Ask Chuck: Should I buy a house in a hot real estate market?

By Chuck Bentley, CP Guest Contributor Friday, July 16, 2021

Dear Chuck,

Housing prices are astronomical here but so is rent. It seems I am throwing money down the drain every month. Would it be a mistake to buy so I could at least build some equity? 

Buy Now or Wait? 

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Dear Buy Now or Wait, 

This year’s real estate market has been crazy! Housing shortages in parts of the country and lumber scarcity pushed prices beyond historic records. Bidding wars are common with all-cash bids and higher down payments, even for houses that have not been seen in person. My son sold his home in Nashville to someone who never stepped foot in the house — only to then receive a backup offer for 10% greater than he was in contract for! 

Homebuyer regrets

Bankrate surveyed 1,400 homeowners, revealing that 64% of millennials (ages 25-40) regretted buying their homes. The main reasons? Cost of maintenance and overpaying for the house. Many first-time home buyers joined the buying frenzy and paid beyond market value in an effort to avoid missing out. Those who lost several offers compromised their budgets in order to win, move, and get settled. Millennials were more likely to buy fixer-uppers than new homes and borrow to make improvements. Reality hit after closing and pricing out the renovations for their instagram worthy dream home.

The pandemic is partly to blame. Travel restrictions and social distancing guidelines made visiting houses prior to purchasing difficult. While more millennial homebuyers regretted their purchases, 33% of baby boomers (ages 57-75) did as well. Lack of experience and FOMO (fear of missing out) may have affected the younger buyers more than the older ones. 

Key findings among surveyed buyers:

• Unexpected cost of maintenance. 
• Disappointment in layout and location of home.
• Interest rate regret—important to mortgage shop. 

Advantages of renting

A growing housing trend is “renting by choice.” This means that although a potential homebuyer is financially qualified to own a home, they choose rather to rent. They cite some advantages: the apartment is “maintenance free” if anything goes wrong, no real estate taxes, the ability to “lock and leave” if they want to do extensive travel, and a greater sense of freedom should they experience a job change or prefer to live in a different part of the country working remotely. Many developers are catering to this market by loading multi-family units with attractive amenities for the discerning tenant. All that to say, renting is not throwing money down the drain. You get a nice place to live and lots of flexibility and freedom for your costs. 

If you decide to buy

Take time to see the home in person, or work with an experienced friend or agent to avoid the disappointment in location, layout, or size of a home. Study housing comps and research the schools, crime statistics, flight patterns, industry trends, traffic patterns, and homeowner association issues (HOA) to make an informed decision. The condition of a home, cost of utilities, property taxes, HOA fees, and other factors can prepare potential buyers for known costs. Home ownership comes with unforeseen repairs and maintenance, which is why an emergency fund is crucial. A budget is a useful tool to plan for a purchase and think beyond just the selling price of a home. 

To know if you are financially prepared to buy a home, answer these questions: 

• Do you have a cash down payment equal to 20% of the purchase price? If not, wait. 
• Do you have $10,000 set aside for first-year expenses related to the move and making changes to your home? If not, wait. 
• Do you have 3-6 months in an emergency savings account that will not be affected by the purchase of a home? If not, wait. 
• Will you have to pay Private Mortgage Insurance (PMI) if you buy a house? If so, wait. 
• Have you researched your very best options for mortgage financing, and do you understand all the costs associated with the loan and closing? If not, wait. 

Buyer beware

Scammers are becoming more proficient in duping the innocent during this hot market. RealHomes.com and Bankrate.com list some of the common rip-offs in real estate transactions such as loan flipping, foreclosure relief, and moving scams.

1. If you must buy sight unseen, hire a buyer’s agent to verify the property’s legal owners. Hire a reputable home inspector for an in-depth report to avoid buying a home with structural problems, mold, or other issues that could be well disguised.

2. Beware of sudden changes like wiring a down payment or earnest money to a different bank account from one that was agreed upon. Scammers can intercept and create sophisticated emails, asking a buyer to wire money asap or to send it to a different bank for various reasons. Look for spelling errors which can signal a fraud. Call your broker or realtor immediately. 

3. To avoid escrow wire fraud, check the original documents from your lender and call those phone numbers to verify wiring instructions. Never click on email or text links or send money online without verifying instructions with a live person at a verified phone number. Always confirm your escrow account number and call your settlement agent to verify the transfer of funds immediately after completion. 

4. If renting, which is common during renovations, do not wire transfer money until you are in the rental home. The Federal Trade Commission website says: “This is the surest sign of a scam. There is never a good reason to wire money to pay a security deposit, application fee, first month’s rent, or vacation rental fee. That is true even if they send you a contract first. Wiring money is the same as sending cash—once you send it, you have no way to get it back.” 

Bottom Line

Without knowing how you respond to the questions I posed above, I cannot say whether you should continue renting or buy now. I hope I have given you enough information to make a good decision. Let us know how we can help. We have plenty of free resources and calculators at crown.org.