We’re about to enter the peak season for real estate shopping: spring. But, before you jump in with both feet, you should know a lot has changed since the last time you may have bought or sold a house. It’s like dating — all of those old rules you used to know have changed over the past few years. It’s important that your approach to home ownership reflects the realities of the current market, and not those of the housing boom. Here are a few of the new real estate rules to help guide you this spring:
1. Then: Don’t buy now, home values have further to fall
Now: It’s a fool’s errand trying to time the bottom. Economists don’t even agree on when the bottom will occur, so the average person probably won’t be able to time it perfectly. While it’s true that home values have further to fall in many areas this year, interest rates will likely rise, offsetting any savings that may come from lower home values.
2. Then: It’s better to buy than to rent
Now: It’s a buyer’s market across most of the U.S. But the time frame for how long you need to live in your home varies greatly across markets. A good rule of thumb is, if you are going to live in your home at least 5-7 years, then buying makes sense in most places. Home values will likely stay flat for several years after we reach bottom at the end of this year, but if you’re planning to live in your home long term, you can ride out the years where appreciation remains flat and come out ahead in the end.
3. Then: You should spend 1/3 of your monthly gross income on your mortgage
Now: During the bubble, many people listened to the advice that they should “stretch” to buy a house. Now, many want to avoid being “house poor.” The standard rule of thumb was to spend no more than 30 percent of your pretax monthly income on your mortgage. Now, many financial experts recommend spending no more than 25 percent. But really, only you can truly figure out what you can, or want to afford based on your various goals (college and retirement savings), lifestyle (kids, travel, special interests) income and debts. So take the time to do your own math.
4. Then: When it comes to re-sale value think: Location, Location, Location
Now: The suburbs are often thought of as the more desirable place to live, compared to the city (better schools, lower crime). So one would think homes in the suburbs would have weathered the housing downturn better than homes in the city. However, according to analysis from Zillow, in most major metros (with some exceptions) home values closer to city center held up better than those in the ‘burbs.
5. Then: Only refinance if rates are dropping
Now: Everyone jumped at the chance to refinance when rates fell below 4 percent. Now that rates are higher it may seem like the opportunity to save money on your mortgage is over. Not necessarily. While rates may have inched higher, they are still at overall historic lows and the general consensus is rates will continue to trend up. So, if you haven’t refinanced yet, even though rates are a bit higher, start shopping for mortgage quotes today. You haven’t missed the boat yet.