Your newsfeed filled with posts of friends buying houses? Don't be fooled by low interest if you're not ready
Dear Pete,
Everywhere I look, people are buying homes. My girlfriend and I are renting right now, and are starting to feel like we’re doing something wrong, because many others are currently trading in renting for owning. Our financial life is OK right now, but I feel like being a homeowner would be a risk because we don’t have a ton of savings. Are we throwing our money away by renting?
— Matthew; Salt Lake City, Utah
The real estate market across much of the U.S. is red hot. It seems as though newly listed homes are selling within days, and in some cases, hours. This is great news if your financial goal is to sell a home without much hassle. However, this isn’t great news for buyers who want to snatch a home at a reasonable price.
Matthew, just think how this process would go for a person who doesn’t even really know whether they want to buy a home or not.
It’s worth exploring the reasons why people are in a frenzy to buy a home right now, whether they’re first-time homebuyers or they’ve owned a home before. There are three primary reasons why the real estate market is climbing at a breakneck pace:
Historically low interest rates.
A psychological desire to homestead and nest.
Fear of missing out (FOMO).
Ask Pete: What to do if your employer lowered their 401 (k) match
Just got a job offer?: Be smart about your new benefit choices like health coverage, 401(k) savings levels
Ask Pete: Your fears help you make smarter choices about personal finance during an economic crisis
Based on various current economic conditions, mortgage rates are incredibly low. For the uninitiated, this means you can afford a more expensive house, while still keeping your monthly mortgage payment at a relatively reasonable level. For example, the principal and interest payment on a $250,000 house with a 30-year mortgage at 4% is $1,193. But since rates on a 30-year mortgage are now closer to 3%, you could theoretically get a $283,000 house on a 30-year mortgage for the exact same payment of $1,193. What does that $33,000 in “additional” house buy you? There’s all sorts of possibilities. Maybe you want to move into a better neighborhood, buy a better made home, or simply buy a bigger home.
The idea that the same payment can now buy you more home is incredibly appealing. But I don’t believe low interest rates are a reason for a nonbuyer to turn into a buyer. Instead, low interest rates just sweeten the pot for buyers.
"If you’re gonna be inside for a while, you might as well be inside of a place you really like,” seems to be the prevailing sentiment among those Americans who haven’t been nearly as directly impacted by these uncertain economic times. There’s a certain level of comfort and stability which comes with making your home exactly what you want it to be, whether you have to move to achieve that aim, or you simply renovate or improve your current residence. I understand this sentiment, and have even made small improvements to my own home over the last six months, in an effort to feel more secure.
I do believe that liking your space more is a reasonable reason to move, but only for people who have the financial bandwidth to pull it off.
Finally, people are gobbling up houses right now because other people are gobbling up houses right now. There’s a fear of missing out on something that is perceived to be good. The real question is whether the buying mania is justified. It’s tough to argue that FOMO buyers are ever vindicated, as buying mania generally leads to a correction in market levels (a crash).
All of this is to say, don’t feel pressure to buy a home right now. Especially if your financial life is really just “OK” and not “great.” Because homeownership rarely turns “OK” into “good.” It typically turns “OK” into “unstable.”
If homeownership truly is a goal for you, do it the right way. Make saving for a down payment a priority, and then make sure your emergency fund is separate from the down payment. The worst thing you can do is buy a home without an emergency fund in hand. You’ll be in debt faster than you can imagine, and you’ll be longing for the no-maintenance apartment you left behind.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: "Million Dollar Plan." Have a question for Pete the Planner? Email him at AskPete@petetheplanner.com.
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
This article originally appeared on USA TODAY: New house post? Don’t feel pressure to buy a home because others are
