Should I rent or buy a home?
First, let me say there is no exact way to determine if one should buy vs rent as everyone’s specific financial situation and goals of homeownership are very different. However, one way is by looking at the 5% rule.
Multiply the value of the home by 5%, then divide that number by 12 to get your breakeven point. If the monthly rent on a comparable home is below the breakeven point, it makes financial sense to rent. If the monthly rent is higher than the breakeven point, buying makes economic sense.
An example of this is to take today’s average sale price of about $350,000 and multiply that by .05 giving us 17,500 and then divide that by 12. This gives us a rent amount of $1,458 a month. Finding a $350,000 home to rent for under $1500 a month would be tough. So in this example, it would make more sense to buy.
Now let’s go deeper into buying in today’s market. Below is a great article from Paul Centopani editor at The Mortgage Reports.
Home buying is getting easier for buyers
On the other side of the equation, home buying conditions are softening. While the median home price jumped 14.2% annually to $435,000 in August, it dropped off from $450,000 in June and $449,000 in July, according to Realtor.com.
Inventory gains are helping to push home values down. For-sale listings expanded by 27% from August 2021, with an additional 166,000 homes listed. In turn, the time properties spent on the market rose to 42 days on average, up from 37 days the year before and the first annual increase since June 2020.
“This year, in addition to the usual seasonal cooling, we’re seeing a shift in the balance of supply and demand,” Hale said. “After years of demand vastly outstripping supply — forcing buyers who wanted to find a home to bid up prices — supply has increased. And that means price growth has cooled.”
On top of that, many industry experts believe interest rates have reached their peak range, with any further growth being marginal.
Fall and winter 2022 could bring even cheaper homes
If 2022 exhibits typical seasonality, these patterns should continue to favor borrowers. Fall is typically the best time of the year for home buyers for two reasons.
- First, sellers entering the market are usually more willing to negotiate so they can move before winter comes, according to Hale
- Second, sellers with listings that didn’t sell over the summer usually find themselves highly motivated and more likely to make concessions
It appears the tide has already started turning from the extreme seller’s market brought on by Covid-19. In the last three months, 92% of sellers accepted buyer-friendly terms, with many allowing for contingencies that can easily kill offers in a hotter market — like home appraisals, covering closing costs, and paying for repairs.
Additionally, mortgage rate growth helped tilt the market toward buyers. When interest rates remained below 4% in March, 82% of homes sold at or above their asking price. That dropped to 69% in August. Conversely, the share of properties that sold below asking rose from 18% in March to 31% in August when rates moved between 5% and 6 percent.
“Buyers can be a little more selective now, and homes priced without factoring that in may indeed linger on the market and ultimately take a price reduction,” said Debbie Van Horn, Compass real estate agent. “In the recent two years, homes were priced and readily sold, without considering upgrades, condition, floor plan utility — all the things that truly affect a home’s value. That will have to shift back to typical pricing strategies. Buyers ultimately set the price.”
The bottom line
If you were waiting for a window of opportunity with less competition and more amiable sellers, your time may have come. Of course, it’s never a bad time to buy a home if you can afford it.
“Home prices are likely to remain high,” said Hale. “But if you can find a home that meets your needs and fits your budget, you may be able to lock in a majority of your housing costs with a fixed-rate mortgage.”
If you’re ready to take the next step, get all your ducks in a row first. Then, reach out to a local lender and real estate agent to talk about your home-buying options.