First-Time Buyer Series: Should I Buy in a Seller's Market?

I really enjoy working with first-time buyers. For me, that is the biggest thrill in the world because I get the opportunity to help someone take a major first step to setting themselves up for financial success in the future. It also meant so much to me to be able to buy my first home that I think everyone deserves an opportunity to experience that same level of joy.

Photo Credit @ Kobu Agency


Many first-time buyers want to know if they should take the leap to buy their first home in a seller's market or if they should wait it out until it is a buyer's market again. While there is a lot of talk nowadays about how inflated the housing market is and why people shouldn't buy until the "bubble bursts," I tend to have a different point of view. Yes, there was a housing crash during the last recession in 2008, and, yes, home prices are way up again like before. And while I can completely understand many people's hesitation to take that next step after what we all witnessed in the subprime mortgage crisis a decade ago, this particular seller's market is very different.


Many housing markets are hot right now, especially "second-tiered" cities and rural areas, but if you are a first-time buyer that doesn't mean the only option is to wait it out and that prices will eventually come back down to where they were. There is no guarantee that will happen. It could, but it also very well could not.


There are many different factors that have contributed to home price increases in the last decade. And while real estate comes in cycles, it does not mean when we go into a bear market prices drop completely to where they were before. That is a major misconception. Other factors - such as inflation and population increase - are constantly playing a role in increasing the value of homes steadily over time despite whether it's a seller's or buyer's market.


Here are some more reasons why I think sometimes it pays to buy in a seller's market:


If you budget properly, keep a solid cash reserve and don't overspend, you will always be able to pay, even if the housing market prices temporarily dip in your area.


Photo Credit @ Sandy Millar


If you buy a property within your budget (and I will blog about creating an appropriate budget later in this series), there is nothing to worry about, period. The reason for this is that because you budgeted well, were realistic about what you could actually afford and you have an emergency fund on the side. You will be able to make the payments whether or not a market goes up or down. The key is to not over-purchase no matter what. If you can't afford granite counter tops yet, then you don't buy the house with them. It's that simple.


Housing is like stocks, you don't lose any money unless you sell them during a market dip. The only way to avoid that is to make sure you can afford the home you purchase from the beginning regardless of what happens in the market. And if you happen to purchase at the peak, when the market dips (which it always does), you just hold on to the property. You could either live there longer than you intended, or even if you don't want to live there, you can still hold on to the property. Which leads me to my next point...


You can always rent out your home later if you decide you want to relocate, upgrade your housing or just make a change in your lifestyle.


Photo Credit @ Scott Webb


This sounds way harder to do than it actually is. I often hear from people who are worried that if they buy now and decide they want to move in a couple years that the market may drop, therefore it simply doesn't make sense for them to buy now. This is absurd! If you have the means, found a good deal and can truly afford it, I always personally lean towards buying over renting. The sooner you get your money working for you (building equity) the longer it has to grow in value for your future.


Think about it, even if you close on a house today, the market crashes tomorrow and you fall into hard times there are creative steps you can take to hold on to your property. Instead of selling you can rent rooms out (some people call it house hacking). This could be either through having a full-time roommate or AirBnb-ing the place if you have a property that is in a good location. You can even move out into a cheaper place and still own your house and rent it out entirely. There are plenty of options!


Say you need to relocate to another city for any reason (got a new job, moving back in with the family to save money, etc.), even if you move away you can still rent out your place from afar. That's why property managers exist! They take care of it and ensure your property is well-maintained and rented out. The key is to not wait until you are in such dire financial straits before you make the tough call to switch up your property plan. But again, you most likely won't need to stress about any of this if you make sure you are in a fiscally sound place before you purchase to begin with and don't purchase more house than you can actually afford.


The only time I would recommend waiting to buy is if the chunk of money you have set aside is for another major life event that you will need access to in 1-2 years. If that is the case, then you shouldn't be tying that money up in a home instead. You've earmarked that money for something important and although you could probably access it through a HELOC if you really needed to, that money should remain liquid if possible to ensure you have access to it for the purpose that you need it for.


Property values tend to go up over time. There are dips here and there, but appreciation is a great way to build wealth without doing anything. If you buy and hold - and find solutions to keep on holding a property, even when you no longer are the resident of it - then buying is usually one of the easiest and safest ways to build wealth.


You need a place to live. You might as well pay yourself first, rather than a landlord if you are in a financial place where you can safely afford a home.


Housing security reduces stress in your daily life.


Photo Credit @ Kelly Sikkema


While many people rent, and there is certainly an argument to be made for renting if you can't afford to buy yet, owning your own home ensures you can't be displaced no matter what, as long as you pay your mortgage and taxes. This give you peace of mind. Don't underestimate the security of that. We have all read or about or experienced gentrification firsthand. When that happens, renters always get displaced. Unfortunately that will continue to happen as long as there are investors who own the properties and are looking for returns on their investments. If you don't own the place you live in, all sorts of things could happen that put your residence in jeopardy. Not to scare you, but just to name a few:

  • The owner of your building could sell it and when your leases come up, the new owner could raise them exorbitantly.

  • You could be displaced by a fire.

  • The city could condemn your building if it isn't being maintained properly by the property manager.

  • Your property manager could intentionally not maintain your building in hopes of getting you out so he can get new tenants in who will pay more.

  • New neighbors could move in that are a noise or safety concern.

  • Eminent domain.

In a world that is uncertain, unless you own it, anything can happen, period. Buying and owning your own property provides an added level of piece of mind and reassurance.


Homeowners have tax advantages that renters do not.


While I don't want to go into too many details here, because the tax advantages do vary state to state and jurisdiction to jurisdiction. Consult a CPA for specific details, but some advantages can include: writing off mortgage loan interest or when you do eventually go to sell, and being able to save money on taxes related to capital gains up to a certain dollar amount ($250k if you are single and 500k) if you are married.

Photo Credit @ Kelly Sikkima


They don't make land anymore.


Property market values go up over time because housing is a limited commodity. Even if prices are up now due to a seller market, and they dip soon, they will eventually go back up. Land is limited. And as populations continue to grow, it will continue to become scarcer and scarcer, thus ultimately driving up the price. Additionally, the better the location, the more quickly the land will appreciate.


Photo Credit @ Chuttersnap


Inflation.


A dollar is worth more now than it will be in the future. Which means home prices will naturally increase in terms of expense over time. Even if the dollar continues to lose purchasing power, which it has throughout our lifetime, if you have a fixed-rate mortgage, the actual mortgage payment will stay exactly the same, which leads to my final point...


We are experiencing the lowest interest rates of our lifetime.


They are unlikely to be this low again, especially for this long, which is why home prices are rising. When interest rates are low, home prices tend to rise because more people are taking out loans to buy homes, thus causing the inventory to drop. There is usually an inverse relationship between rates and home prices. When it gets too high again, the scale tips back. This is why there are so many buyers right now. Credit is fairly easy to obtain - and at great rates. When rates rise, it will shift back towards more of a buyer's market, typically.


The most ideal situation is finding a deal in a buyer's market, purchasing and then refinancing in a seller's market when rates are low. With that being said, however, it may not make financial sense to wait until that time comes because we never really know when that will be the case. Those who say they can time the market... can't. They recognize patterns and cycles, but even knowing that, nothing is certain. If 2020 showed us nothing else, it's that you simply cannot time a market, any market. While the stock market crashed in March, and everyone assumed home sales were soon to follow, instead they soared to new heights. Additionally, this winter, typically a time when sale slow down in the Northeast, we have continued to see buyers out there purchasing. You can never really plan or predict when the perfect time to buy is.


Which leads me to say, you can find a good deal for you in any market. It may take time, patience and creativity. You may have to adjust your "must-have list." Or hopefully you have a really amazing real estate agent who can sniff out the deals for you (wink, wink), but it is possible to find that perfect home for you in any market. It comes down to ensuring you have done the work to stabilize yourself financially before you begin your home search, and it requires that you have and stick to your budget. I'm looking forward to helping you establish what a reasonable and realistic budget should be in our upcoming posts in this series.


Hope you found this helpful! Feel free to comment with one takeaway that resonated the most with you!


Forever grateful,

Mack


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