Given the rise in interest rates and the fact that home prices are still around all-time highs, is it a bad time to buy a home? Would it be better to wait for mortgage rates or home prices to drop? I would love to hear your thoughts.
– Yaakov Kilstein, CFA
Boca Raton, FL
Owning a home is a lifestyle choice, not an investment. A personal residence should appreciate in value over time and hopefully keep up with the long-term inflation rate. However, after considering all its associated costs, including taxes and upkeep, it is generally not a good investment relative to stocks, owning rental properties, and even some areas of the bond market. It’s far better to view a home as a way to control your living space and a place to create memories. Both of which are important benefits that should not be overlooked.
Realizing that a home should not be viewed as an investment is freeing. It should relieve some of the stress associated with trying to maximize the return on your purchase by aiming to time the housing market or arrange the most favorable financing. Attempting to time your home purchase with the optimal market conditions is like trying to time when to invest in the stock market. In both situations, you will most likely not be successful. Instead, focus on the following framework to help guide your decision of the right time for you to buy a home:
Step #1: You are in the market to buy a home: This may seem obvious, but so often people feel pressure to purchase a home because friends in their social circle have done so. What others do should not be a consideration for how you lead your life. Everybody has different familial and financial circumstances. It’s far better to assess your required living space and financial situation to help determine if it makes sense for you to buy a home.
Step # 2: You find a community in which you want to live: In the frum world, purchasing a home means committing to a specific community. This includes finding a shul you want to attend, a rabbi to whom you are comfortable asking shailas, and people with whom you want to associate. There may also be certain amenities associated with a community that appeal to you such as yeshivas, regular shiurim, kosher supermarkets, or perhaps its location, near the beach, mountains, or city, suits your lifestyle choices. Locating a desirable community is an important second step to purchasing a home.
Step # 3: You find a house that satisfies you: Real life is not “Million Dollar Listing” or some other reality show that romanticizes the real estate buying process. Buying a home is stressful. You will not find your “dream” home because every house has flaws. Even a house that you custom design will have issues that you won’t notice until after you move in. Therefore, it’s important to keep an open mind and have realistic expectations. When you find a home that you are satisfied with and serves your purposes, then that’s a great sign.
Step # 4: You can afford the house: One of the biggest financial mistakes people make is buying a home that they can’t afford. This error can cause strain on your personal life and derail your ability to meet other financial goals, like affording education or saving for retirement. That’s why it’s important to be realistic about what you can actually afford. Affordability doesn’t stop at merely having a proper down payment of around 20% of the value of the house. It also includes closing costs, upkeep expenses, property taxes, and insurance. Together, housing costs should make up no more than 30% of your expenses. Every year or two repairs will need to be made, and taxes and insurance costs will rise. Don’t make the mistake of overextending yourself. Keep in mind, you can always buy a larger home in the future if your financial situation permits.
It’s important for readers to keep in mind that in most situations there is nothing wrong with continuing to rent until you are comfortable purchasing a home. There are many cliches out there when it comes to renting such as “renting is throwing away money” or “why would you pay the landlords mortgage instead of your own.” While catchy, most of these one-liners are intellectually lazy. They discount the many benefits associated with renting such as offloading upkeep costs and property taxes and maintaining the flexibility to move if necessary.
Buying a home is one of the most significant financial decisions you will make in your life. It’s prudent to take your time to review the above framework before rushing into any decisions.
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Readers are encouraged to ask their personal financial questions, which may be quoted from and addressed in a future column, by emailing Jonathan@shenkmanwealth.com.