Wondering when is a good time to buy a house in Colorado? Or asking yourself if you could save money by waiting to buy a home? Get answers to these questions and more in this blog post.
We are often asked when is a good time to buy a house in Colorado. With rapid home price appreciation throughout the state, many are wondering if we have reached the top of the housing market in 2021.
In this post we will cover the following FAQs:
- Is the housing market currently in a bubble?
- Will home prices keep rising in 2022?
- Can I save money by waiting to buy a house?
- What does it mean to be “financially ready” to buy a house?
Will home prices keep rising in 2022?
With property priced around $340 per square foot in Denver and around $240 per square foot on average throughout the state, this still dwarfs the median price per square foot in other major metro areas such as Seattle ($520 per square foot), San Jose ($610 per square foot), San Francisco ($1,100 per square foot), and Manhattan ($1,400 per square foot).
Colorado’s population has increased by about 800,000 residents to 5.8 million since 2010 – a nearly 15% increase. During the pandemic, Colorado ranked fourth on the list of most moved to states (Florida, Texas and California were the three that were higher on the list). This influx of new residents continues to cause shortages in the housing market on both the purchase and rental side.
Inventory levels have been at all-time lows for quite some time now and this is unlikely to change all that much in 2022. Homebuilders are still not building enough homes to keep up with demand.
Due to shortages and other factors, the cost of land, labor and the materials that make up the price of a home are steadily increasing.The millennial generation is currently in their peak household formation years resulting in massive demand for housing. Many seniors are also choosing to ‘age in place’ rather than sell and move into smaller homes or other forms of senior housing. Add all that up, and the inventory problem doesn’t look like it’s going to be solved for quite a few years.
Can I save money by waiting to buy a house?
While waiting out a hot market like the one we have been in since 2020 can seem like a reasonable thing to do, it might actually cost you more money in the long run. There are a number of factors that go into this equation.
Interest rates are a major piece. Currently, the Federal Reserve is artificially keeping rates low by buying Mortgage-Backed Securities. At some point, the Federal Reserve will have to cut back on the amounts they’re purchasing and interest rates could climb quite a bit resulting in a higher mortgage payment. This can also translate into increased rents.
While the median home price over the last year has gone up by almost 17%, rents are not too far behind at a 14% increase. Now, if you buy a home and do a fixed 30-year mortgage, the monthly Principal & Interest portion of the mortgage will stay the same whereas rents will keep going up in perpetuity. Of course, property taxes & insurance can increase slightly year to year but this amount is likely to be far less than monthly rent increases.
The other thing to keep in mind is that when you have a mortgage, the portion that goes toward principal is what we call a forced savings plan. This is part of the equity that you’re building every month via your regular payments. Combine that with the likely increase in home value and you will have more built-in wealth than if you’re renting and paying the landlord’s mortgage versus your own.
Sample illustration of renting a house versus owning a house:
What does it mean to be “financially ready” to buy a house?
The best time to buy a home is when you’re financially ready to buy. This is an individualized decision based on a set of three key factors:
Down Payment Funds Available
What do homes in your target market cost? Do you have 3% – 20% of this saved for a down payment? Although there are down payment assistance programs available where you can technically put ‘No Money Down’, you will still have closing costs and you will almost always get a better deal if you can come up with 3-5% down. (If you are a military veteran, you may be eligible for 100% financing)
Keep in mind that if you are planning to put less than 20% down, you may also need to pay mortgage insurance, which is a type of insurance that exists on conventional and FHA loans. Mortgage insurance can later be canceled once you’ve reached a certain equity position on your home. FHA mortgage insurance is typically for the life of the loan but there are certain scenarios where you can get rid of it without refinancing.
Comfort With Your Current Budget
If you’re renting, you’re already used to paying a set amount for housing each month. If you’re comfortable with this rent payment, this could be your target mortgage payment on a future home. Note that the mortgage payment includes more than just the purchase price of the home.
Your mortgage payment consists primarily of four different piece (PITI)s:
The house you buy may also be in a Homeowner’s Association in which case you would have HOA dues that are paid to the association. These fees can be assessed monthly or at other intervals throughout the year.
As mentioned above, you may also have monthly mortgage insurance. Certain areas of the country also have some other types of taxes and if you’re in a hurricane prone area, you may have a separate wind policy for your homeowner’s insurance.
One often overlooked cost of owning a home is maintenance. It is typically recommended to budget for about 1% of the home’s value in yearly maintenance costs. This is just a ballpark number as some years you’ll have no expenses and other years you may experience more costs than others but it always helps to have some cash on hand for these emergencies.
Good Credit Score
A good credit score is crucial to qualifying for a mortgage. A higher score will save you money on the interest rate which can add up to tens of thousands of dollars in the long run. We’ve written a detailed post about this.
Overall, if you can afford the payment on a residence that meets your wants or needs, a.k.a. “financially ready” is the best time to buy. In my initial consultations with clients, we will cover monthly budget, credit scores and what they mean to the type of loan you can qualify for and the interest rate that results from that score and whether we need to do any credit work, as well as long term goals (how long you plan to be working for, what retirement looks like, one income vs. two, etc.).
So when should I buy a house in Colorado?
While there can be certain times of the year where there may be more inventory available or the chances are higher that you’ll be competing against fewer buyers, timing one of the largest asset purchases of your life perfectly is not always the most ideal route to take. Interest rates can change, your lease may be coming up, your kids might be starting school, you may be starting a new job or any number of factors can affect when the right time for YOU to buy is going to be.
Buying a house is a decision that can only be made when you have all the proper information at your disposal and have considered YOUR personal financial readiness to buy a home.
