Is Now A Good Time To Buy A House?

If you’re considering buying a home, you might be wondering if this is a good time to take the plunge — or how you even define a “good time” when it comes to today’s market.

After the whirlwind of activity that defined the housing market during the early years of the pandemic, things have calmed down. Mortgage rates have increased significantly since then (and have only now begun to come down), creating an affordability problem and helping slow down demand — which in turn might have given homebuyers some of their negotiation power back.

Does it mean you should start shopping for a home now? Below, CNBC Select analyzes the current housing market and offers a few important questions you should consider before moving on with the purchase.

During the pandemic, mortgage rates plummeted below 3{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d}, flooding the real estate market with homebuyers trying to snag a good rate. Craziness ensued. People snatched up houses at a record speed, with many buyers waiving contingencies and bidding over the asking price. As a result, between May 2020 and May 2022, the median home price shot up 45{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} from $299,000 to $433,000, according to Redfin data.

Today, the market looks very different. In most places, home prices have only slightly dropped because inventory remains limited. Mortgage rates, on the other hand, have about doubled since 2021. This has made homebuyers reluctant and led to a continuous decline in home sales.

These rates could become “the new normal”, according to Lawrence Yun, chief economist and senior VP of research at the National Association of Realtors.

“Mortgage rates have trended down in the past couple of months,” he says. “And the new normal maybe is 5.5{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} to 6.5{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d}. So… [for] someone waiting for a 3{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} or 4{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} mortgage rate, it’s not going to happen.”

Yun also forecasts no significant changes in home prices on the national level this year. The only exception is overheated markets such as San Francisco where prices might drop as much as 15{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d}. “So if someone is living in the Bay Area, maybe they should be on the lookout for some meaningful decline in home prices,” he says. “But for most parts of America, I think there will be a very small movement in prices.”

The other consideration, Yun notes, is that homes are sitting on the market longer now. Even though mortgage rates are high compared to two years ago, some buyers may get more negotiation power, especially for properties that have been lingering in the marketplace for a while.

Moreover, mortgage rate buydowns seem to be having a moment. A mortgage buydown is a financing technique that allows a buyer to reduce interest payments for the first year of the mortgage.

For example, Rocket Mortgage is currently offering a mortgage rate buydown program called Inflation Buster. The lender will pay 1{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} of your interest rate for the first year. Say you got a 6.5{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} interest rate on your mortgage loan. With the buydown, you’d only pay 5.5{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d} in interest for a year, which can shave off hundreds of dollars in monthly interest payments.

Market conditions are rarely ever perfect for buying a home. What’s more important is to figure out whether you’re ready for this kind of commitment, regardless of what’s going on with home prices and mortgage rates. To determine that, here are some questions you should ask yourself.

1. Why do I want a house?

A home will likely be the largest purchase you’ll have ever made, so it’s crucial to evaluate your motives. For example, buying a home because you feel it’s what you’re “supposed to do” isn’t smart if your finances don’t support the purchase. You should also avoid buying your first home as a pure investment — even though it does have the potential to appreciate in value.

A good reason to buy is to want a home to call your own because you’re in the right place personally and financially. Without a doubt, homeownership might offer plenty of benefits, but a house is first and foremost a place to live in the long term, and you should treat it as such.

You might also want to buy to avoid rent hikes. “There’s always that opportunity cost for trade-off,” Yun says. “Not buying means renting and the rents continue to rise, rise, rise.”

But don’t assume buying will save you money over renting. Do the math, including potential home maintenance costs and how long you’re planning to live in the house — which brings us to the next point.

• Do you have an emergency fund? An emergency fund is your safety net. This is the money you’ll use to pay the mortgage and other bills in case you lose your income. You can also use it to pay for urgent repairs. You want to have at least three months’ worth of expenses saved in a high-yield savings account before buying a house.
• Do you have credit card debt? Credit card interest is incredibly expensive and can easily smother your budget with debt. Work to get rid of credit card debt before applying for a mortgage. One possible solution is getting a balance transfer card or debt consolidation loan.
• Are you contributing to your retirement account? If your employer matches your retirement contributions, make sure you’re contributing enough to take full advantage of their match. If not, figure out how much you should be saving for retirement and commit to that number. You want retirement savings to be a part of your monthly budget before you add mortgage payments to it.
• What is your credit score? While it’s possible to get a mortgage with less-than-perfect credit — think a score of 669 or lower — you’ll probably be stuck with a higher interest rate. A few extra percentage points can cost you thousands of dollars over the life of the loan and decrease your buying power. Keep an eye on your credit with a free credit monitoring service such as Experian free credit monitoring. If your credit needs work, take some time to improve it.

4. What is my budget?

You’ve determined you’re on top of your financial health. Now it’s time to figure out how much house you can afford.

You can always use one of the many online calculators for a ballpark figure. You can also speak with a lender and get a prequalification to receive an estimate based on the information you provide.

However, a mortgage pre-approval is the most reliable way to learn how much you can borrow. This involves your lender checking your credit and looking at your financial documents, such as bank statements, tax returns and others.

It’s best to get pre-approved by several lenders to ensure you’re getting the best deal. Shopping around also gives you a chance to find a lender offering benefits that line up with your finances and preferences. For instance, Chase Bank can offer flexible down payment options. Ally Bank can allow you to save on lender fees, while SoFi provides a number of discounts and cash-back incentives.

Note that mortgage pre-approval considers your gross income. Only you know how much you can afford to pay each month. You might have financial obligations such as helping your family members or paying vet bills for your pet that your lender doesn’t take into consideration. You also need to keep in mind additional costs, such as property taxes, utilities and HOA fees. Factor these in to figure out your realistic homebuying budget.

5. Have I saved up enough money?

How much you have saved up for a down payment will also impact how much house you can afford. Plus, if the down payment is less than 20{a57a8b399caa4911091be19c47013a92763fdea5dcb0fe03ef6810df8f2f239d}, you’ll have to add private mortgage insurance to your monthly bills.

Remember that your down payment isn’t the only upfront cost you’ll need to pay. Closing costs may include origination fees, administrative fees, home appraisal, inspection and taxes. Further, once you close on a home and are ready to move in, you might choose to work with professional movers — and that will cost money, too.

Make sure to budget for all of these expenses to avoid dipping into your other savings, such as your emergency or retirement fund.

6. Am I ready for the responsibility?

Finally, you need to be prepared for the commitment that comes with owning a house.

“People should stay within budget and consider this as a major serious responsibility,” Yun says. This might mean sacrificing vacations and travel and putting some sweat equity into a fixer-upper instead of buying a dream home.

You’re also responsible for all of the maintenance the house will need. Stay ahead of the busted pipes and broken furnaces in your future by creating (and contributing to) a separate savings fund for these expenses. And when you do need to pay for some home repairs or improvements, consider using one of the cards CNBC Select has listed as the best for home improvements such as the Citi® Double Cash Card or the Chase Freedom Unlimited®. That way you make the most of the money you have to spend on keeping your house a livable home.

It can be tricky to navigate the current housing market. But whatever is happening in the real estate space, buying a home should be a decision based on your financial situation. A house isn’t the kind of purchase you want to have buyer’s remorse over. Evaluate whether you’re buying for the right reasons and determine if you and your budget are ready for this important milestone.

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