For the vast majority of Americans, a home stands as the largest purchase you will ever make. That’s scary in a normal economy, but in one where the housing market has been on an upward tear (although it appears to be slowing in some markets), and mortgage rates have been higher than they have been in a very long time, it’s downright terrifying.
Buying a home comes with risk. You don’t know what problems your buying that won’t show up during an inspection and everyone worries that they’ll end up overpaying and end up with an asset that’s worth less than the purchase price.
The good news is that American history has generally shown that given time, housing prices go steadily up. Housing, of course, varies by market, so location matters as do population trends and whether more, the same, or fewer people will want to live where you buy a home.
Brian Rugg, who serves as Chief Credit Officer for loanDepot, a mortgage lender answered TheStreet’s questions about whether it makes sense to rent or buy given the current market.
Daniel Kline: How do you decide whether renting or buying is the right financial decision?
Brian Rugg: Everyone should consider that the day you purchase a home, you start building equity. And when you pay rent, you are paying someone else’s mortgage.
Purchasing a home is arguably one of the single largest drivers of generational wealth building for most Americans. If you’re in a position to purchase a home, and it aligns with your goals in the short-run, it may make sense to purchase and start building equity now.
Purchasing isn’t necessarily the best option for everyone, though and there may be situations in which renting is more prudent. If you are living in an area but do not plan to settle there, or if you intend to potentially relocate for work or family, renting may be the better option for the short-run.
Owning a home also comes with added maintenance and expenses, so you always need to plan for unexpected repairs, which can be costly.
Kline: Is it fair to say that over time housing prices generally go up?
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Rugg: Historically speaking home values typically rise over time. That being said, recessions and other potential unforeseen circumstances (like natural disasters) could drop home values in certain markets depending upon the impact to supply and demand. If you are thinking about buying a home, keep in mind that housing is a longer-term asset and gains in equity are typically realized over time.
Kline: Can you put today’s mortgage rates into some historical perspective?
Rugg: While rates are higher today than they have been in recent history, for the most part they’re still very low. I still remember when my wife and I purchased our first house in March 2000 and the interest rate was 8.5%, which at that time was considered a decent rate.
One mistake I have seen people make is getting too caught up in one factor, like interest rates – and making a decision to purchase solely based on that. If you wait too long for the ideal market conditions, you may miss out on an opportunity to start building equity. In the end, you should weigh multiple factors when determining if now is the right time to buy for your situation.
Our first home wasn’t even a 1-bedroom. It had a loft we used as a bedroom and 1-bath. But because we purchased when we did, we were able to sell that home a few years later, after our son was born, and upgrade to a home that met the needs of our growing family. The equity we built up helped accomplish that.
Kline: Do you see younger buyers being priced out of the market?
Rugg: Young buyers aren’t alone, buyers of all types are being priced out of the market right now. There’s an affordability issue across the country with a lack of inventory of affordable homes due to a number of factors. Starter homes are in such short supply, or are increasingly becoming out of reach of first-time homebuyers as home prices and rates have risen.
Kline: What’s your top piece of advice when it comes to buying a home?
Rugg: Be sure to look at multiple factors when looking to buy a home and specifically ask yourself does it make sense for my situation in the short-run and beyond? If you can afford to buy and start building equity, and it makes sense for your situation – I would seriously ask yourself whether the benefit of waiting for ideal conditions is truly worth it. In the end, remember that the longer you’re paying rent, the longer you’re building wealth…for someone else.