Buying a House in 2022 or Waiting: A Financial Analysis

In the face of fluctuating real estate markets, the decision to buy a house now or wait a while is a common dilemma. For many millennials like myself, this question has been a recurring thought. Let's examine the situation through a retrospective lens, with a focus on the late 2022 and early 2023 timeframe.

Current Home Prices and Mortgage Rates

The median home price in 2016 was around $300,000, a figure that has now risen to approximately $430,000 by late 2023. Meanwhile, the average mortgage rate has seen a significant increase from about 3.5% in 2016 to around 7.5% today. If a buyer had a 5% down payment capability, their monthly mortgage payment would have been about $1,300 on average, factoring in mortgage insurance, property taxes, and other fees, which could rise to $1,900 per month. This would have given them about $150,000 in equity by today.

Waiting to Buy a House

Let's consider the alternative scenario where the buyer chose to wait. The median rent in 2016 was roughly $1,500 per month, while today it is around $1,900 per month. Assuming the buyer saved about $1,000 per month towards purchasing a new home, they would have accumulated an additional $84,000 over seven years, meaning they could now put about $100,000 down on a new home. However, given the higher value of the home today, they would need to secure a larger mortgage. With interest rates at around 7.5%, their monthly mortgage payment would be approximately $2,300, or around $2,900 with property taxes and other fees. Their initial home equity would be solely their down payment of $100,000. They would be in a longer mortgage period, approximately 30 years, compared to the 23 years they would have had if they had started the mortgage seven years ago. Additionally, the rented apartment would likely have been much smaller than the potential home, leaving them without the experience of living in a nicer residence for those seven years.

Investment Gains and Opportunity Cost

Furthermore, by renting, they would have had an opportunity to save and invest the $1,000 per month they were saving for a house. Assuming an annual average return of over 12% in an SP 500 stock fund, they would have gained another $135,000 or so in equity. This further enhances the financial benefit of buying earlier with a lower down payment.

Conclusion

In summary, if a person had purchased a house seven years ago, they would have about $300,000 in equity and a monthly mortgage payment that would be paid off in just 23 more years. Considering the same person had waited and saved until today, they would find themselves with only about $100,000 in equity, a significantly higher mortgage payment, and 30 years left to pay. Moreover, they would have had to endure the long-term discomfort of renting in a smaller apartment rather than enjoying a bigger home. Clearly, buying earlier with a lower down payment would have made far more financial sense.