to the debt the buyer is responsible for, it can have a significant effect on the availability of favorable mortgage rates.

 

Lenders are trying to assess the risk that a buyer will fail to make payments on their mortgage when they consider the debt-to-income ratio. To that end, we see it commonly reported that a prospective buyer should look to have a debt-to-income ratio less than 35%.

 

How do you determine your debt to income ratio? Take the total amount you pay each month for debts (car loans, student loans, credit cards, etc.) and calculate that as a percentage of your monthly gross income.

 

For example, if a prospective buyer earns $2,000 a month and pays $500 toward their various debts, the prospective buyer would have a debt-to-income ratio of 25%.

 

Down Payment

Regarding the down payment for a home purchase, there is really no limit to how much is appropriate. The more a buyer can pay down, the less that buyer will need to finance. With that said, there are other factors to consider.

 

In the case of a conventional loan, private mortgage insurance (PMI) is a type of insurance that lenders apply to mortgages in order to protect themselves from loss in the event a buyer cannot make their loan payments. Typically, these payments are required when the down payment on the home is less than 20% of the total price of the home.

 

If a buyer cannot afford such a down payment, then PMI will be added to the mortgage - which costs the buyer more money over the course of the loan.

 

Using our $100,000 example from earlier, that means that a prospective buyer should try to have $20,000 available for a down payment to avoid PMI.

 

Other types of loans exist and each have their own requirements regarding down payments.