Figuring out when to plunge into the real estate market can be quite intimidating—especially when prices are high, choices are limited, and history urges restraint.
“We’ve seen two or three years of what could be considered unsustainable levels of price appreciation, as well as an inventory shortage that resulted in a record-low number of homes for sale across the country,” says Javier Vivas, director of economic research for realtor.com®. “When you factor those together, you have a market that has to either explode or see some relief.”
New predictions for 2018 forecast more moderate gains in home prices and rising inventory levels, while low unemployment and record levels of consumer confidence mean more buyers are feeling good about their finances.
A lot depends on where you live (and how much you plan to finance), but these factors combined could mean 2018 will be your year to take the buying plunge.
1. Rates are going up
After years of record-low interest rates (hello, 3%!), the Fed is finally making some noticeable increases: The rate for a 30-year fixed mortgage broke the 4% mark last year. And with economic growth continuing to carry momentum, Vivas predicts we’ll see at least two to four more rate increases throughout 2018. Rates are anticipated to hit 5% by the end of the year.
“The big story there is that those increases will further constrict affordability,” Vivas says. “The more buyers wait, the more expensive it will get to buy—not just because of home prices, but because of inflationary pressure.”
In other words, if you want in on the American dream, now might be the time.
2. Prices are climbing, but not crazily fast
Home prices have soared over the past few years, pricing otherwise well-positioned buyers out of high-cost areas and leading some experts to cry “bubble”. But in 2018, price increases are expected to moderate.
Vivas forecasts a home price increase of 3.2% year over year, after finishing 2017 with a 5.5% year-over-year increase. Existing-home sale prices are predicted to increase 2.5% year over year.
Of course, it all depends on where you live. While red-hot markets such as San Francisco are predicted to finally lose some steam, sales numbers and home prices are poised to climb in Southern states such as Texas and Florida, where economic momentum continues chugging along and new construction is happening in the right price points.
So what does that mean? Basically, home prices will still increase, but not at the same pace as they have over the past few years.
3. Inventory levels will begin to increase
An inventory shortage has plagued the U.S. housing market since 2015, forcing some buyers to settle (a tiny house with linoleum floors for $1 million, anyone?) and keeping others out of the buying game entirely. But by fall 2018, the tides will begin to turn, with markets such as Boston; Detroit; and Nashville, TN, recovering first.
The majority of inventory growth will happen in the middle- to upper-tier price point, in the ranges of $350,000 and $750,000 and above $750,000, Vivas predicts.
New home construction is also expected to expand. But that will happen slowly, thanks to a constricted labor market, limitations on the number of lots and land that are available, tight bank financing for building loans, and a run-up in building material prices, says National Association of Home Builders chief economist Robert Dietz.
“It’s been a slow climb back from the recession, and now we’re confronting all of these limiting factors and supply-side constraints,” Dietz says.
It’s particularly tough, he says, for builders to break ground at the entry level for first-time buyers, particularity in high-cost coastal markets such as California. That means it will take longer for those inventory levels to recover.
But there’s a bright spot: Builder confidence is at its highest level since 1999, according to the NAHB. And that means hope is on the horizon.
“As we head into 2019 and beyond, we expect to see the inventory increases take hold and provide relief for first-timers and drive sales growth,” Vivas says.
4. More Money in Your Pocket
Renting can be expensive. In most cases, from a monthly savings perspective, you’re better off buying. According to Zillow, the average home in the United States costs $206,300 as of November 2017. If you do the math with an amortization calculator, that comes out to a mortgage payment of $1,014.87 on a loan with a 30-year term at a 4.25% interest rate.
Also according to Zillow, the average payment for monthly rent in December was $1,439. Compared with that average mortgage payment, this would mean a monthly savings of more than $400 per month for buying over renting. Among other options, that’s a nice chunk of change to put into retirement or college fund savings.
Finally, when you look at it as a percentage of income, buying makes a ton of sense. Zillow’s data shows people spend 29.1% of their income on rent, as compared to 15.4% of income spent on a mortgage. The gap is also widening when put up against historical averages.
Buying could make a ton of financial sense. If saving money is or has been an obstacle, there are many low down payment options. The conventional wisdom that you need to put 20% down has become a myth.
Depending on the loan type you qualify for, you could get into a primary home with anywhere between 3% – 5% down.
5. It’s Your Home
A big reason to buy a home at any point in time is just the fact that it would be yours. When you have your own home, it opens up all sorts of options for you, both financially and aesthetically, that you wouldn’t have if you were renting.
To begin with, each time you make a payment on your home, you gain equity and come closer to full ownership as you pay off the loan. That’s something you don’t get with a landlord.
Since the property is yours, you also see the benefits of any gains in value due to market conditions as well as any renovations you’ve made.
Not only do you gain ownership, but your house is an investment. You can take cash out for things like renovations or to boost a retirement or college fund. The more equity you have, the more you can turn into cash.
Beyond the financial stuff, you can simply do a lot more with your own house over a rental. Whether you want to paint the bedroom a nice shade of lavender or yellow with polka dots, it’s really up to you. If you want to remodel a bedroom into a tricked-out man cave, you can go for it. The world is your oyster.
If you’re in the market, rates are still low. It remains a great time to buy. If you’d like to get started, just give me a call and I’ll help you on your new journey towards Home Ownership in New Jersey.