Many people I know, and not just first-time homebuyers, are considering whether it’s smarter to buy or to rent and eventually want to own their own home. In past years it has been challenging for first-time homebuyers to scrape together the necessary cash for a down payment on a home and it still is. This, however, was at periods in time when it was generally cheap to rent a place of your own. The monthly out-of-pocket cost to own a home was higher than renting when you considered the monthly mortgage payment (including taxes and insurance) and yearly maintenance you may have to do. It made the decision to buy harder since renting was fairly cheap. However, what we are seeing now, is a flip flop in the cost of renting versus the cost of owning.
Housing prices are clearly rising. This chart from the MLS shows housing prices in Fort Collins for 2015 compared to last year at the same time. Note the median home prices from 2015 vs 2014. Double digit increases.
This is a legitimate concern to people looking to buy in the near future, but what is more important to consider is not where prices are right now, rather, where they will be in the next few years. We don’t really have a housing market “bubble” like we had back in 2006. That market was propped up by hungry lenders giving out unwise loans to unsuspecting consumers who, when the bubble popped, were upside down on their homes with no option other than foreclosing because of a weakening economy leaving many without jobs to pay that morgage. We don’t have that now. Lenders are much more stringent with their lending policies and more conservative with income and employment requirements. Employment, on the whole, is stronger as well. My prediction is that if the market does come down in the next few years, it may come down to around where it is right now, not lower. We won’t see a “crash” like we did in 2007/2008.
That being the case, if you are considering buying in the next couple years and concerned about how much of a down payment you have or where prices will be, here are some things to consider. The market still has steam left in it. Prices are still increasing. This means that if you are considering buying a house in two years once you have saved up another $10,000 to add to your down payment, for example, the house that you would be looking at today could be valued well over $10,000 more than today, which means you still have a larger mortgage. For example, waiting to buy a $300,000 house you’re looking at today after two years of 5% growth would be valued at $330,750, which far exceeds the benefits of that extra $10,000 you saved toward your down payment. Even at 2% growth per year (which is a really modest number) for two years, that $300,000 home would be listed at $312,120 by the time you have the extra $10,000 saved. A larger down payment doesn't necessarily help you if it isn't enough to outpace the marked, even at modest growth.
Clearly, it’s never a good idea to buy if you are not in a position to do so or simply don’t want to, nor would I urge someone to stretch themselves over what is logical. And there may be other factors at play such as your psychological "readiness" to buy or your comfort with how stable your job is and will be. But if you are considering buying in the next year or two, remember that a little extra money saved for a down payment might not be worth it when home prices grow to exceed what you’re able to put away in the next couple years.