Have you ever toured a home, fallen in love with it, but decided to wait and see if something better comes along? We’ve all been there. That adorable Craftsman with the big backyard seems ideal, but what if an even more adorable Craftsman pops up next month for less? It’s so tempting to tell yourself “I’ll just wait a little longer.” After all, timing the housing market can save you a ton of money, right?
Not so fast, friend. While your patience may pay off occasionally, more often than not, waiting to buy a home can actually cost you. From rising rental rates to lost tax breaks, you may be leaving big money on the table by delaying your purchase. Let’s take a look at why patience often isn’t a virtue when house hunting.
Costs of Renting Continue to Rise
Rents are going through the roof lately, especially in popular markets like Austin, Miami, and Phoenix. Data from Apartment List shows the national median rent rose 14.1% from January 2021 to January 2022. And rents in some cities ballooned by more than 30% last year!
Just ask Sara in Austin. Her monthly rent jumped from $1,800 to $2,400 when she renewed her lease last fall. That’s an extra $7,200 per year that she’s now paying – for nothing. Sara’s not building any equity and has no long-term security. If the landlord decides to sell or move into the property, she could easily be displaced.
Now let’s say Sara purchases a $500,000 home in Austin with a 30-year fixed-rate mortgage at 5%. Her estimated monthly payment would be around $2,600 including taxes and insurance. That’s just $200 more per month than her new jacked-up rent price. And unlike rent, Sara’s mortgage payment is fixed. It will never go up. Within a few years, rent growth would likely push Sara’s rental payment higher than her mortgage cost.
According to real estate analysts, rents are projected to rise another 10% in 2023. Can you really afford to keep paying more for less while your landlord pockets the profits?
Lost Tax Breaks
Here’s another cost of renting that you may not have considered: lost tax breaks. Homeowners can deduct mortgage interest, property taxes, and certain home improvements and repairs from their federal income taxes. In 2022, the mortgage interest deduction limit was $750,000 for married couples filing jointly. With an average mortgage rate around 5%, that’s nearly $30,000 in potential tax savings!
Homeowners can also deduct 20% of qualified business use of their home, like a home office. In addition, capital gains from selling a primary residence are exempt from taxes up to $500,000 for married couples. Sound nice? Well, none of these juicy deductions apply to renters.
Crunching the numbers shows just how much money is left on the table by renting instead of buying. Let’s say you pay $20,000 in rent each year and have no other itemized deductions. As a homeowner with similar housing costs, you could deduct around $15,000 in mortgage interest and taxes in your first year, reducing your taxable income by that amount. For taxpayers in the 22% bracket, that translates to over $3,000 in tax savings for homeowners. What are you waiting for?
Appreciation and Building Equity
Here’s one of the biggest costs of waiting to buy: missing out on home price appreciation. Home values have skyrocketed in the past decade, with cities like Phoenix, Tampa, and Charlotte seeing over 100% growth since 2012. Just imagine if you’d purchased that Phoenix bungalow for $250,000 ten years ago. Today it could easily sell for over $500,000!
As home values rise, homeowners build equity in their properties. Equity is your ownership stake in the home based on the current market value minus what you owe to the lender. Even if you put only 3% down, your equity starts growing through appreciation immediately. After five years in that wildly appreciating Phoenix market, your $7,500 down payment could turn into over $75,000 in equity!
Renting results in zero equity growth and none of the financial benefits that come with it. No cash-out for renovations, no borrowing against your asset, and no profit when you eventually sell. You’re just lining the landlord’s pockets instead of your own.
Interest Rates and Refinancing
Current mortgage rates sitting around 5% have some prospective buyers hitting pause. But historically speaking, these rates are still fantastic. Just two years ago, 30-year fixed rates were under 3%.
If you buy now, you can always refinance later when rates fall again. Imagine getting a 5% rate today and refinancing to 4% in two years. On a $300,000 loan, that 1% drop would save you over $100 per month.
The housing market is cyclical, and rates will fall again at some point. Waiting too long risks getting caught with higher interest rates and either being locked out of homeownership or paying more each month. Taking advantage of today’s rates while planning to refi in the future can give you the best of both worlds.
Competition and Inventory Impact
Competition has cooled a bit from the 2021 home buying frenzy when buyers desperately outbid each other. But inventory is still historically low, with 40% fewer homes for sale now compared to 2019.
If mortgage rates fall again or more millennials start shopping, buyer competition could quickly heat up again. Bidding wars may return, and sellers could regain leverage to require waived contingencies, quick closings, and other unpleasant buyer concessions.
Acting now allows you to take advantage of the current tempered demand before the competition comes roaring back. Don’t wait until all-cash offers and waived inspections become the norm again.
Strategies for Buying in Current Market
Okay, we’ve covered numerous costs of waiting to buy. But how do you actually win in this market when inventory is still tight? Here are some tips:
- Move quickly on homes that meet your criteria. See a new listing within 1-2 days and submit your offer ASAP.
- Get pre-approved for a mortgage. Pre-approval letters show sellers you’re serious.
- Keep your contingencies flexible. Avoid stringent demands around inspection repairs or appraisal values.
- Explore adjustable-rate mortgages if you may refinance when rates drop. You’ll get lower initial rates now.
- Look into down payment assistance programs that provide grants or low-interest second loans.
- Extend your home search radius into neighboring towns if nearby inventory is super tight.
The market always has its unique challenges. But sitting back and waiting indefinitely until the stars perfectly align could be one of the costliest mistakes you make.
From rising rents to accumulating equity, it pays to be decisive when navigating today’s housing market. The key is focusing on your goals, not trying to time unpredictable swings. Strategies like planning to refinance can help you get the rate and payment you want long-term, even if you purchase when rates are a little higher. Don’t let indecision today cost you the home you’ll love for years. Consult a mortgage expert to map out your home financing options. Then take a deep breath and make the leap into homeownership!