It starts with a vision: the kitchen with the gorgeous granite countertops, perfect for whipping up your favorite meals. The backyard where your family will run giggling through the sprinklers come summertime and build snowmen in the winter. The loft area with the skylights where you’ll rock your children to sleep or finally finish your novel.
Maybe you’ve gone beyond those first fantasies to do some harder-nosed sleuthing. You know how to quickly scan for telltale signs of water damage during a showing and can estimate how much it costs to replace a roof. You might even have a separate savings account just for the “unexpected” homeownership expenses you know by now to expect.
But there’s another critical factor to consider – one entirely outside your control.
Everyone’s heard how increasingly competitive it’s been lately, whether or not they’re in it to win it. (And by “it,” we mean a reasonable-ish bid on their dream home.)
So for those of us who are in the housing market – is it the right time to buy? Or should we put on the brakes?
How is the housing market today?
The housing market has been making headlines for years now. As the Federal Reserve reports, and sparked in part by the COVID-19 pandemic, the market tightened, prices soared, and interest rates reached a historic low by mid-way through 2021. That translated to a lot of people vying for an increasingly small pool of available housing, all at once (i.e., high demand for low inventory). Chances are you’ve heard anecdotes of house hunters searching for months on end to no avail – or, in some American cities, to find the perfect place… and be outbid by $100,000 over the asking price.
Now we’re mid-way through the year, and the market is still making news, but for different reasons. According to Forbes, interest rates are finally on the rise again, which has many experts hopeful that inventory will perk back up at long last. As one Atlantic article claims, it’s arguable that the U.S. housing market has “peaked” – but hopefully not in a 2008-housing-bubble way. In that author’s opinion, it’s more likely that the boiling-hot market will slow to a simmer, which could make buying a house more possible (though, thanks to those higher interest rates, more expensive).
Case in point: per Freddie Mac, the average fixed interest rate on a 30-year mortgage was 5.23% in May 2022 – up from 2.96% last May (and 3.23% in May 2020).
And per the St. Louis Fed, the average sale price of a home in the U.S. is an eye-widening $507,800 for the first quarter of 2022 – though you can see the steep upward climb of the last two years finally starting to flatten on their chart.
Is the housing market slowing down?
Short answer: yes. With inflation on the rise (per the Bureau of Labor Statistics) and spiking interest rates, the super-hot housing market is finally cooling down a bit – which is both good news and bad news for house hunters.
On the positive side, a cooling housing market means an increase in inventory. (Translation: You might actually be able to find a house before the competition snaps it up.) But on the not-so-sunny side, the causes of the slow-down are synonymous with higher prices, which could make buying a house less affordable.
So what does that mean for homeownership hopefuls? There are both pros and cons to buying in this market.
- Cons: Current buyers have missed out on last year’s lowest interest rates and rapid home value growth. Along with paying more for a house today than you might have six months ago, you probably won’t see the same acute appreciation as your neighbors who bought pre-2020.
- Pros: It can save buyers a lot of heartache not to compete with a dozen other bidders for a single property. An increase in inventory means more options to choose from – and a less-frantic home search could translate to more level-headed decision-making.
Still, some experts recommend waiting a little longer to see what this cooling-down period will look like in the long run. Conor Sen, a Bloomberg Opinion columnist, wrote that “buying conditions are likely to be more favorable in a month or two than they are today” at the end of May 2022. Inventory is still rising, and interest rates are still figuring themselves out.
In other words, since you don’t have to rush like you did in the white-hot market a few months ago, you may as well take your time.
When is the best time to buy a house?
The seasonal timing of your home purchase can affect your bottom line. While your financial standing is probably the most important piece of the home-buying equation, shopping at the right time could help you save a substantial amount of money and hassle.
The basic trend is pretty simple: Hotter seasons = hotter housing markets, while colder seasons = colder housing markets. (Hot housing markets have lots of competition among buyers, leading to higher prices and bidding wars; colder markets mean less competition and lower prices.)
Which is to say, if you’re looking for a great price on your home, it might be worth waiting until winter comes around. Given the inconvenience of cold weather and the school year being in full swing, fewer shoppers are likely to be on the market. That means sellers and real estate agents may be happier to offer better deals and incentives to buyers.
Spring and summer can be competitive and expensive for the opposite reasons. Families may have more free time to shop (and lots of motivation to get their move out of the way before school starts again), and sunny weather makes it easy to get out for showings. Plus, most homes look better when their yards are in full bloom.
So if you have the flexibility to do so, waiting for the end of the year – think August onward – could put the odds in your favor to find the best deal on your dream home. But you may also have to deal with lower inventory, which makes it harder to find a home that fits the “dream” category. (That’s not to mention the logistical difficulties of traveling and shopping in winter weather.)
Can I afford a house?
Here’s the real question you should ask yourself when you wonder if it’s a good time to buy a house or not. No matter how well you time the market, buying a house is going to be something of a stretch (or even an impossibility) if you’re not in good financial standing.
Many people focus on how much money they have to save up ahead of time for the home purchase – having a down payment and enough to cover additional expenses like closing costs and repairs. But there’s more to your decision than whether you’ve got 3.5% of the total home price saved up. The majority of your home’s purchase price will likely be on your shoulders for the next several decades, spread out in the form of your monthly mortgage payment.
That’s why lenders are concerned not just with how much money you’ve got saved up right now but how likely you are to be able to continue making regular payments for years to come. A few important financial data points for qualifying for a mortgage include:
- Your credit score. Many private lenders require a credit score of around 670 to qualify you for a mortgage, though it’s possible to qualify for certain types of mortgages with a low credit score. Still, the higher your credit score, the lower your interest and the more favorable your terms are likely to be. Getting your credit score as high as possible (and keeping it there) is a good first step for potential homebuyers.
- Your debt-to-income ratio (DTI). Lenders want to know that you have the money to make your mortgage payment in full each month. That’s why they’re interested in how much debt you already have – and how much income you’re generating to take care of those payments. Your debt-to-income ratio is an expression of the total amount of your monthly income you have to spend on existing debt, including housing, and for most lenders, your DTI needs to be less than or equal to 43%.
- Your income and employment history. Again, it’s all about the long game for mortgage lenders, so they need to verify your current income and your ability to continue earning it.
- Your down payment. Lenders need to know you’ve got enough of a down payment saved to meet the terms of the loan. They may also require the money to be “seasoned,” which means it’s been in your account for a certain minimum amount of time (60-90 days). Figuring how much you need to save to buy a house is a key first step in the homebuying journey.
Should I wait to buy a house?
Not sure if you’re ready for the responsibility of homeownership yet? Only you can determine whether or not it’s the right time to make this major money decision, but, generally speaking, you should have the following items on lock before you consider buying a house:
- Have a steady source of income. Whether a salaried position or a lucrative freelance gig, having money in the bank to pay your mortgage every month is critical – not just to get you qualified, but to keep you from foreclosure.
- Get your credit score in shape. Even if you can qualify for a mortgage with a lower credit score, you stand to save a lot of money on interest by working on your score before you apply.
- Keep your debt under control. Not only will dialing down debt positively impact your credit score, it’ll also make it easier to make ends meet every month when those mortgage payments start coming due.
- Know what you’re looking for. It’s not all about money! If you’re not sure you’re ready to stay in one place for at least five years or so, or if you’re not sure you want the responsibility of keeping up with the maintenance a house requires, it may make more sense for you to continue renting. Even a smart investment is only worthwhile if it fits your lifestyle and your needs.
Is the housing market going to crash?
No one can predict the future, but experts agree that this moment in history is different from the years before the 2008 crash. Plus, regulators put plenty of additional mortgage restrictions and guidelines in place to avoid that scenario repeating itself. (Check out the Dodd-Frank Act, if you’re curious.) Today’s market slowdown is driven by increasing interest rates, an intentional mechanism the Fed uses to combat inflation.
How are mortgage rates now?
Mortgage rates are higher now than they were a year ago and may continue to climb over the next few months (though some experts think we’re nearing a plateau). As mentioned above, the average fixed interest rate on a 30-year mortgage was 5.23% in May 2022, according to Freddie Mac – up from 2.96% one year prior.
The best time to buy a house is when you’re ready
It’s true that timing the housing market can help buyers save money, and interest rates are indeed higher now than they have been over the past few years. But the most meaningful way to determine the right time to buy a house is to wait until your financial ducks are in order – and you’re ready to commit to a significant purchase.
Fortunately, now that the market is cooling off, there’s no need to sign anything in a mad dash. You can wait until you find the house that truly makes your heart sing – and who knows? In the absence of a giant bidding war, you might just get it.
Ready to take the plunge? Learn how much you should save to cover your down payment and closing costs.