The biggest question many buyers ask themselves is: “Should I/we buy now, or wait until the market goes into a correction”?
It’s a common question I get as a Realtor in the North Denver Colorado area. Our Real Estate market has been like trying to feed 10,000 piranhas only 1 grasshopper. With as many as 30-40 buyers making offers on one single home, how do you even try to compete with that?!
Since 2012, Denver has seen an influx of buyers at a time when marijuana was legalized, low interest rates, a strong job economy and an amazing climate hard to pass up. With that, we’ve seen home prices increase 7-10% on average, year over year, with some markets seeing 15-20% in appreciation, on average. 2016 doesn’t look like it will slow much either. We’ve also seen record rent growth throughout Denver and the North Metro area, which is interesting, but we’ll touch on that another time.
So why would anyone want to partake in a market as competitive as Denver’s? Below are are 3 reasons why you may be able to consider buying, and 3 reasons it may not be the smartest choice.
1.) Interest rates continue to remain extremely low, For now… This actually is a double edged sword. With low interest rates, many more buyers have much more buying power, and some buyers that couldn’t buy, now can afford to join in the fun, essentially helping the market stay as crazy as it has been. But, assume your interest rate of 3.75% increases to 4% on a $350,000 home. That is an additional $600/year in interest, on just a quarter percent. That makes a huge difference for first time home buyers. I do expect the Federal Reserve to increase rates over time given the strength of our economy. Being able to achieve a low interest rate on a mortgage allows you to lock in a great monthly payment, and allowing you flexibility on other bills, or even paying it down quicker, along several other advantages such as tax and appreciation.
2.) If you could lock in a mortgage payment for less than your rent, why not? It’s a no brainer to purchase, if your mortgage is less than your current rent, right? Not all the time. Speaking simply, ABSOLUTELY. However, you need to take into account where you are buying, how long you plan to stay, and an exit strategy. If you plan to move in 2 years or less, you are taking more of a risk than if you were to hold onto it for 5-10 years. Could you rent out the home with a positive return without going into the red? There are many things to consider here, but you and your agent should be able to break this down to figure out if the #’s make sense.
3.) I don’t have 20% to put down on a home…. That’s ok. Many local Credit Unions and banks have programs for first time homebuyers and even conventional programs that allow you to put as little as 3.5% down. Your Realtor should have a great network of lenders who can and have performed and been able to get loans for their clients. Ask them first.
So why should you maybe wait to buy a home?
1.) Lots of Debt. Now, this may not be a huge factor, but with lenders, it’s something they consider greatly. The ability to repay your loan or make payments is a deal breaker. Typically if your debt to income ratio is less than 43%, then you are sitting ok. For example, if you have $3000 in monthly expenses such as car payments, loans, credit cards, etc. and your monthly income is $6000/month, your ratio would be 50% and would be challenging for lenders to consider you qualified. However, some smaller lenders are able to be flexible on certain situations. Many smaller credit unions and lenders have less restrictions and can help work a deal that works for you and them. You need to consider your situation carefully if this is you. It’s very important to make sure you don’t get in over your head and you may want to work on getting your debts paid down or consider spending less on a home. Your agent and lender can help with walking you through a plan to a purchase down the road along with offering debt counseling.
2.) Are you in your 20’s/30’s and Single? You might want to consider your lifestyle and age. Don’t buy a home in the burbs, just to own a home when you are 25 and single. You may want to consider renting in downtown or in a core area to enjoy your 20’s/30’s rather than having to drive 20 minutes to the burbs everyday and being alone Sure, it’s cheaper, but you will regret missing out on the excitement of night life.
3.) Worried about your Job Security? If you are currently in the oil business, you may want to hold off, given the past 3 months in the oil business. However, it differs for every company and industry. But if you are worried that you may be relocated or laid off in the next 2 years. I would wait and keep your flexibility open to options. Losing your job and not having a consistent income can really put you in a tough position when owning a home. You cannot just simply down size. However, in a market like Denver, you may be able to sell in 7 days, but you cannot count on that. If you are unsure about the job situation, or hate your job. Keep your situation fluid so you can make better decisions for you and not your creditors.
That’s it! Tune in every week for new posts and videos. This was my very first blog and hope, if you are still reading it, that you enjoyed it and found it interesting. Leave me comments, questions or feedback below!
Agent Scotty Otis