Should you buy a house now or wait it out? With mortgage rates skyrocketing to levels not seen in over two decades as of mid-October, the guys are here to break down the current real estate scene. They'll talk through what high mortgage rates mean for your monthly budget, the long-term commitment that comes with home buying, and, most importantly, how you can navigate this wild market. By the end of this episode, you'll have to make the decision whether to buy a house now...
For the full show notes, transcript, and resources, visit theinvesteddads.com/198
Sign up for our exclusive newsletter here!
The Invested Dads: Website | Instagram | Facebook | Spotify | Apple Podcasts
Should you buy a house now or wait it out? With mortgage rates skyrocketing to levels not seen in over two decades as of mid-October, the guys are here to break down the current real estate scene. They'll talk through what high mortgage rates mean for your monthly budget, the long-term commitment that comes with home buying, and, most importantly, how you can navigate this wild market. By the end of this episode, you'll have to make the decision whether to buy a house now...
For the full show notes, transcript, and resources, visit theinvesteddads.com/198
Sign up for our exclusive newsletter here!
The Invested Dads: Website | Instagram | Facebook | Spotify | Apple Podcasts
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better, helping you to understand the current world of financial planning and investments. Here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. I am Austin Wilson, Co-Portfolio Manager at Hixon Zuercher Capital Management.
Josh Robb:
And I'm Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with our podcast?
Austin Wilson:
Subscribe if you're not subscribed, so you get new episodes when they drop on Thursdays and leave us a review on Apple Podcasts, Spotify, wherever you're listening to us. That way, you get new episodes as soon as they drop because they are hot, hot, hot. Too hot to handle.
Josh Robb:
That's right.
Austin Wilson:
So do that today, Josh. We're talking about housing.
Josh Robb:
Housing.
Austin Wilson:
Housing. We live in houses. We do.
Josh Robb:
We live in a house.
Austin Wilson:
Is now a good time to buy a house? Wow, that sounds like a loaded question.
Josh Robb:
Yes.
[1:01] - Considering Factors When Deciding to Buy a House
Austin Wilson:
So there's a lot of factors. So we're going to talk about that. Mortgage rates for a 30-year fixed rate mortgage, which are what most people use to buy their house.
Josh Robb:
That's kind of the benchmark for the industry.
Austin Wilson:
Benchmark.
Josh Robb:
Yeah.
Austin Wilson:
Seven-plus percent, highest we've seen in 20 years or so. So that's a long time. A lot of high-interest-rate new mortgages out there. However, when you look at housing in total, most people have a fixed rate mortgage that they locked in prior to this current run up in rates. The effective rate on mortgages is in the three to four range.
Josh Robb:
That'd be ideal.
Austin Wilson:
But new mortgages are very hot. This causes an issue for pricing, pricing in terms of how the housing market is very elevated compared to historical levels. And one of the reasons for this is the few amount of houses that are coming for sale. And why is that? Because people have cheap fixed-rate mortgages-
Josh Robb:
They don't want to lose that.
Austin Wilson:
... yeah, from three or five or even 10 years ago that they don't want to give up a 3% mortgage rate to sell their house and buy something else at seven. So that is keeping supply low, which means the demand for existing houses that are on the market are very high.
Josh Robb:
And new home builds are well below the growth of our population.
Austin Wilson:
And they have been for a long time.
Josh Robb:
Since '09.
Austin Wilson:
So we are in a point where prices are high because the volume of houses for sale are low and mortgage rates are very high. So a couple of things going against that right now. But given the fact that prices are high and mortgage rates are high, you may be hesitant to be thinking about buying a house. That's why we're going to be talking about this today. A couple of quotes that I thought were very interesting that people who work in the housing industry have said. So there's a lady named Stacey Froelich, she's a broker with Compass in New York City.
She said, "If a buyer finds a property they want to call home, they shouldn't delay. Timing the market is impossible and the home should be viewed as a long-term investment." Now, that's true. If you find a home you like, that's probably great, provided you have the financial situation to afford it and all of that. Viewing a home as a long-term investment is a very touchy subject because it can be hit or miss and your investment return buying at levels now might be a little bit diminished from where it would've been a couple of years ago.
Josh Robb:
That's right.
Austin Wilson:
People view housing very differently, a lot of people. Real estate investors view real estate as a sure thing, it's going to go up, there's low risk. There's a lot of nuance to that, and a lot of times, that doesn't always work out. So it is risky to view it as an investment. That's just my own opinion and we're going to get to that later. Another quote from Melissa Cohn, Regional Vice President of William Raveis Mortgage in Connecticut said this, "Remember, you marry the house and you date the rate."
So in other words, you can always refinance later when mortgage rates drop and more buyers enter the market causing prices to rise. So you can always refinance in America anyway. So we have a unique mortgage situation where in places like Canada, really close to us, their housing market, even Europe, very different, every five years or so, you readjust to the current prevailing rate.
Josh Robb:
Okay. So you don't have a fixed rate, a variable rate.
Austin Wilson:
It is very rare globally to have mortgages like we have now, which I'm thankful that we do-
Josh Robb:
Yes.
Austin Wilson:
... but it's very interesting. So, that's an interesting thought that you can always refinance if you find a house you love, that's one thing.
Josh Robb:
The fixed rate is great when interest rates are going up, you stay at that lower rate. And then like you said, in our real estate market, if interest rates go down, you can refinance or renegotiate with the bank. So really, from a purchasing standpoint, you have the best option in both directions, from a fixed rate.
[4:47] - Ask Yourself These Three Questions Before Buying
Austin Wilson:
There are adjustable-rate mortgages, ARMs, they have their place and can work out opportunistically if you time it right. That being said, timing it right is tricky and the ability to refinance almost gives you the adjustable-ness in your fixed-rate mortgage. So that's my preference in general. So here's a couple of questions that you can answer, there's three questions, whether now is a good time to make a home purchase.
Josh Robb:
All right.
Austin Wilson:
Number one, do you have excellent credit? And we've talked about this in multiple episodes.
Josh Robb:
Yeah, we've done an episode of credit.
Austin Wilson:
But one episode recently, and we'll link that in the show notes, but if you have good credit, and that's preferably 740 or above, pretty good credit, you can usually get decent rates in terms of your mortgages because you're viewed as low risk. And actually, the new mortgage originations, the average credit scores in the second quarter of 2023, 769. So-
Josh Robb:
That's pretty good.
Austin Wilson:
... banks are lending specifically to high credit score people.
Josh Robb:
Low risk.
Austin Wilson:
Lower risk. They're trying to take on less risk right now. So generally speaking, demonstrating that you're a low risk borrower and you have good credit history on time payments, this allows you to have the best rates possible, even the best rates possible are still elevated from where they have been. So that's number one. Do you have good credit? Number two, do you have a substantial down payment? Because obviously-
Josh Robb:
Important.
Austin Wilson:
... it's important. We advise, and banks would say, 20% is a good starting point. If you've got 20% down, you're viewed as less risky, you get a favorable rate, and you don't have to buy things like mortgage insurance. And mortgage insurance is an additional cost added to your mortgage payment for the first 20% of your loan when you're paying it back.
Josh Robb:
Yes.
Austin Wilson:
It's just money down the drain. It's not going to any-
Josh Robb:
It's a premium you don't want to pay.
Austin Wilson:
So if you have a substantial down payment, that's one benefit of it. Another is you're financing less at a high rate, so you're paying less interest.
Josh Robb:
And if a bank knows they're taking less risk because they don't have to finance as big a percentage of the bank, you could probably get a better rate in general because what they're always worried about is if you stop paying, they have to sell that home and get their money back. So if what they're lending you is less than 80%, they feel pretty good that they can get their money back from that home. So you're right, having big down payment is huge.
Austin Wilson:
And another thing about is as you're putting together that down payment, it's also good to have money set aside that you're not using for that down payment because a couple of things. Number one, you may have things like closing costs. Those are one-time expenses. But also, when you buy a house, there's a lot of expenses that come up right away. You don't think about something's pop up, you need a new furniture here, you need to repair this, home warranties and stuff can help a little bit, but having some cash set aside in addition to your already established emergency fund. If you don't have a fully funded emergency fund, maybe not time to buy a house yet. That's what I'm generally thinking there.
Number three, do you plan to stay in your house for a while that you're buying? If you do, that's good. That actually means that the one-time cost in terms of closing and things like that is going to be really spread out over a long period of time. But if you're not planning on being there very long, a lot of these upfront costs right away that you're just going to have to make in another couple of years might make it not even worthwhile to be buying a house. You might as well rent. So if you're going to be staying in your home for an extended period of time, and everyone has different amounts of time, that is, I've heard things like five years, anything less than that doesn't necessarily make sense.
Josh Robb:
Yeah, and when you look at capital gains and things like that too, staying a certain amount of time allows you for a primary home to eliminate capital gains and not own any tax on any sale as well, which is nice.
[8:25] - Dad Joke of the Week
Josh Robb:
All right, let's take a break from your questions. We're going to come back and talk more about should you buy a house. But first, I have a dad joke and it is housing-related. All right. So, how did the real estate agent handle a rude client?
Austin Wilson:
Uh-oh, how?
Josh Robb:
She showed her some manors.
Austin Wilson:
Some manors. M-A-N-O-R.
Josh Robb:
Yes.
[8:52] - Should You Buy a House Now or Wait?
Austin Wilson:
I love it. So, you might be asking me the question, Josh, should I just wait until next year-
Josh Robb:
That's a good question.
Austin Wilson:
... instead of buying a house right now?
Josh Robb:
Austin, should you wait until next year to buy a house?
Austin Wilson:
That's a great question.
Josh Robb:
Okay.
Austin Wilson:
I'm glad you asked about it. I would say it depends. Ultimately, the choice is yours because things are going to continue. Your career is going to continue, bills are going to continue, your family's going to grow. Lots of things can change between now and next year. Timing it is really up to you. There's no right or wrong time, as we talked about earlier with a couple of different factors, and you can change your interest rate if you find the right house and all these different things. If you really want to buy a house, you can buy a house. It's okay as long as your financial situation is intact. Now, if you're holding out for better interest rates, this is actually kind of a Catch-22 because if you're holding out for better rates, that means the economy's weakening, which means housing prices might come down too, but that means you also might get less for your house, so you might be trying to sell.
So, it's not perfect if you want to wait it out, if you're waiting on prices to come down. That being said, mortgage rates in the above seven range that we're in right now seem higher than we've seen in a while. And it actually could seem very feasible that they could come down next year. In fact, just my own personal opinion is it's more likely that they're down from here than up from here for a longer term mortgage. I'm not saying a lot, but that seems likely right now. The big impact is to your payments if rates come down. Say housing prices stay the same, which they'll move a little bit too, but if housing prices stay the same, a 1% change in a 30-year mortgage can have a huge impact on your monthly mortgage payment because of the way mortgages are amortized and how much interest you're paying and all of that.
So if you're all about trying to be frugal and save money, it might be worth waiting for interest rates. But that being said, like we've talked about, you may be able to just spend a couple of thousand dollars and refinance your home anyway at that point. So it's really, really hard to think about exactly where rates or prices will be next year, but there are three scenarios where it might actually make sense to hold off another year maybe or so. So number one, if property values where you're living are declining, it may continue into next year and that could prove even more lucrative to wait another year because housing cycles actually are pretty long. They're not necessarily huge, just choppy swings. So if you're already seeing some softening, it could likely be even-
Josh Robb:
It's possible.
Austin Wilson:
... softer next year, especially if the economy, whether that be nationally or your local economy, slows next year compared to where it's this year, then there actually could be an opportunity for prices to come down next year. Some of the bigger metro areas in the country, they're slowing already, but they had a huge run-up before. So some of this is relatively normal and some normalizing of prices over time. Number two, if there is an upswing in housing inventory in your area, it could be prudent to wait because as inventory comes online, prices are going to soften up as well, and that's a good thing. One thing that could cause that inventory to come online is a lower mortgage rate in general too because people might be more apt to move. So keep an eye on housing inventory.
If you see a bunch of houses for sale, it could be showing that the market is softening up enough that prices could be coming down and you could be getting another tailwind of mortgage rates coming down, causing people to do that as well. So if you see a bunch of houses coming online, that could be okay. And then number three, if your financial situation gets better or is planned to get better, you may plan on making some changes next year, it could be a really good time to be considering to buy a house better than now. So there's a lot of different things, but if you're expected to receive a big bonus or an inheritance or some other windfall of money that could really make your mortgage situation change over time and you can put more down or whatever, that could be worth waiting. So prices also could be better as well. So between those three different things, it's worth keeping an eye on things. It might be worth considering next year. But, Josh, what are your overall opinions on buying a house right now?
Josh Robb:
Because of the limited inventory, I think I liked what you were talking about at the very beginning of if you find that ideal home for you, making that move now may be worthwhile because, again, you're looking at something ideally that you're going to be in for quite a while, so you really want to find that one that it's just like, "That's it. This is the one I love." Because you can make those adjustments down the road when it comes to your payments and interest rates and all that stuff. But never buy a home hoping you can grow into the payments because there's no guarantee that your income will grow into it or the home will increase in value and you'll be able to refinance or do anything like that.
So I say it to say that if you're looking down and you find the perfect home, as long as, like you said, it fits within all those criteria, your down payment, all that stuff, now is not a horrible time. Interest rates are hard, no one likes to see it, but again, go ahead, talk to a grandparent or even a parent and ask them, if they bought a home in the 80s, ask them how they did.
Austin Wilson:
They were at 13%.
Josh Robb:
Yes, and they were fine. And everything worked out because as the interest rates went down, a lot of them refinanced and the house they were already able to afford at that point became even more affordable as the price went down. So, again, not the end of the world. There may be better opportunities, but again, if you find that thing that you really like, go for it.
Austin Wilson:
Yeah. I would say, yes, I agree with that. I understand the hesitancy to try and sell right now when you have a cheap mortgage.
Josh Robb:
Yeah, the selling part's the other end. Yes.
Austin Wilson:
If you had really good timing and you refinanced at the end of 2020 into 2021 and sometime in there, you probably refinanced, hopefully, into a fixed rate at record low interest rates, and you'll probably never see them that low again. That's my opinion. So, my personal situation is that I don't really want to sell my house because-
Josh Robb:
Locked in.
Austin Wilson:
... I'm locked in at a low rate-
Josh Robb:
Stuck.
Austin Wilson:
... and I do feel stuck.
Josh Robb:
So from a selling standpoint, I agree with you. Buying though, and I guess I approach the buying being you weren't also in that selling, or even if you find that ideal home, maybe it is still worth it knowing you can maybe refinance back closer down the road.
Austin Wilson:
I think this is a really tough situation and tough market for young first-time home buyers. So if you're a younger millennial, Gen Z, you probably are buying your first house maybe. You're thinking about buying your first house and you're in a little bit of a tough spot because compared to where the average house had been a handful of years ago, or the average mortgage rate, certainly the average payment, you're spending a lot more money on a house. And to come up with 20% of an elevated home cost for a down payment and think about taking on this bigger level, it's just a tough place to be for young people. So I feel for young people trying to buy their first house right now, certainly-
Josh Robb:
Oh, it's hard.
Austin Wilson:
... because you're going to be spending a lot more money of your expendable income on your house than previous generations. And the-
Josh Robb:
Well-
Austin Wilson:
... numbers that -
Josh Robb:
... the last maybe 20 years.
Austin Wilson:
Yeah.
Josh Robb:
But previous generations, parents in the 80s, they're spending a good chunk.
Austin Wilson:
Well, I've looked at the percentage of your take-home pay or whatever.
Josh Robb:
Oh yeah, from that standpoint, yes.
Austin Wilson:
When you look at that standpoint because they were obviously-
Josh Robb:
The home prices have went crazy.
Austin Wilson:
Yeah, they were obviously making less money back then, so their mortgage rates being higher, yeah, that makes sense, even though their house prices themselves were proportionally smaller-
Josh Robb:
Right. That's true.
Austin Wilson:
... their take-home pay percentage was lower today. It's like 40%-plus of people's pay that goes to their shelter cost now.
Josh Robb:
Wow. That's crazy.
Austin Wilson:
And that's a lot more than we would recommend from a shelter standpoint in terms of when you're looking at your budget and wow. So it's definitely a different interesting market, and I think it should cool down. No, I'm not saying it has to fall apart. Some people are calling for Armageddon for the housing market. I think that there's too much of a supply demand imbalance to see Armageddon, but to see a slowing of the rate of increase-
Josh Robb:
It could happen.
Austin Wilson:
... or even a slight pause where things slightly decrease, that's probably a healthy thing to bring some buyers into the market and cool things off a little bit. So I don't know. I think that we could have a little bit slower days ahead for housing. Not necessarily saying things are going to fall off a cliff, but I would be in the camp of, "If I didn't have to buy right now, I would try and wait six months or a year and take a look at things, but keep an eye as they go."
Josh Robb:
Okay. Sounds good.
Austin Wilson:
All right. Well, thank you for listening. Please remember, you can always share these episodes with friends and family. If you had someone asking, "Hey, what about this crazy housing market? Should I buy right now or maybe wait?" So go ahead and do that. Email us any ideas at hello@theinvesteddads.com. Until next episode, have a great week.
Josh Robb:
Talk to you later.
Austin Wilson:
Bye.
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn't have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today's show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don't miss the next episode. Josh Robb and Austin Wilson Work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management.
This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.