With all the drama in the housing market and mortgage rates since the pandemic, it’s become harder than ever for first time home buyers to decide when to buy a house.

We got sick of the endless cycle of broken budgets and anxiety around saving,  if you've experienced this and are looking for a community of like minded people who’re ready to try something new, hit subscribe above and join us on our journey!

Assuming you have good credit and your down payment ready, here are 5 things to consider to help you decide when you should buy a house.

Should I wait for mortgage rates to go down?

The Federal Reserve has said they’ll start cutting interest rates when inflation reaches 2%, which will lower mortgage rates. However, experts don’t agree on when that’ll happen and how much cuts will be. Some experts believe it’ll start in 2024, but others believe it could take longer and that cuts will be modest.

When we look at historical data, we see the 30 year fixed mortgage rate stayed above 5% for 38 years between 1971-2009. It could be a long time before they drop to the lows we’ve seen in the recent past. Keep in mind that once mortgage rates go down, there will be more competition for home buying.

30-Year Fixed Mortgage

This means it’s going to be very hard for you to time it for optimal rate levels. If you’ve found a house you love that’s within your budget, you’re better off buying it now and refinancing your mortgage later when rates are lower.

Should I wait for a recession?

The impact of a recession on the housing market depends on a lot of factors, but the key is that it doesn’t always cause home prices to fall and the impact varies a lot based on location. Let’s look at what happened in different cities during 2 past recessions.

The Great Recession in December 2007-June 2009 was caused by a crash in the housing market, but home prices in Dallas were unchanged while they plummeted -45% in Las Vegas. According to research by Texas A&M University, this was because Texas had more conservative lending standards and more balanced supply of homes.

Great Recession

The Dot-com Recession in March 2001-November 2001 was caused by a crash in technology stocks, and home prices fell -5% in technology industry dominant San Francisco. However, they rose 7% in financial services industry dominant New York during the same period.

Dot-com Recession

Due to the persistent housing shortage across the country, most experts don’t expect home prices to drop significantly if a recession does occur in the near future. This means it’s going to be very hard for you to time it for optimal price levels since a drop in home prices due to a recession is not guaranteed.

On the flip side, you’ll also need to consider how likely you are to get laid off in a recession and how long it’ll take to find a new job. If you wait until a recession to buy a house, it’ll be hard to get a mortgage if you get laid off. If you already own a house by then, can you cover mortgage payments while you’re in between jobs?

Is now a good time to buy a house in my life?

If you bought a house today, you’d need to stay for at least 5 years for it to be worth it. You need to live in it for at least 2 years to qualify for capital gains tax exemptions and at least 5 years to make up for interest and closing costs. For example, if you borrow $500,000 on a 30 year fixed mortgage at 7%, you’d have 5.75% equity after 5 years and 14% equity after 10 years.

Some questions you should ask yourself are:

— Does my line of work allow me to stay here for 5 years or more?

— Could I find a new job if needed without having to move?

— Do I want to live in this area for 5 years or more?

If the answer is no to any of the above questions, then you shouldn’t buy a house right now.

Am I ready for the costs of owning a home?

The cost of property taxes and maintenance every year often surprises new homeowners. Make sure you’ve factored these costs into the calculation of what you can afford.

The average effective property tax rate in the US is 1.04%, but can range from 0.32% to 2.23% based on data from the Tax Foundation. Because property taxes vary by each county and city, look up what the property tax rate is in your area to get an idea of how much it will be.

Maintenance costs include smaller things like general upkeep and repairs to larger projects that need to be done every 10-20 years like replacing the roof or siding. Experts recommend you set aside at least 1% of the purchase price per year for maintenance. 

Other costs like utilities, insurance, and HOA fees can add up to 1% or more of your purchase price every year. In states prone to natural disasters like wildfires, tornadoes, and hurricanes, new homeowners insurance policies can be even more expensive. HOA fees used to only apply to condos, but a lot of new development neighborhoods now have HOA fees for single family homes.

These costs can add up to 3% of your purchase price every year. Besides making sure you can afford these expenses on top of your mortgage payments, you should think about whether it will need to come from your travel or fun budget. If you’re having to spend nearly all your discretionary income on your house, you’ll either need to reconsider the price point you can afford or hold off on buying a house.

Am I taking too long?

Are you feeling pressure to buy a house because your parents already bought one when they were your age? It’s not because you’re lazy or buy too many avocado toasts. It now takes a much bigger share of your income than it did for your parents’ generation to buy a house. Let’s take a look at what things were like for first time home buyers in 1995 compared to now.

Annual Income vs Down Payment

In 1995, a 20% down payment on a median home cost $27,720, which was 81% of median annual income of $34,076. In 2022, the down payment ballooned to $95,900, which was 129% of median annual income of $74,580. You need to save almost 50% more of your annual income than your parents for a down payment! That’s why it's taken you longer than your parents to save for a house. The rise in income has not kept up with the rise in home prices.

Final thoughts

As we’ve highlighted in this article, it’s going to be very difficult (if not impossible) for you to time mortgage rates and home prices right. The reality is that unlike other investments, you wouldn’t sell your house just because it’s appreciated in value. If you did, you probably wouldn’t go back to renting and would need to buy another house that’s also more expensive.

It’s better to think of buying a house as a long-term investment in your life. You should buy a house when it’s the right time in your life and you’re financially ready.

Seedling is the first game designed to change your spending and save meaningfully in real life. Subscribe to stay up-to-date with personal finance posts, play early versions, and give feedback throughout our development journey.