Purchasing A Home in 2023

Is Purchasing a Home in 2023 a Good Financial Decision?

In this episode, we'll discuss the pros and cons of purchasing a home in 2023. We'll cover topics such as:

• Why are mortgage interest rates so high?
• Is it financially feasible?
• How does it compare to renting?
• What should you do if you have a home with a low-interest rate?
• What are the risks of homeownership?
• What if house values decrease?
• What if interest rates decrease?

We'll also provide some tips for making an informed decision about whether or not to purchase a home in 2023.

Whether you're a first-time homebuyer or a current homeowner, this episode is for you. We'll help you understand the financial implications of homeownership and make the best decision for your individual circumstances.

Listen to the episode today to learn more!

Transcript

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It might not be the best home that you're able to afford and get into, but you're able to get into a starter home or something that can make sense for the next few years. If home values continue to store like they've done the last 10-15 years, well at least when you go to make that next home

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purchase.

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This is Techie Personal Finance Bootcamp where I help tech professionals in their 20s and 30s balance a great life today without sacrificing their future possibilities. I'm your host, Lucas Casaris, certified financial planner and founder of Level Up Financial Planning, where I help educate, coach, and build strategies with my clients to help them take their financial confidence to the next level.

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This information's for education, so don't just go use it. First consult with your financial advisor, because that's way more legit. That's it.

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That was Orlando Gomez, and you can catch him in season three, episode four on how he broke into tech by writing a

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jingle.

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If I'm your goals for 2023 or here in the near future is purchasing a home, this is definitely an episode that you want to catch. If you're here with me live, definitely reach out and ask questions. I can answer those as I go throughout the talk today. But yeah, things are a lot different now. Purchasing a home in 2023 versus I'd say 2021, 2022, things started to get pretty similar to how they are now, especially this time last year. And then for the last year, it's been consistently more expensive, consistently harder to pull the trigger on purchasing a home. And there's a lot of various reasons for that, right? There's definitely the interest rates are the most newest thing that occurred in the last year that made it extremely high cost to afford a new home purchase because the interest rates have soared from 2.5% to about 7% right now. And they jumped pretty quickly. It wasn't too long ago that they they were that low. And anyone that's just started looking for a house is probably that's a blow on your mind that that interest rates were even that low just about a year and a half ago. The other thing that's kind of consistently always been a pain at least the last 10, 15 years, has been house prices just keep increasing every single year. And that's obviously doesn't help, right? It's like a moving target. If you're trying to save up for a down payment in a house, well, 20% on a certain value one year when that value grows the next year as you're kind of getting close to hitting that down payment amount that you're aiming for. Well, it feels like it's a moving target because now it's 20% of a large larger number. And so those things are really the things that have made it difficult to purchase a home. And we'll we'll dig into some of the things as far as, well, just because it's more expensive, does that mean that it's something you shouldn't do? And we'll go over that. Uh so again, not specifically advice if you are not necessarily excited about the idea of purchasing a home, anyways, if it's not really a goal of yours. This is not to talk you into it. I'm not trying to sell you on real estate or purchasing a home. For me, my family, and for a lot of my clients, it's been something that has helped build a ton of wealth just because where I live in Colorado, a lot of my clients in California just live in high cost of living areas and high growth areas as far as values of homes. Uh, so for a lot of people, it has made sense and it's been a goal of theirs. So I do help them uh achieve their goals with those. So if it is a goal of yours, let's let's dive into it. Let's kind of talk through well, should should you go ahead and try to hunt down a house and purchase some in 2023 or here in the near future? And I already mentioned some of the scary things that that might kind of make you think that that's impossible. And it might be, it might just simply be that with your income, with the expenses that you have, with some of the other things like student loans coming back online, having to start making those payments again, that purchasing a home is just unaffordable. You just cannot do it. And and that's fine. It's good to know if that's the case, because then you don't have to be spending time searching. You can spend your time doing other things. If if it's still an important goal of yours and you don't want it to be out of reach forever, you can look at, well, how much income are you generating? Are there ways to increase your income? That was my last episode or the the very first episode for the season for this podcast was how to increase your income. And so that's something that could definitely help change that a little bit. Maybe there's some debts that you need to pay off. And once those payments fall off, then all of a sudden those things are more affordable for you. So if you cannot financially afford a house right now, that's not necessarily the end of the road. Most likely you're not going to be pulling the trigger here in the next few weeks, few months. You can continue listening if you think that you're gonna be able to put yourself in position to be purchasing a home surgeon just to kind of find out a little bit more information, be armed with more education and knowledge when it is time for you to be able to achieve this goal.

Can You Afford It Today?

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So that's the biggest question, though, is it important to you? Is it an actual goal? And if it is, well, now can you afford it? If you can afford it, then that's a big deal, right? Because you can afford it today. We don't know what's gonna happen with prices in the future. We don't know what's gonna happen with interest rates necessarily in the future. The Federal Reserve just finally stopped increasing their the interest rates today for like the first time. I forget if it's the 11 times in a row or 12 times in a row where they've met and they increase the rates. Again, that's why interest rates on mortgages have soared so crazily uh over this last year. But today they said, you know what, we're not increasing rates today. So that was the main thing. They'll probably expect to still increase it a couple more times this year. But as of right now, they actually hit the pause button for at least a month, which is good news, right? Give everyone time to recuperate and kind of see if things are working. Maybe, maybe they can pause on this longer. Maybe they don't have to make the increases that they're planning to do later this year. But if they do increase interest rates again, again, look to see mortgage rates potentially climb even higher than the 7% that they are now. And another thing that's unlikely is interest rates might drop a little bit, but they're probably not gonna be two and a half percent like we saw a year and a half ago. So those are important pieces of information that you have to be ready for if you can afford it today and we know what things are today, then that's that's a good reason to at least explore it, right? See if if it makes sense financially to go ahead and move forward with this. And whether it makes sense financially is definitely different than than it used to be. Because previously there was a huge discrepancy as far as how much it costs to rent something and how much it costs to buy the equivalent or that same type of property. And for the longest time, because interest rates were so low, even with the high cost of homes increasing, a lot of times it was, whoa, sometimes it was cheaper, at least on a multi-payment basis, to go ahead and purchase a home. Your mortgage might be slightly lower than you what you'd be paying in rent. So it was a lot easier to move forward with that. Now it has flipped pretty dramatically. So there's kind of a big discrepancy between a mortgage payment on the high side now versus what it used to be versus rent where it's lower that might be changing here in the new futures, near future, because what we've been seeing is well, a lot of people are getting their rent sold renewal rates here for the summer, and those things are jumping pretty substantially. Probably not yet to the point where it's easily an easy decision to go without a mortgage versus your rent payment, but it's definitely getting a lot closer, it's getting a lot tighter because you're gonna start seeing huge increases on what the rental amounts are for those types of properties. So big thing to be aware of and and kind of just know that yeah, just just because rent makes sense now doesn't mean that four years from now rent cannot might not just be as low as they are now, and that mortgages will be higher than it is the rent. So definitely want to keep that in mind. The biggest issue right now I'm seeing with a lot of folks is you probably can afford it. So I work with a lot of folks in tech.

Is There a Mental Hurdle?

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Incomes are substantially higher than the average US citizens, and you might be able to afford the home, but the mortgage payment just looks super painful. Maybe it's $4,000, maybe it's $5,000, and like that is a lot of money for a 30-year mortgage, and you can afford it, but just mentally you kind of can't get past it. And so one thing I want you to think about is well, because you can afford it now, that's good to know because what what if it just gets more expensive? You might be gawking at that price now or that monthly payment now, but what about a year from now or if all of a sudden that jumps another $1,000 or another few hundred dollars? Technically, that's costing me more, right? If if you could have purchased it, could afford it, decided not to because the prices are too high, and then eventually you just end up jumping in and locking it in at an even higher amount than what you are were initially locking it. That's what happened a lot to people over the last handful of years is oh, home prices are so high, eventually the bubble's gonna pop, eventually home prices are gonna drop. And they never did. Luckily, interest rates stayed low enough where the monthly amount never took off like it has in this last year and a half. And so what people ended up doing is they kept saying, Oh, it's too expensive, too expensive. They ended up jumping in when it got even more expensive. So that could potentially happen if you're gonna purchase a home anyways. It is an extreme goal of yours, or maybe fiancés or spouses, whoever, they might just wear you down. And and a year from now, you end up doing it anyways, and it ends up being more expensive. So that's one reason why I definitely want to think through this. And if it makes sense to do it, it might just make sense to do it now if you can afford it anyways.

Non-Financial Benefits

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And another thing I want you to wrap your head around is there's a lot of things that you do day to day, month to month, over the course of your life where it's not necessarily financial beneficial, right? So, what's the financial benefits of going on vacation, eating out, doing nice things, maybe saving some time and things like that? A lot of times there's not actually a financial benefit. It's just you get value out of those things. And so that could be a part of the equation, too. So definitely there's some financial benefits long term of owning a home, building up equity, but some of the benefits are just the intrinsic value of, hey, this is mine. I can do what I want. You can start to change things around, make it your own home. And so you do have to weigh that too, just the value of being a homeowner if you're not already, or maybe you are a homeowner and you're transitioning to a different type of property. Well, what's the increase in value from jumping from your property now to that next property? And if that's substantial enough, that might be worth the additional cost right now. Because again, if you spend $10,000 on travel and vacations, that's that's not financially beneficial, right? It's life beneficial. It's it's quality of life beneficial. And so you got to balance these things out and and to think purely that your home just has to be the best financial decision ever. You definitely don't want it to be a worse one or a horrible decision, but you do need to balance it out between the value and benefits you get out of it, plus the financial side, the equity that could potentially build up for you. So let's talk through those things a little bit more. It's a big, big change whether you're coming from being a renter to purchasing a home or an existing homeowner to purchasing

Getting Your Foot in the Door to Building Equity

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a home. So if if you're a renting, some of the benefits and differences to transitioning from renting to owning is you're gonna get your foot in the door and actually start building equity. So equity, if the value of the home increases, that's one way you build equity. Another way you build equity is every month you pay what's called principal. And as you pay the principal, the mortgage goes down. So as the mortgage goes down, the equity you have in your home goes up every single month, basically. And so you don't get that when you're rented. And so that's definitely a big piece of the puzzle is like, hey, it might not be the best home that you're able to afford and get into, but you're able to get into a starter home or something that can make sense for the next few years. If home values continue to soar like they've done the last 10, 15 years, well, at least when you go to make that next home purchase that's gonna be more along the lines with what your goals and your initial kind of dreams were. Well, you'll have a big chunk of equity to bring to the table. And if you are just always renting, you might not have that big down payment, that big equity built up that you would have if you would have gotten your foot in the door to purchase something maybe a little bit more modest than what your original goals and dreams were. So again, with rents technically being more affordable on a monthly standpoint as of right now, that's something you need to weigh. It's gonna be tricky, might not be the best financial benefit short term, because yeah, I I could rent this for hundreds of dollars less than than buying it. Short term, that makes sense. But again, you're not building equity. And if rents start to increase and all of a sudden they're about the same two or three years from now, and then but then your mortgage payment would be even higher. There is gonna be a break-even point, most likely, for a lot of these things where, yeah, it it might be cheaper to rent for two or three years, but over time it's gonna be a lot more expensive than owning a home potentially.

Cons of paying repairs vs. building equity

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And one negative to being a homeowner, and definitely something you need to be aware of is stuff breaks, right? And when stuff breaks, when you're a renter, you just call the landlord, whoever is the property manager, they'll take care of it out of their expense, out of their pocket. When it comes to being a homeowner or something breaks, you had to think you had to foot the bill there and you had to do those things. From my experience, and again, I'm definitely coming from an area where values of homes are high and they're tend to increase up substantially. So if my home went up in value $50,000 over the last year and I had to pay $3,000 in expenses to fix our basement or to replace the AC and furnace and things like that, well, that's an easy financial decision to make. I'm still way ahead just from that one-year snapshot of my home equity building up my wealth technically being built up, even if I do have to fork over some thousands of dollars each and every year, because at the end of the day, I'm way ahead every single year that my home increases in value. If you live in an area where property values are not increasing, it's like property value only increases $2,000 a year. Well, that makes things a lot tighter. It's not as easy or an obvious of a decision to go ahead and purchase a home there, handle all those expenses for appliances, different things that go wrong with houses that you need to fix and maintain might not be the most financial benefit. But again, if if you're in a high cost of living area where home values are likely to continue increasing at a sizable clip, you probably will still come out ahead even absorbing those expenses. So you want to make sure you're accounting for those things mentally.

Tricky thing for current homeowners

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So the trickiest thing right now is current homeowners, current homeowners most likely, unless you just bought your home in the last year, you have a really low interest rate, 2.5%, 3%, 3.2%. If you're anywhere in that neighborhood and you were looking at buying another house, it is pretty ridiculous the huge jump in monthly expense versus the value and additional benefits of the house you can get. I can kind of pick on myself and my wife, for example. There's a house that was just like a couple blocks away, same neighborhood and everything. Fits a little bit more style of what we hope to be in long term. And it's fifty thousand dollars more expensive from a purchase price versus sale price of our home. And so what that is, that's like less than a 10% difference. So a 10% higher cost house than ours. And the problem is the payment, because we're going from 2.75% interest rate to uh 7% interest rate, the payment basically doubles our payment. So we'd have to pay double the payment to purchase a home at value that's only 10% higher than ours is now. And when you look at the value, the additional small benefits we get from doing that, it just doesn't make a lot of sense. And for a lot of people, that's gonna be the case. There might be just huge deal breakers with your current home. You're just family's way too big, or you need to relocate, anyways. Well, in those situations, then yeah, purchasing a house, even if financially it looks pretty ridiculous to move from this lower, lower mortgage payment to a higher mortgage payment. Again, if you can afford it, if the value is going to be there for you, it might make sense, but it is gonna be a lot trickier, right? Because you're comparing something that you know is is a pretty good deal right now with those lower interest rates that we have locked in. So definitely want to be aware of that, be aware of the value. And

Renting current home own

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a lot of things that my clients have been exploring as they're thinking about going from current homeowner to purchasing a new home is actually not selling their home with a lower interest rate, but renting it out instead and actually getting a few extra hundred dollars from charging rent on their current home. And that helps offset a little bit of that large new mortgage payment. So there's there's ideas and things you can think of outside the box too that you might be open to when it comes to making these dreams and goals happen for them. So two big things when it comes to purchasing a house is well, what if the value of my home decreases and what if rates decrease? So going back to the biggest question we always need to answer with purchase a home is can you afford it today? If you can afford it today, what happens if the value of the home decreases after you're locked in at the mortgage and in that monthly payment? Is you know what you could afford it before, you can still afford it even if the home value temporarily decreases. If you look up the statistics of how many years over the last 50 years that home values have actually decreased, it's super small. And for most of those years, it's actually decreased like 2% or something crazy like that. If you look at the gains and the values of increases, it's usually way higher. And then there's that 2008-2009 period where, yeah, double double digit drops in value, but that was really super rare compared to the historical trend of what happens in real estate. So although it could happen, it's likely it'll bounce back. And if it does happen, it might even be such a small amount that it doesn't really notice or impact you, anyways. The biggest downside if the value decreases, and and definitely something you need to think about, is if you need to sell that home after it decreases. So you purchase a home, something comes up life-wise, and you're like, oh man, now now I need to sell. It's not even an option. I just have to sell. I gotta go take care of this thing. I need to go move somewhere else, relocate, whatever it is. If the value of your home dropped there, now you're really feeling it. Now it really is impacting you. So when you whenever you're purchasing a home, you want to think long term. Hey, am I reasonably going to be here the next three to five years? If so, it's more likely your home's gonna increase in value than it would decrease. And and the probabilities are pretty strong for that. So, what happens when rate decreases, though? That that's actually a good thing. So if you get it locked in now at a rate you know you can afford and the rate decreases, well, you're just gonna be able to lock in some additional savings. It's not gonna impact you negatively. You locked it in at something you knew you could afford, rates go down, you refinance that and then get a lower monthly payment and or just pay it off sooner. And so you actually get the best of both worlds. You lock in something you know you can afford, and if rates go down, you are able to jump on that and actually reduce your costs, and it ends up being a better deal than you even originally thought. So you can more afford it in that situation. So I think all this stuff is valuable to you if you want to purchase a home, if you think it's reasonably within affordability that you could. And I I think factor all these things in, figure out if it makes sense for you, talk through it, if there's a significant other, or if you have trusted people you can kind of bounce these things off of. You definitely want to explore this because yeah, that there is a chance that things could just be more costly. The opportunity cost most likely will go up higher than it would be dropping lower just based on what we know and kind of what's out there today. Um that check on these comments before we wrap this up. Yep. So Alan commented in here saying, marry the house, date the rate. That is true. And and if the rates go up, then you even got a better deal, right, Alan? So if then you're like, yep, we can we can choose to marry that rate over time, too. If all of a sudden you lock it in at seven percent and interest rates just keep going up there at 9% or something like that, well, then you got a super good deal. Like you're never gonna get rid of that rate. Just like I'm never getting it rid of the 2.75% rate that I had. So good advice there, Alan, for marrying the house and date the rate. I think if this is something that's important to you, it's worth exploring, right? You don't want to write it off. I've seen that happen many times, even when a house was even more affordable than they are now. People would just write it off. They would look at the multi payments, they would look at the values of the houses and whatever it is, they didn't look at the whole picture. They just saw one point of information and they said, there's no way I would ever be able to afford that. And that's a handful of my clients. A handful of my clients actually have since purchased their first home and are enjoying the benefits of the equity that has accrued, the benefits of being a homeowner and kind of having a place to call your own and kind of tweak and do your things with it. And so, yeah, don't write it off unless you actually kind of go through the process of seeing, well, what can you afford? When you look at what you can afford, are there any deal breakers or can you get into a house to get your foot in the door, start building equity? The house we're in now is actually our third home. And there's no way we'd ever have been able to afford our third home if we want to have bought that first starter home about nine, 10 years ago now. So definitely food for thought too. I think a lot of times we set our sights on like, yep, we got to get the most perfect thing, perfect right out of the box and never have to move again. Realistically, you probably will move anyways. We're just becoming more and more transient, more likely to move, whether it's just to the the next town over, the next couple blocks over, or across states and relocate for positions and jobs and whatnot. So yeah, getting your foot in the door, getting kind of the minimum viable product. So that's that's uh a tech word, right? When you're looking to launch a startup, what's the minimum minimum viable product? Same thing with purchasing a house. What's the minimal viable product, the minimum viable house that you could be happy with, excited about, and build equity and lead that to kind of bungee jump or launch yourself into that next house a couple years on the line? Once you've built up more assets, built up more recesses, further on in your career, built up a lot more tools and resources to help you kind of make that next purchase and get something more in lines with probably what your normal expectations and dreams are. So I think that helps along the way too, just being realistic and adjusting, and adjusting what is possible so that maybe you don't get that perfect one yet, but the only way you're gonna get there is by kind of taking those initial steps, getting it your foot in the door there. So hope that was helpful for everyone listening and reach out if you ever have

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any questions.

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Thank you so much for listening to Techie Personal Finance Bootcamp. You can find show notes by visiting lobofinancial planning.com and finding the podcast page. You'll also be able to find strategy guides, videos, and tunes too to help you take your financial confidence to the next level. If you feel this episode has added a ton of value for you, please array and share this with friends and colleagues. Catch you next time on Techie Personal Finance Bootcamp.