After bottoming at 2.65% in January 2021, thirty-year mortgage rates have more than doubled to over 6% today. With higher rates resulting in larger mortgage payments, it’s no surprise that home prices have started to cool. What is surprising is how much home prices have risen – up 53%, in fact – since the depths of the COVID-19 pandemic. While few could have predicted such a speedy ascent at the start of a complete economic shutdown, many of my younger clients are now wondering if home ownership is still a good idea.
They’re concerned about home affordability given the jump in mortgage rates. They worry they might not benefit from further price appreciation given the recent run-up in home values. In addition to these important financial considerations, clients are questioning the home-purchase decision from a values and lifestyle perspective: do I want to put down roots or is being tied down to one location, in one house, too limiting? Am I ready for such a big and seemingly permanent commitment?
These concerns come up more frequently with my Gen Z, Millennial, and even Gen X clients whose version of the “American Dream” is much different than many of my older clients.
Today, broader work from home options are opening up the country – and the world – to younger, tech savvy generations who are thinking twice about settling down to a single property with a sizeable mortgage payment. Instead, many are relocating to different cities, and even countries, for months at a time. Although others are staying put, they dream about retiring abroad and are hesitant to commit to a permanent U.S. residence during their working years.
Although I’m an older Gen X’er, I can relate to the wanderlust I’m seeing among my younger clients. During my twenties and early thirties buying a home and settling down just weren’t on my radar. I traveled, lived abroad, and remained open to life’s possibilities. I visited several countries, lived in West Africa and France, and remained a lot more open to adventure than my father would have liked, but it’s what I needed to do.
Finally, after returning to the workforce in 2013 and refreshed from my year abroad in 2008 with several years to rebuild my savings, I bought my first home. In hindsight, following my intuition (and not buying prematurely) was the best thing I could have done.
All this to say that buying a home is a significant decision that requires not only adequate financial resources, but alignment with your deepest values, worldview, and dreams for the future. When that happened for me and I was ready to buy, the financials fell into place. Granted, they fell into place with a lot of hard work and saving; however, because I was so clear, saving for a down payment felt easy and energizing. At the same time, I received a sizeable raise at work and a healthy year-end bonus. It seemed that as soon as I found my inner alignment, the Universe conspired to help me.
As a financial advisor, I don’t push my clients to do anything they’re not ready to do – including home ownership. Although, when the time is right, I encourage clients to buy because owning a home is one of the most important pieces of a strong financial plan. That’s because homes have historically appreciated in value, have significant tax benefits, and can provide emotional stability in an otherwise crazy world. Okay, that last benefit isn’t exactly financial, but it’s important and it may just give you the metaphorical “ground” you need to advance your career.
On a national basis, home prices have risen almost 5% since the early 1990’s. That’s above long-term inflation rates and much better than paying rent, which has gone up 8% over the same period. While most of us need to take out a mortgage to buy a home, I consider this “good” debt as it’s a loan on an appreciating asset – as opposed to a car which depreciates the minute you drive it off the lot.
In addition, you can deduct interest on the first $750,000 of your mortgage, as well as write-off up to $10,000 in state and property taxes per year. Should you decide to sell your home as a single person, you’ll avoid taxes on the first $250,000 of gains, or $500,000 if you’re married.
While the benefits of home ownership abound, high home prices today coupled with rising mortgage rates are no doubt lowering affordability. So, is now still a good time to buy? It is if it’s the right time for you! What I mean is that buying a home should be based on your particular situation.
If your intuition is saying “yes” and purchasing a property aligns with your long-term goals, and your finances support it, then now is the right time regardless of the current market environment. That’s because supply and demand dynamics are hard, if not impossible, to predict, and home ownership is ideally a long-term investment with long-term benefits.
In my experience, home ownership can do wonders for your financial life, as well as your personal life. Planting roots can help foster community, lead to life-long friends, and help you raise a healthy family. From a financial perspective, it can allow you to build equity in an appreciating asset, gain access to substantial tax savings, and live “rent-free” one day. While it’s prudent to understand the current real estate environment first, buying a home is ultimately a personal decision. When done at the right time, for the right reasons, buying a home can help you and your finances flourish!
Disclosures:
- EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this article. EPWA has used its best efforts to verify the information presented. However, EPWA cannot guarantee the accuracy or completeness of the information included. All expressions of opinion are exclusively of the authors and subject to change without notice.
- A number of factors that are unique to the desires and financial circumstances of each individual must be taken prior to deciding to buy a home. This article is not a comprehensive assessment of the topic discussed. Many additional considerations that must be made prior to determining whether to purchase a home were not addressed or taken into consideration in the analysis provided.
- The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult with a professional tax and legal advisor who has been provided with all pertinent facts relevant to your situation