Guide To Buying A House In 2017
It may be the best of times and the worst of times to buy a home.
On the pro side, interest rates are rising and you can still lock in a low rate before steep, anticipated increases in 2018. But the current low interest rates mean a hot housing market, with many areas reporting low housing inventories and record sales prices. In most areas of the country, buyers can still expect to compete with multiple offers on properties. The current political climate adds a dose of uncertainty, as its remains unclear what impact the Trump administration's budget proposal will have on housing programs and taxes. If predicting what will happen next in the housing market were easy, we'd all be real estate tycoons. But seasoned and first-time homebuyers alike can make sound, educated guesses on what the short- and medium-term future holds and try to determine if now -- based on their own, personal financial situation – is the right time to buy.
Buying Still Beats Renting
Home ownership rates for adults under 35 have fallen to a historical low of 31% and the percentage of households that are renters is at its highest level in 50 years. Financial news outlets are offering a slew of headlines that suggest owning a home may no longer be the sound financial practice we once thought it was.
But a Trulia study released earlier this year found that buying is still better than renting for most people in most markets, including real estate hotbeds like San Francisco and New York City. Trulia even offers a handy calculator where you can figure out what makes the most financial sense given your current situation.
The reason owning trumps renting hasn't changed either. Home owners aren't just paying for a place to live: they're making an investment. Since 2000, homes have increased in value an average of 3.8% annually, not far off the pace of the S&P 500 (4.5% per year) and well ahead of inflation (2% per year).
If You End Up Renting, Do Something Smart With The Money You Save
Renters feel like they're getting the better deal because they don't face the out-of-pocket costs that confront homeowners. Insurance, taxes and upkeep add up to make the month-to-month cost of renting cheaper than owning.
But study after study confirms that most renters are using the money left over at the end of the month as disposable income instead of investing it. Home owners essentially are forced to invest in their property, allowing them to come out financially ahead of renters in the medium- and long-term.
Don't Be Scared By Rising Rates
Yes, rates are rising, with experts predicting rates to increase to 6% by 2019 or 2020, from current levels of about 4% for a 30-year-fixed mortgage.
That means the longer you wait to purchase a house, the more you can expect to pay. But don't buy a home you're not 100% sure you want just because rates are lower now than they are likely to be a few months from now. The National Association of Realtors notes that a rate hike from 4.2% to 5% would increase average monthly mortgage payments by $90 for the average home. That's not chump change, but it’s a small portion of what is the biggest purchase most of us will ever make. And even if rates do rise, keep in mind that they're still flirting with historical lows. In 1981, when mortgage rates peaked at 18%, the idea of ever getting to single-digit rates seemed like an impossibility.
An increase in rates could work in your favor, as rising interest rates usually lead to lower prices and less competition.
Inventory Is Tight, And Getting Tighter
In November 2016, the number of homes for sale had fallen 10% to 1.85 million homes from a year earlier, and real estate experts expect that number to continue to decline in most markets. That means homebuyers can expect more competition for fewer and fewer houses. As a homebuyer, you can’t do anything to increase inventory, but you can decrease competition. Consider starting your house hunt in the winter months, which is typically seen as the slow season for real estate. You're likely to have less competition and more likely to meet motivated sellers than if you wait to spring, when you'll be elbow-to-elbow with other wannabe buyers at every open house you go to.
Prices Are Still Going Up
Home prices rose 5% between 2015 and 2016 and hit levels that were even higher than they were before the crash in 2007. And experts are predicting another 2-3% increase this year. No one knows when prices will peak, but homebuyers should be weary of the fact that they may very well be buying at the top of the bubble.
That's less of a factor if you're looking for your "forever home," as you're likely to see your home's value increase over the long run. But in the short-term, buyers that are looking for a house for the next few years may be better off renting to wait out the hot market.
Are You In A Buyer's Market Or A Seller's Market?
While nationally, sellers are in the driver's seat at the moment, there are fluctuations from region to region.
Knowing whether your local real estate market is favoring buyers or sellers should be part of your market research and will dictate your strategy for finding a house and making offers. The Texas A&M University Real Estate Center says a market is stable when it has an average inventory of 6.5 months. In other words, the average home in a balanced market sells after 6.5 months. Numbers lower than 6.5 months mean it’s a sellers' market; numbers higher than 6.5 months favor buyers. The national average was under five months in 2016, but your market may be more buyer-friendly. Don't rely on anecdotal evidence or cocktail party conversation which may just be people echoing what the business press is reporting about national averages. Realtor.com, local newspapers, and your sales agent can all offer a current assessment of the local market.
There's A New Guy In The White House
It's too early to tell what impact the Trump administration will have on the housing market.
The consensus among real estate pros is decidedly mixed, meaning a lot of uncertainty, and uncertainty is never a good thing for buyers or sellers. The clearest signal came at the end of April, when Trump released his tax reform plan. A Trulia report said while the impact of the proposal would not severely disrupt the housing market, certain groups would be harder hit than others. “While the proposal does not do away with the mortgage-interest tax deduction, it doubles the standard deduction and eliminates the ability of filers to deduct state and local taxes, including property taxes,” Trulia's Chief Economist Ralph McLaughlin said. “While raising the standard deduction will undoubtedly put more dollars into the pockets of homeowners, it’s less clear how these changes affect the financial advantages of buying a home.”
But here's where the uncertainty comes in: Morgan Stanley is forecasting that the Trump tax reform plan will not pass this year, meaning housing markets may remain in limbo for the foreseeable future.
Money, Money Everywhere
Despite the uncertainty a new president has brought to real estate markets, there are still plenty of banks willing to lend money to first-time homebuyers. That's a reversal from the great recession, when lenders wouldn’t consider anyone without perfect credit and a 20% down payment.
The best deals still go to people with good credit scores and healthy down payments, but not having both won't necessarily keep you on the sidelines. Now, borrowers with FICO scores as low as 690 are getting approved for conforming mortgage loans. Meanwhile, lenders approved two-thirds of refinancing applications in the fourth quarter of 2016, up from about a 50% approval rate at the end of 2014.
But You Still Need At Least 20% As A Down Payment
Yes, you can get into a house with a down payment that is lower – and often, significantly lower – than 20% of the purchase price. But that doesn't mean you want to.
That's because such purchases will involve private mortgage insurance, which is typically priced at a rate between 0.5% and 1% of your mortgage. A $250,000 mortgage with 1% PMI means an extra $208 per month. PMI was originally designed for high earners with limited savings but has more recently been offered to all sorts of borrowers. The best course of action for most buyers, however, is to wait until you can afford the 20% down payment or start looking for homes in a more affordable price range.
Research Homebuyer Programs
The U.S. Department of Housing & Urban Development offers a number of grants and programs for first-time homebuyers that can help reduce the cost of homeownership.
Programs range from grants and low-interest rate loans to low down payment options and special programs for people purchasing homes in certain areas or people who have certain backgrounds. The Good Neighbor Next Door program, for example, offers up to 50% off list price for law enforcement officers, firefighters, emergency medical technicians, and teachers to purchase homes in revitalization areas. Make sure you discuss grants and programs with your lender: not all lenders will approve loans in which the buyer uses a program like the ones offered by HUD. You can also contact HUD for a list of pre-approved lenders that have experience working with the agency.
Make A Deposit
Real estate websites talk about the importance of a healthy down payment. Less often they talk about a key tool for buyers: the money deposit.
This can put your offer on top of the pile when you're going up against other prospective buyers. A money deposit of 3-5% of the purchase price tells sellers you're serious and compensates them for taking the house off the market during the closing process. A money deposit is usually paid by check when an offer is accepted. Keep in mind that a money deposit is refundable if you have an appraisal or inspection contingency on a house that doesn't pass.
Budget With Precision and Accuracy
How much are all those "other" costs of home ownership we’ve been talking about going to really cost?
You'll want to get accurate tax assessments and up-to-date insurance quotes to make sure you know what your month-to-month budget will look like. And don't rely on sellers to give you accurate estimates, either. Take flood insurance, for example. FEMA has been updating flood maps and more people are being told they live in flood-prone areas, meaning they need to purchase flood insurance. Meanwhile, rates for existing flood insurance customers are increasing with every FEMA flood-zone expansion. Rates rose as much as 20% in certain parts of Florida last year, and some insurers are now putting caps in place meaning they may not cover the entire cost of replacing your home in the event of a worst-case scenario.
The Deal Ain't Over Until It's Over
The listing agent shakes your hand and gives you the wink that the house is all but yours. But unless you have a signed contract, nothing is certain, especially in the hot, seller-friendly housing market.
Indeed, that same listing agent may be using your offer to get a higher offer from a preferred bidder. If you want to be one of those preferred buyers, make sure you are preapproved (not prequalified) and have proof of funding in place. Be flexible in closing conditions. And, assuming you're confident in your ability to spot all the potential problems lurking in a house, consider – with caution – waiving the inspection. If you're not comfortable forgoing the inspection altogether, you can offer to shorten the typical 10-day holding period five days or offer to make any recommended repairs the inspection turns up under a certain dollar amount. Some buyers write letters to owners telling them how much the home will mean to their family, while others tell sellers they will exceed all offers up to a certain amount.
In the current market, buyers should be prepared to do anything that is fiscally feasible to gain an edge. And, even after all that, don’t assume the house is yours until the contract is in place.