To buy or not to buy? That is the question. Much like a Shakespearean soliloquy, you have probably uttered these words aloud in the hopes of hearing a clear answer. Whether you have recently relocated to Seattle or are a long-standing resident who has yet to purchase a home, let me play your Hamlet and help answer that which you ponder. And if you are actively looking in other very busy US markets, please read along. The information is relevant no matter where you are house hunting.
Let’s begin by acknowledging why renting a home makes sense in many instances. After all, purchasing isn’t the right option for everyone. What possible scenarios make renting a better option?
- Credit or income is not conducive to a home loan at this time
- Residing in Seattle or ‘Destination X’ is a short-term commitment (2 years or less)
- You are new to the area and need time to find your ideal neighborhood
You may look at the reasons for renting and think the list quite short. Well, it is. Investing in real estate is almost always a better option unless it is not. Let’s take a look at the reasons why considering a home purchase sooner rather than later is likely a better idea. The cost of waiting may be greater than you think. And let’s note, rental costs have a way of increasing year over year. We are back to a landlord’s market here in Seattle and many other ‘pandemic pause’ locations. Rents are climbing and inventory is going, going, gone.
Seattle Market Conditions
One observation: this is likely not a bubble. Not in Seattle at least. Would you like to know why? As much as we all want to peer into the future to find out when the Seattle real estate market is going to come crashing down, there are limited factual arguments for that to happen. The current environment is not another “Great Recession” when bad-apple lenders issued loans on stated (i.e., unverified) income and over-leveraged buyers ended up with poor loan products they subsequently defaulted on. Even in 2008, Seattle’s valuation decline was minuscule compared to other areas nationally and rebounded more rapidly. How can we be sure this is not a bubble? While we cannot predict the future, we can turn to fundamentals, which are the best data we have. Seattle remains a destination city for high-wage earners and job opportunities continue to expand. When money and opportunity are paired together this area is not only attractive but competing for talent from all over the world. Besides, Seattle is also a desirable place to live with a high quality of life from arts, to food, to the great outdoors.
So, why invest in a home in a high-priced market like Seattle? Especially, when for many of you, Seattle’s cost of living is far higher than where you are moving from and you are weighing the arguments for relocating here. Think about the opportunity and quality of life narrative noted above. It’s real and it drives value. Allow me to outline some things you have probably heard before and some you may not have considered.
How Home Value Math Works
It’s no secret that owning a home is the American dream. Homeownership is like a savings account that you cannot get out of depositing money into every month. Paying rent has virtually no long-term financial incentive for you, but is a great way to build the wealth of your property owner.
Top 5 common objections we hear when renters are considering a home purchase:
- My lease doesn’t expire until (fill in the blank). It is not illegal to break your lease. Renters do it all the time. Check your lease for lease break clause language to determine the penalty. Typically it amounts to about two months’ rent. Sometimes the cost of a lease break is covered in corporate relocation policies.
- I am waiting for the market to cool down. The current forecast for home appreciation in King County (Seattle), WA is around 10% for this year. Put another way, a home that costs $800,000 today will cost you $880,000 in 12 months. Long-term models show a steady 5% annualized increase for the area year over year. Is there an upper limit? There always is, but it’s also unlikely home values will plummet.
- I don’t have enough for a down payment. The common down payment is 10%. A 20% down payment is not a requirement to purchase a home. Lenders are wizards at finding the right home loan structure for you and a conventional loan can be obtained with as little as 3-5% down. Or a combination first and a second loan might be a better option. You will pay Private Mortgage Insurance (PMI) until you have a 20% equity position and then you can retire the PMI. In this area, you might be there in two years. The wealth you accrue in equity by buying today most likely outweighs the temporary monthly cost of PMI. Your other option of building your savings for a bigger down payment is not likely to keep pace with the market and you will be priced out. Using the $800,000 home purchase example: let’s say you have saved 5% down today which is $40,000, but you want to get to 10% down which means you need to save another $40,000. How long will that realistically take? Let’s assume a year. In that year the home will also increase a conservative 5% meaning it’s now selling for $840,000. You just lost $40,000 in equity while saving $40,000 more for a down payment. Not to mention 10% down on this home is now $84,000.
- I don’t want to overpay for a house. No one does! A home is worth what someone is willing to pay for it. Every home closing sets a new bar for pricing and future appraisals. Yes, price escalations are commonplace here, yet lower than sales price appraisals are few and far between. If several offers well over the asking price are received on a property that is an indicator of the home’s market value. In essence, the home you don’t buy today will cost you more tomorrow. Should you be careful about overheated markets? Absolutely yes. But steady value growth in a growing market is not the same as crazy swings in fly-by-night markets with no history of home valuation stability.
- I have a home to sell. Making an offer on a home in the Seattle area which is contingent on the buyer selling another home has a very low likelihood of being accepted. I am no statistician, but in my selling experience the odds are low. . In fact, a quick look at my local MLS shows 3,831 pending listings in King County today. Of those, 10 are contingent on a home to sell (2.6%) and half of those purchases for $2M and higher. You may be surprised to learn that depending on income and remaining debt on the home you need to sell, you qualify for a new home purchase. If that’s the case, you can shop now and sell later. There is a process for recasting a new home loan with the proceeds from a sale after the fact. It’s a beautiful strategy. We can talk about it.
Keep in mind, when you purchase a home the sale price of the home does not represent your actual investment. You are investing your down payment funds and putting the market to work for you in which the overall property value has an impact. If you invest 10% on an $800,000 home that’s an initial output of $80,000. Over this next year you could earn 10% appreciation on $800,000 which is another $80,000. Invest $80,000 and double it. When you consider your next home purchase in Seattle as an investment. the cost of waiting far outweighs any counterargument. In this current example, waiting one year not only means you lose $80,000 in equity, but the home is now selling for $80,000 more which essentially costs you $160,000.
To conclude, there are no guarantees, but there is data. So do your homework, ask a lot of questions, and decide what is best for you and your financial plan and capability. To buy or not to buy? That is a question only you can answer. When is the right time to buy a home? When you feel like buying a home. As Shakespeare said, ‘the readiness is all.”
By Shelly Bean, Designated/Managing Broker, Station Cities Seattle
Information deemed reliable but not guaranteed. Prospective buyers should seek professional financial planning and tax advice prior to making investment decisions.