By now, this is probably a familiar story: A hopeful home buyer makes a strong offer on their dream home — above asking price, significant earnest money deposit, no inspection contingency, etc. — only to get outbid by a higher offer or someone paying all cash.
Thousands of Americans have had similar experiences during what’s been one of the hottest housing markets we’ve seen since before the 2008 crash. And while things have cooled off a bit, inventory is still incredibly low and home prices are still much higher than average. Combine that with rising interest rates and it’s no wonder buyers are starting to ask the question: Is buying a home still a good investment?
How did we get here?
In March 2022 the National Association of REALTORS® (NAR) reported that the median existing-home price for all housing types was $375,300, up 15.0 percent from March 2021 ($326,300). This marked 121 consecutive months of year-over-year increases, the longest-running streak on record.
And home prices aren’t the only thing on the rise — interest rates are steadily climbing as well. According to data from Freddie Mac, the average rate for a 30-year fixed-rate mortgage was 5.1 percent for the week ending April 28. That’s an increase of 1.25 percent since March 3, when rates were around 3.76 percent.
Rising interest rates (as well as higher inflation) have caused mortgage applications to decline a bit, but Nadia Evangelou, NAR’s senior economist and director of forecasting told MSN.com, “We [would normally] expect higher mortgage rates to lower housing prices, but I don’t see that happening—we will see lower demand, but not necessarily lower prices.”
Is buying a home still a wise investment?
Most experts predict that home prices will continue to rise throughout 2022 and 2023, although possibly at a slower rate. And while interest rates are also climbing, they are still at low levels, historically speaking.
According to Freddie Mac, at the start of the Great Recession in 2006, the average mortgage rate was 6.41 percent. Ten years earlier in 1996, the average mortgage rate was 7.81 percent, and in 1986, the average rate was 10.19 percent.
While an increase in interest rates may reduce the buying power of some hopeful homeowners, REALTOR® Amy Sweet with RE/MAX Real Estate Professionals says it shouldn’t deter them from pursing the dream of homeownership.
“Buying a home has always been a good long-term investment and a solid foundation for building wealth,” she said. “Not only do you own an asset that may increase in value over time, but every monthly payment you make goes towards building equity and investing in your future.”
This point was echoed in a recent video on CNN.com, in which NAR’s Chief Economist Dr. Lawrence Yun shared that the wealth difference between homeowners and renters is “staggering,” explaining that, “a typical homeowner has roughly $300,000 in net worth, while for renters, it’s only around $6,000 or $7,000.”
Yun said another benefit of homeownership is that “theoretically, a homeowner with a 30-year, fixed-rate mortgage would pay a fixed payment steadily for the next 30 years, while renters would pay rising rent over time.”
REALTOR® Frank Jajou with Century 21 Affiliated owns several investment properties himself and says Lansing renters are already experiencing dramatic rate increases as landlords’ costs (property taxes, homeowners insurance, repairs and maintenance, etc.) are also on the rise.
“A home that once rented for $875 or $975 a month, might now go for $1100 or $1150,” he said. “Even with home prices steadily increasing, purchasing a home, in most cases, is still a better financial decision than renting. In this market, if you bought a home at $125,000, even at six percent interest, your mortgage payment would likely be less than what you could rent that same home for.”
But like any major financial decision, whether it’s the right time to purchase a home is a personal decision that depends on many factors. While it’s always important to consider economic indicators and the state of your local housing market, your short- and long-term goals and readiness to become a homeowner are just as important.
Sweet says if you have questions about purchasing a home, start by consulting a local REALTOR® who will listen to your concerns and offer objective information and opinions.
“No matter if you are ready to buy, still on the fence, or have questions about your ability to qualify for a mortgage, it’s worth having that initial conversation with a trusted agent,” she said. “For those who aren’t quite ready financially, we can put you in touch with a local lender who can evaluate your financial profile and help get you on the path to homeownership.”
Both REALTORS® say they understand buyer hesitancy. After all, this is an unprecedented market. But Jajou says, at the end of the day, it’s not about finding the perfect time to buy a house. It’s about choosing the right time to buy for you specifically.
“In my opinion, it’s always a good time to buy a home for anyone who is financially ready,” he said.
For a list of local REALTORS® and lenders who can help guide you through your homebuying journey, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.