First-Time Buyers: Should You Buy A House With Inflation On The Rise?

If you’re a first-time homebuyer, the current economy could be putting a damper on your homeownership dreams. With rising home prices and inflation upping the cost of life’s basic expenses, is now really the time to dive into your first mortgage? And if you wait, could you be priced out of the market completely?

The good news is that, according to experts, first-time buyers still enjoy several advantages in the current housing market if they choose to buy.

While taking on a mortgage might not make sense for all buyers right now, here’s how to better understand what’s going on in the housing market, and tips to make the most of your home search—despite the inflationary market.

The Case for Buying a Home Now

Looking at real estate listings can be entertaining. From the comfort of your couch, you can scroll through photos of perfect homes in beautiful neighborhoods and imagine how it’ll feel to unload your groceries into that brand new stainless side-by-side fridge.

But then there’s the downside of looking at those listings. Your favorite homes probably fly off the market in hours, if not days. Homes are selling for over listing price—sometimes hundreds of thousands of dollars more. And the groceries you want to stuff in that fridge cost more each week thanks to inflation.

But Mark Zipperer, managing broker and founder of The Zip Group in Chicago, says there’s often one thing his buyers don’t think about in today’s fast-paced housing market.

“When a first-time buyer tells me that they’re not sure about buying in this market, I always ask, ‘Is your rent going down?’” says Zipperer. “A predictable mortgage payment each month not only helps you hedge against rising prices elsewhere in the economy. Homeowners typically have a net worth that’s 40 times greater than renters. Buying, even if you have to start small, is a path to building wealth.”

But how exactly does spending money to get into your first home help you build wealth?

• Building equity vs. paying rent. Each time you make a mortgage payment, you essentially build a bit of equity in your home, as long as there isn’t a housing crash. Each month you pay rent, you’re only building your landlord’s equity.
• Mortgage interest deduction. Homeownership makes you eligible to deduct your mortgage interest and property taxes on your federal taxes each year, which can reduce your tax liability and free-up money for retirement and emergency savings.
• Appreciation. Your net worth increases when the value of your home increases. In the current market, where housing supply and interest rates are low, home prices continue to rise, adding to your net worth and future resale value.

Yet even when Zipperer shares these benefits with prospective buyers, some remain concerned that they’ll get less house than they want when buying what they can afford.

For those buyers, Zipperer advises that not only are home prices not going down considering February 2022 prices were up 14% from a year ago. He says that buyers also have to think about starting somewhere so they can get to where they want to go.

“Few of us are lucky enough to buy our dream home our first time out,” he says. “So, instead of thinking about getting everything you want, think about finding your sweet spot. You can work with a realtor to strike a balance between home size, price, features and neighborhood.”

Perspective on Rising Interest Rates

Even if you’re ready to find a home that hits that sweet spot Zipperer mentions, you still might be worried about rising interest rates. Will you even be able to afford your first home if rates keep going up?

Take heart. Experts say that though rates will increase, mortgage rates are still at historic lows.

“Fixed mortgage rates have increased recently, but remain under four percent,” says Bob Griffith, general manager of home services at Houwzer. “Lower rates mean lower monthly payments, and fixed rates don’t change over the life of the loan.”

But what do today’s interest rates mean for your monthly payment on your first mortgage? It helps to put today’s rates into perspective by comparing them to decades past.

Here’s how today’s high-three percent for a 30-year fixed mortgage compares based on Freddie Mac data (note: figures have been rounded to the nearest whole number):

1970s: 9.03%

1980s: 12.70%

1990s: 8.12%

2000s: 6.29%

2010s: 4.09%

2020: 3.11%

2021: 2.96%

2022 (YTD): 3.61%

So, looking at a median home price of $300,000 (which is accurate for 2022), here’s how much your 30-year fixed rate mortgage payment would be per month in:

1970s (9.03%): $2,299

1980s (12.70%): $3,085

1990s (8.12%): $2,115

2000s (6.29%): $1,762

2010s (4.09%): $1,375

2020 (3.11%): $1,218

2021 (2.96%): $1,195

2022 (3.61%): $1,297

Note: Figures assume 5% down payment and a mortgage of $285,000 and don’t include taxes, insurance, or PMI where applicable.

Pros and Cons Of Buying in the Current Market

Even if the data above makes a solid case for buying your first home in today’s whirlwind housing market, it’s not the right decision for every buyer. Here are some criteria you can use to help evaluate whether your desire to buy translates into a wise financial and emotional decision:

You might consider buying now if:

• A mortgage payment would be less than rent. Do your homework and work out whether renting vs. buying makes sense in your market. A rent vs. buy calculator can help you crunch the numbers.
• You have a down payment saved up. You’ve done your research and know how much you want to put down, the types of mortgages you can get and have the money already saved up in the bank.
• You’re pre-approved for a mortgage. Pre-approval tells sellers you’re serious about an offer and also gives your parameters on how much house you can buy.
• You’re ready to be patient. It’s possible you’ll need to put in several offers on several homes before you have an accepted offer. Not feeling rushed or pressured will help you save money by not overspending and help you stay sane as you shop.

You might consider waiting to buy if:

• Renting is still a great deal in your market. If renting can save you money over buying, consider saving the difference between your rent and a mortgage each month toward your down payment.
• You’re struggling with a down payment. If you want a bit more in the bank before you put a down payment on your first home, you could be better off building your savings and researching down payment assistance programs.
• You could use some time to improve your finances. Paying down debt, boosting your credit score and building your emergency savings could score you a better interest rate in the future.
• Home buying and homeownership stresses you out. If you’re losing sleep at night about buying in a fast-paced market and then making that mortgage payment each month, putting the brakes on being a homeowner might actually make you feel better.

3 Tips For Buying a Home In the Current Market

For those interested in buying a home in today’s seller’s market, there’s still a considerable amount of planning to be done to make sure you make an informed decision. Here are three tips to help guide you towards the home of your dreams:

1. Do Your Research and Know Your Limits

If you haven’t gone through the mortgage pre-approval process, you could be in for a rude awakening when your dream home is of your price range. You can save yourself that heartache by researching your local market and getting your buying power sorted out before you begin your home search.

“We never want to see people get in over their heads or have them waste time looking at places they can’t afford,” says Leif Boyd, chief production officer, retail sales at AmeriSave Mortgage Corporation.

You can use online real estate search engines to get a clear picture of the market in the area where you want to buy. Then, find a lender and get pre-approved for a mortgage before you start shopping. Pre-approval will take a look at your entire financial picture and give you a borrowing limit you can use to keep your home search within your means. And in a competitive market, your real estate agent may need to submit your pre-approval letter with any offer you make.

2. Consider Emerging Neighborhoods

“Many people want plug-and-play homes with all the bells and whistles, but you’ll often get more if you’re willing to broaden your search,” says Mark Zipperer of The Zip Group.

He often advises clients to look at homes that would require some sweat equity, especially in emerging neighborhoods. “Then you can get into a home at a good price, fix it up and get involved in the neighborhood groups with other homeowners,” he says. “Building neighborhood equity is an overlooked opportunity for buyers to build home equity.”

Neighborhood equity is essentially how desirable a certain neighborhood is for homeowners. Factors such as cleanliness, walkability, curb appeal, schools, access to public transit and overall safety can make or break a buyer’s decision to purchase a home.

3. Be Flexible With Home Type

What renter doesn’t have their heart set on a single-family home with no shared walls? But so does everyone else, which might mean that the type of home you want comes at a premium. Zipperer says that buyers in his Chicago market are getting more bang for their buck if they’re flexible with the type of home they’re willing to buy.

“Our market has seen a good amount of multiple-offer scenarios on single-family homes, so buyers are starting to look at alternatives like condos and townhomes,” he says.

Even though buyers might balk at condo association fees and shared walls, these home types often enjoy lower homeowner’s insurance rates and a built-in community that can make homeownership a daily joy. While condos tend to appreciate at a slower rate than single-family homes, they’re still a great way to start building some equity as a first-time buyer.

And never forget: Your first home doesn’t have to be your last. You can build equity in a condo and then parlay that equity into a single-family home later down the line.