Originally published in North Bay Business Journal
Interest rates continue to be on everyone’s minds these days, and with good reason: The Fed has raised rates a total of six times this year in an effort to combat inflation. With mortgage rates hovering around 20-year highs and the housing market softening, what is the most prudent way to think about buying or selling a home?
While scary headlines and hyperbolic 24-hour news segments may deter you from making any real estate moves for the foreseeable future, don’t let fear drive your actions! Here are six suggestions for making logical, thoughtful financial decisions.
Get to know your assets.
Now is the time to fully understand your financial situation, well before you put in an offer on a property. Once you know that, learn how your expenses will change following the purchase of a home, given possibly higher property taxes, limitations on the mortgage interest deduction, maintenance, and home improvements.
Get to know the home you’re buying (or eyeing).
Take the time to fully understand the home itself. If you’ve had an offer accepted, give yourself plenty of time for inspections and ensure that all necessary repairs are made. If you are getting ready to put in an offer, talk to your potential future neighbors, two or three doors down, to understand the area’s traffic, barking dogs, etc. Don’t assume anything about the location of your property lines, whether permits were pulled on a remodel, whether a home down the street is a rental or not, or if there is a registered sex offender next door. Verify before you buy.
Get comfortable with the worst-case scenario.
When selling your home, do a thought exercise about what would happen in a worst-case scenario: What will you do if your home sits unsold for several months? What if it sells for less than you expect? You should have a plan for how to handle these situations – hope for the best, prepare for the worst.
Buy for the right reasons.
So many of us believe that real estate is always a good investment, but that’s just not the case. There are many situations when real estate is a terrible investment, so don’t rush into anything blindly. Very generally, for real estate to be a good investment, you need to hold on to the property for a few years at least, probably five years minimum, so you’re making a decision that you will want to stick with for several years. Think long-term. Buying a home is, for most people, the biggest financial decision they will make, so take the time to do it right and reduce the chance of buyer’s remorse.
Be patient but be ready.
Real estate prices are still at relatively elevated levels and it may take some time to decline further and find bottom. That said, highly desirable homes are still selling quickly. A great property in a great location may still get multiple offers, so it’s crucial to know what you want and make a move to get it when you find it. On the flip side, if you find a home that doesn’t check every one of your boxes, take your time with it to really make sure this is a decision you can live with for several years.
Adjust your expectations.
The higher interest rates we’re seeing now are closer to more historic norms, so I wouldn’t expect 30-year mortgages to drop below 3% again. If you can afford your new dream house, don’t let the current rates dissuade you from buying now; you can always refinance later if rates drop. And if rates continue to rise, at least you’ll know that you got the best rate you could. If you currently own a home with a mortgage, it is likely in the 3% range. Such a low rate is difficult to give up if you sell your home, giving all the more reason to carefully consider the motivations and financial repercussions of a move.
For buyers: If you are not quite ready to buy, the most important thing to do is to talk to your financial planner and a mortgage lender. Give them an idea of your financial situation and what kind of home you want, and they will walk you through getting pre-approved and educate you regarding what kind of loan you can get. Educate yourself on how the underwriting process works. Take time to explore neighborhoods and get specific about what you want. Go to open houses, put feelers out, talk to lots of people, and find an experienced and engaged real estate agent you trust.
For sellers: If you’re not quite ready to sell, carefully choose some home improvements, remove clutter and do a deep clean inside and out. Paint the walls if it’s been a while, perhaps remove the carpeting and re-do the floors – but don’t get too crazy! Little things make a big difference, like replacing old door handles and light fixtures. A full kitchen or bathroom remodel likely will not pay for itself when you list the home.
Despite what you’re hearing on the news, it’s not necessarily the worst time to buy or sell. Every situation is unique, and with a bit of education and reflection, you can make smart decisions even during unsettling times.
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Jason is a Certified Financial Planner, Wealth Advisor, and Managing Partner at Willow Creek Wealth Management. Willow Creek is a fee-only financial planning firm in Sonoma County, CA serving clients throughout the San Francisco Bay Area and across the country. Willow Creek offers comprehensive financial planning encompassing investment management, retirement planning, tax planning, charitable giving, sustainable investing, and more.