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Why you shouldn't buy a house right now?

Inventory is down partly because homebuilders are building fewer homes and apartments. According to realtor.com, the number of US active listings has declined from about 1 to 1.5 million before the pandemic to about 500,000 – 600,000 during the pandemic, although the number has now started to rise.

wane.com - 5 Reasons To NOT Buy a House Right Now | WANE 15

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House prices have soared in the United States during the pandemic, especially in small cities and rural areas. Nearly half of all Americans are concerned, if not desperate about the lack of affordable housing. But buying a home is central to the American dream because it is often viewed as a path to building wealth. The common mantra is that renting throws away money while purchasing a house builds equity and, thus, wealth. Homeownership does add to your wealth, but like all other asset classes, valuation matters in real estate. In fact, there are many reasons to buy a home, but there are relevant arguments against home ownership as well. Many homeowners who bought during the last peak from 2005 to 2006 waited years just to break even on their purchase. Why? Interest rates were low, lending standards weaker, and inventory too high. Looking at the track record of the past, people purchased homes and condominiums, thinking prices would continue their upward arc. But unfortunately, they did not, and when these trends changed, it took many years for prices to recover. Keeping that in mind, here are five reasons not to buy a house now.

1. House Prices Are Near a Record

The Pew Research Center reported that 49% of Americans said, “availability of affordable housing in the local community is a major problem.” Another 36% of Americans said it was a minor problem. That’s not surprising. Inventory is down partly because homebuilders are building fewer homes and apartments. According to realtor.com, the number of US active listings has declined from about 1 to 1.5 million before the pandemic to about 500,000 – 600,000 during the pandemic, although the number has now started to rise. Lastly, housing and rental vacancies are down to about 5.6% and 0.9%, respectively, in 2021. The result is higher home prices. The median listing price in 2017 was $250,000 to $280,000. That price leaped to $435,500 in August 2022, slightly below the record from May to July of the same year.

2. Mortgage Rates Are the Highest Since 2008

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Americans attempting to purchase a house today are also facing higher mortgage rates. The 30-year fixed rate mortgage (FRM) is now over 6%, the highest rate since 2008. Many first-time homebuyers have not experienced rates this high. Similarly, the 15-year FRM is more than 5%, and the 5/1-year adjustable rate mortgage (ARM) is about 5%.

Higher mortgage rates mean higher monthly payments.

A buyer paying $2,398 per month on a $400,000 loan at a 6% rate on a 30-year FRM, could save $250 a month if the interest rate was only 5%. A reduction of $2400 to $2100 may not sound like much, but it adds up to $3,000 annually. That means the homeowner pays nearly $100K more over the life of the loan. The double hit of higher mortgage rates and higher prices have put new and existing homes out of reach for many first-time buyers. One benefit of owning a home is the mortgage deduction incentive. However, the tax advantage is not the same as before. The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction to $24,000 from $12,700 for those in the married, filing jointly, status. The deduction is now $25,100. As a result, many new homeowners no longer benefit from itemizing their tax deductions. Homeowners who pay more than $25,100 in interest still benefit, especially if their state and local property taxes are high, because the TCJA caps tax deductions at $10,000. The bottom line, though, is if your mortgage loan interest is smaller than that, you are probably just taking the standard deduction.

4. Interest on Savings Is the Highest in Years

Think of houses as investments. Despite the decline during the Great Recession, home prices, on average, increase over time. Moreover, savings accounts have been paying a meager interest rate for years. However, high inflation has reversed the trend, and interest on savings accounts and, more importantly, short-term US Treasury bonds and US Government-issued Series I Savings Bonds (I Bonds) are the highest in years. The US Treasury website lists the 1-year rate at almost 4%. So, if your brokerage allows bond purchases, take advantage of the highest interest rate in more than a decade. Similarly, I Bonds are paying a 9.62% composite rate because of high inflation. I Bonds are inflation-protected savings bonds issued by the US Government. If inflation rises further, the I Bond rate also increases.

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Know the facts before you buy. With I Bonds, your money is not accessible for at least one year, and there is an interest penalty for cashing savings bonds before 5-years.

5. Save for Retirement Instead

Considering high house prices and mortgage rates, it may make sense to save for retirement instead. So far, 2022 has been difficult for those invested in the stock market, between poor total returns and enhanced volatility. The stock market’s valuation has declined compared to 2020 and 2021. In addition, investors fear rising interest rates and recession risks, so this year will likely not be a good one for the market. Eventually, though, the stock market bulls will return. Investors who can tolerate the volatility may find this year a good one to add to their portfolio instead of buying a house. Buying a home is a personal and complicated decision. Many reasons exist to buy a house, being near good schools, a quiet neighborhood, living near grandparents, tax benefits, access to healthcare, etc. However, there are also good reasons not to buy a home, especially when prices are near a record and mortgage rates are the highest in a decade. Potential home buyers may want to wait if they view a house as an investment rather than for other reasons.

wane.com - 5 Reasons To NOT Buy a House Right Now | WANE 15

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