To Buy, or Not to Buy, That Is the Question
Home prices have steadily increased in the past two years, leaving many wondering if now is the time to buy. But what has led to such a sharp increase in this short time? Although the COVID-19 pandemic is not the only contributing factor, it did allow people to work remotely, with many companies continuing remote working options, giving workers the opportunity to stay or move somewhere more favorable. This, coupled with a housing shortage and a lag in new construction from labor shortages and rising materials costs, has created a supply and demand problem. However, since the Fed started raising interest rates in March 2022, there has been a slight decline in home prices to accommodate interest rates. So, what does the future hold for potential home buyers? Here’s what you need to know when purchasing a home at today’s prices.
Will Interest Rates Continue to Rise?
With pandemic supply shortages, massive stimulus packages, and increasing fuel costs, experts feared a nearing recession, so in March 2022 the central bank proceeded with its protocol of raising interest rates “to quell record-high inflation without sending the broader economy into a recession tailspin” (CNBC). Since then, home buyers have seen an increase in mortgage rates each month, peaking in mid-November at an average of 7.08% for a 30-year fixed, compared to 3.22% just one year ago.
Current rates have exceeded experts’ predictions but don’t let the headlines scare you. As of right now, rate predictions vary among financial advisors for the final quarter of 2022. Factors such as inflation and economic growth play a role; however, the best thing you can do to ensure a good interest rate is to stay financially healthy. Find a lender that can provide you with a variety of options that fit your financial needs and offers competitive rates with flexible terms so that you can fulfill your dream of buying a home.
Are Home Prices Here to Stay?
The simple answer to that question is ‘yes.’ Home prices are up more than a staggering 30% compared to just a couple of years ago. However, unlike the few years leading up to the Great Recession when home prices were driven by “loose lending practices and rampant investor speculation in the market”, today’s prices are based on supply and demand. One of the leading causes of this lack of inventory is the shortage of new and affordable homes being built to accommodate a growing population. According to Mike Kingsella, the CEO of Up for Growth, “We're seeing a shortage, or housing underproduction, in all corners of the U.S. …America's fallen 3.8 million homes short of meeting housing needs…And that's both rental housing and ownership."
Kingsella isn’t the only one concerned about the lack of housing. Dr. Robert Dietz, Chief Economist and Senior Vice President for Economics and Housing Policy for the National Association of Home Builders, says home builders haven’t been able to keep up with the demand, and attributes these constraints to the “five Ls”:
- Labor– lack of skilled workers, particularly in hot markets like Texas and Florida
- Lots– there is only a year’s supply of lots; we need between 2-3
- Lending– home builders face a tighter market for borrowing the needed funds
- Lumber & materials– massive lumber price hikes due to shortages and delays on materials like appliances
- Laws & regulations– zoning laws limit the number of homes that can be built in a certain amount of space
It will take time before the housing supply can keep up with the demand. The rise in mortgage rates and steady home prices will deter many from purchasing a home; however, if you’re looking to buy, you need to decide on a budget with these factors in mind and be on the lookout for a good investment.
So, What’s a Good Investment?
Purchasing a home has historically proven to be a good investment because prices generally increase over time. If you’re looking to invest in a home, there are several factors to consider first:
- Your Credit Score – The higher your score, the lower your rate will be.
- Affordability – A general rule of thumb is that your mortgage payment should not exceed 28% of your gross monthly income. Use our Mortgage Calculator to see what your monthly payment would be.
- Down Payment – Putting down a minimum of 20% saves you from paying private mortgage insurance (PMI).
- Location – Ensure where you’re looking to purchase has proven to trend upwards in buying trends.
- Type of Home – Single-family? Condo? Townhome? What makes the most sense for your lifestyle?
The only bad investment is purchasing a home you cannot afford. Working with the right lender can help you navigate the ins and outs of home buying and get you on the road to ownership. Our Crews family of banks works closely with you to help secure financing so you can purchase your first home, vacation home, or even investment property in the great state of Florida.
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About the Author
As Crews Bank & Trust's Residential Lending Director, Jamey Dodson supervises residential lending operations at all locations. He has been in banking more than 30 years and has held positions at community and regional banks in business and mortgage lending, loan operations, and sales. A lifelong resident of Manatee County, Jamey joined Crews Bank & Trust as a vice president and lending officer in 2018. He graduated from Manatee Community College and earned a bachelor’s degree in finance at the University of South Florida. He actively serves the community and holds board positions for several nonprofit organizations.