Is Now a Good Time to Buy a New Home?
On this episode of the Money Confidential podcast, host Stefanie O’Connell Rodriguez talks with licensed real estate agent Mindy Jensen about how to make the decision to buy a home.
Getty Images
Every Monday on the Money Confidential podcast, host Stefanie O'Connell Rodriguez, a nationally recognized money expert, delves into your (confidential) money problems and delivers smart, practical, and completely doable solutions that will help you work toward your ultimate financial goals. This is the place to come for real talk about money—and real solutions that actually work.
Follow now: Apple Podcasts / Spotify / Amazon Music / Player.FM / Stitcher
On This Episode
Is it possible to take on major financial responsibilities such as buying a new home while you’re still paying down debt? Is now even a good time to buy a home? This week’s guest, a 39-year-old aspiring homeowner living in Iowa City, Iowa, is struggling with whether homeownership is right for her because of these questions and more. For advice, host Stefanie O’Connell Rodriguez turns to author Mindy Jensen, who is also the host of the BiggerPockets Money Podcast and a licensed real estate agent.
Meet Our Caller
"Jasmine" is a 39-year-old in Iowa City who's considering building her own house. However, the current market is looking pretty treacherous. She and her partner are also thinking of keeping their current home as an investment property, which comes with its own set of concerns.
"When we first started talking about this possibility about a year ago, it was like, Oh, this will be a great option, but we just weren't ready. And then things just are spiraling. Prices are sky-high right now."
Meet Host Stefanie O'Connell Rodriguez
Stefanie is a nationally recognized personal finance expert ready to talk work, worth, and money with unapologetically ambitious women. Her work has been featured in The Wall Street Journal, The New York Times, USA Today, Cosmopolitan, Glamour, and Oprah Magazine, and Stefanie has appeared on ABC World News, CBSN, Fox & Friends, Fox Business, Bloomberg, The Dr. Oz Show, The Doctors, and more to share her smart, practical solutions to any money problem.
Meet Our Expert, Mindy Jensen
Courtesy of Mindy Jensen
Mindy Jensen is a licensed real estate agent, author, and host of BiggerPockets Money Podcast. She's been investing in real estate since 1996 and loves walking first-time home sellers and buyers through the process.
Advice From the Episode
"I really don't want people listening to jump into home ownership without a big safety net—a big emergency fund—because something always breaks when you buy a house."
"If you are moving for a job and you have a two-year contract, it may not make sense, especially in this hot, hot market. It may not make any sense at all to buy a house because what happens if the housing prices go up and up and then they soften—or they flatten out or they start to decline. Then [you're] kind of stuck." —Mindy
Make sure you have a good team of experts—a real estate agent and a banker—who can help guide you through the process and make sure that you're making good decisions on what will likely be the biggest purchase of your life. —Mindy
Make sure you consider everything before deciding to build your own house. "Building your own house has this romantic connotation that you're going to get everything that you've ever wanted. And it will take three times as long as you think it will. And it will cost at least twice as much as you think it will. It's so much headache and heartache and stress." —Mindy
If you're thinking about renting out a property, make sure you run all the numbers—budget for repairs, a loss of rental income, landlord insurance, and other potential expenses along that route. —Mindy
"So is now a good time to buy a home? If the only reason you find yourself asking that question is because everyone else is doing it, the answer is probably not. But, if you see a home purchase as part of a long-term lifestyle plan—one that you hope to commit to for at least 5-7 years—then it's certainly worth looking into your options."
Links and Resources
Listen to the BiggerPockets Money Podcast.
Have a money issue you'd like to share on a future episode? Fill out our intake form.
Recent Podcast Episodes You May Like:
I want to buy a home. Will home prices ever return to normal?
I have an emergency fund and save for retirement. What should I do next?
--------------------------
This episode first aired on October 4, 2021.
Transcript
Tori: Everyone in my life is like you got to own a house. You have to own a house. We knew we wanted to be in a different space but the financial planning aspect wasn't there.
Megan: I made a lot of sacrifice and now it's like, okay, we want to buy a house which is going to be pretty much all of my savings.
Stefanie O'Connell Rodriguez: This is Money Confidential, a podcast from Real Simple about our money stories, struggles and secrets. I'm your host, Stefanie O'Connell Rodriguez. And today our guest is a 39-year-old aspiring homeowner living in Iowa City, Iowa, who we're calling Jasmine—not her real name.
Jasmine: I didn't start off great in my twenties. I wasn't paying enough attention to money. So I kind of got myself in a bit of a hole —a little credit card debt I couldn't really climb out of. But as I got into my thirties started taking things a little more seriously. I was also kind of in that rent cycle.
So fortunately for me with my boyfriend, I was able to move in with him and my rent now is building equity in his owned house.
Stefanie O'Connell Rodriguez: You use this phrase "cycle of renting," and I don't know that I've ever heard that before. So I wonder if you would kind of flesh that out, what that means to you.
Jasmine: Just not building equity of my own. As I was trying to get out of the credit card debt, I didn't have enough money to save up for a down payment for my own house or anything like that.
My dad always told me you're not wasting money renting, because you have a home to live in. But then I think the American dream to be a homeowner has always been there and so I think it's a hangup in my own head.
Stefanie O'Connell Rodriguez: Even before the pandemic, the US housing market was booming. Between 2012 and 2019, the price of the average American home rose more than 50%. And with the pandemic triggering a surge in home buying, the average price of American homes is higher than it's ever been in real terms.
What does it mean to you to be able to own your own home?
Jasmine: I think security, having the flexibility to you know, paint a wall and that sounds silly, but just making it your own and just being really happy with your space.
I think being a renter you can find something that really suits your needs for the most part, but you aren't able to really create your own happy space. And I think that's just something that is important to me I think it has more meaning that I can't really elaborate on.
So we have talked to a banker and we know what we are approved for. We have a lot of things that we agree on, with the style of home we want. We've done so many projects around this current house that we are at the point where we do want to build something because we know what we want and we don't want to go in anywhere where we have more projects to do. My boyfriend, I should also state, is an electrician. And so he's handy. And so there's some things that he can do on his own for cost-savings.
And so we want to build but we also, since we are in a college town and we have a duplex, we want to keep this as a rental. So it's just a lot of moving parts to dive into, and we just have a lot of questions. Like knowing that we only have five years left on this mortgage —would it be beneficial to keep this? Or should we put the equity into a new home? What financially, what are some options that make the most sense for us? So that's where we're at right now.
Stefanie O'Connell Rodriguez: Thinking of the time and energy aspect that goes into buying a property and building a home on top of managing a rental property, what do you think of it in terms of cost benefit from that perspective?
Jasmine: I think I would be okay with it. I like to manage things. I think it would be stressful, but I think it would be rewarding. Both of our extended families have owned rental properties.
So I have, I wouldn't say personal experience, but I have anecdotal experience and people to lean on for, for things like that to help guide what would we charge for rent and, you know, how would we manage the situation.
Stefanie O'Connell Rodriguez: Based on what you've heard and what you've seen, what are some of the questions or fears you have around it?
Jasmine: Fears would be having a horrible tenant. Alternatively, if you have a great tenant it could be quite simple. So I think just managing all the finances, managing all the paperwork, making sure everything is recorded properly.
I think it would be a big learning curve to figure out if we're taking advantage of the investment property to its full extent and just being good landlords.
Stefanie O'Connell Rodriguez: If you were to sell this home, instead of renting it out would there be gains on it?
Jasmine: Yes. He bought this 15 years ago or so, for $150,000 and around the neighborhood, ones are selling for $215k plus. So I think there could be some gains.
Stefanie O'Connell Rodriguez: Given that the property market is where it is, how is that influencing your thoughts around this whole process?
Jasmine: When we first started talking about this possibility about a year ago, it was like, oh, this will be a great option, but we just weren't ready. And then things just are spiraling. Prices are sky high right now.
And that's another reason we're leaning to building as well. Like anything we see that it's like, semi-decent that we might want it goes so fast.
When do we pull the trigger? When do we put all of our ducks in a row? And how do we know when the market is back to a quote, normal place where it's like, okay, pull the trigger. Now you can build, and you're not going to be scorched out of a fortune.
Stefanie O'Connell Rodriguez: Do you feel like at this point, it's just timing.
Jasmine: I think financially we were in an okay place before, but it's more just getting everything around the duplex ready. Like all the projects we've been doing, all the updates and such. So it finally came to the point where we're like, okay, let's, let's start actually talking to people and making decisions and not just talking about it in the abstract.
And so we are ready to pull the trigger. but it's just, is now the time? I don't think so.
We were hearing from someone like two by fours used to be $1.50 and now they're $8 or whatever, whatever the price is. But if it comes down to like $3 or $4, that's probably the new low. And it's like, is that real? Like do we look at the price of a two by four and decide? I have no idea.
Stefanie O'Connell Rodriguez: Given this real uncertainty have you been looking anywhere to try to get some answers?
Jasmine: I mean the internet and then I'll look at like real estate websites or just Google, like building costs and stuff and everything I see is so wishy-washy
It looks like maybe it'll be down like early 2022? And what if it looks down and then it gets lower, you know? I mean, there's always that possibility, but it's, I just don't know what to look for.
Stefanie O'Connell Rodriguez: Know what really stinks about personal finance is that no one can predict the future, no matter how much of an expert they are.
Jasmine: Right. And if I'm working with a builder, are they going to be honest with me or are they just going to be like, yeah, let's do it.
Stefanie O'Connell Rodriguez: I do think it's good that you're giving yourself the time and not letting that emotional experience trigger you into what could long-term be a bad decision. You're talking about a property and a home that you could potentially live in for decades.
And we don't want to be making decades-long decisions over what is a one-year situation.
Jasmine: You know, I'm the joke of like Zillow porn I'm on there every day, just seeing the prices go up. We just kept thinking, why do we want to spend way over the price of what this house sold for five years ago? And then we'd have a million projects to do.
We're getting excited about it, but it's like, okay let's get these prices down.
Stefanie O'Connell Rodriguez: In episode 18, we talked about how lockdowns, low housing inventory and historically low mortgage rates, led to many Americans making home buying decisions from a place of FOMO or fear of missing out during the pandemic —triggering high levels of homebuyers remorse.
So Jasmine is on the right track by doing her research, asking a lot of questions and not letting the pressure of the moment rush her into a home that doesn't necessarily fit her budget or her needs.
After the break, we'll talk to a real estate expert who can help Jasmine and anyone else wondering whether they are ready to buy a home, get some answers —and whether now is a good time to even consider it.
Stefanie O'Connell Rodriguez: What is going on in the housing market?
Mindy Jensen: Oh my goodness. Insanity is going on in the housing market. Every time I think I have a handle on what's going on, prices just jumped exponentially again. And I'm like, wait a second. What's going on?
Stefanie O'Connell Rodriguez: That voice you just heard is Mindy Jensen. A licensed real estate agent, author, and host of The Bigger Pockets money podcast.
Mindy Jensen: I mean, COVID was just really, really, really strange. And it affected the housing market —depressing for a while for a very short time. But then once we could show houses again, all of a sudden everyone's like, I can't stand being cooped up in my house with my four kids in my thousand square foot apartment.
I need to get out and wait a second. I can buy the same house, or I can buy, you know, four times the house for the same amount of money in a different state and I'm working from home anyway. So what does it matter? So I think there's just a lot of people with a lot of money who now want a lot more space
Stefanie O'Connell Rodriguez: The listener this week is from Iowa City. So she has been planning to buy a house for a long time, has been saving up for a long time, but was not anticipating that there would be this total surge in the housing market. And so now there is a lot of confusion and uncertainty around, wait, how should this impact my plans?
So should I change my plans? Should I rent? How should people even conceptualize how the factors around them should play into their financial plan?
Mindy Jensen: They should really look at their market. What does it cost to rent a property? And what does it cost to buy a comparable property, like monthly payment wise. And what are your plans? Are you setting your roots down and you're never going to leave? A lot of people plan that.
But then that's not really how reality works. People tend to move every five to seven years. So if you are moving to Iowa City for a job and you have a two year contract, it may not make sense, especially in this hot, hot market. It may not make any sense at all to buy a house because what happens if the housing prices go up and up and then they soften.
Or they flatten out or they start to decline, then she's kind of stuck.
Whereas if they've lived there their whole lives, or, you know, they're moving there because their parents live there and they really love the town and they want to live there forever, have plans to live there for at least five to seven years.
That's a good time to start looking. It costs a lot of money to sell a house and people don't think about that when they're buying a house, but on the front end, buying a house, it costs approximately two to 4% of the purchase price in random closing costs.
And that's not including your down payment on the house. It's just the random extra costs like your attorney or your title insurance, and you know, all the little things that you can't imagine actually exist when you buy a house, when you go to sell it on the backend, it's more like eight to 10% of the price of the house.
Sellers traditionally pay the commission for both the buyer's agent and the seller's agent Additionally, you have your own closing costs, like title insurance for the mortgage company, for the buyers and title insurance for the buyers themselves and on and on and on.
Stefanie O'Connell Rodriguez: The home that our listeners living in is one that she moved into with her now partner.
They're also thinking about turning that space into a rental property because they are in a college town and then trying to purchase something else that they live in. But they have a lot of uncertainty around what that even looks like in the amount of labor that would go into that.
Mindy Jensen: Number one is, can you afford both mortgages for any period of time?
COVID has shown us that there are some people who can't pay rent and the government may step in and say, you can't evict this person. So here you are not able to evict the person who is living in a home. You are still required to provide a habitable home for this person. So if something breaks, you have to fix it.
Like, wait, you didn't pay me rent and I have to fix your garbage disposal too. Or, you know, whatever the thing is. So if you can't pay that mortgage. You need to have a big buffer before you go and buy another house that you are now required to pay that mortgage.
Second, you need to run the numbers on the property. Does it make sense as a rental property? It may not. If your mortgage payment is $2,000 a month and your duplex rents for $500 a side, you are buying yourself a job of being a property manager and paying a thousand dollars a month to subsidize somebody else's house, because your rent doesn't cover your mortgage. If renting it out as a long-term rental doesn't work, does renting it out as a short-term rental, like an Airbnb or a longer short-term rental, like a traveling nurse or a corporate rental?
Does that work because when it's a furnished rental, it typically gets a higher rent? But your mortgage isn't your only expense. You have a lot of other expenses, utilities, you have maybe HOA payments, taxes, landlord insurance. You have capital expenditures, which is short for expensive repairs.
So think about your roof, your $15,000 roof —you want to be able to pay for that. You don't want to have to take out a loan to pay your roof. And the same for appliances and windows and a furnace. And air conditioner.
There's a lot of things involved. And if your rent payment barely covers your mortgage, all this other stuff is going to cost you all your cash flow for years. If it breaks, let's say you're making a hundred dollars a door. So the duplex, two doors, $200 a month.
Your air conditioner is going to be three or $4,000. How many months of cash flow does it cost you to replace the air conditioner? That doesn't make sense to me as an investment. So you want to run the numbers and make sure that all of the things that are going to cost you money are covered by the rent.
And then also there's extra. You don't want to just break even, what's the point of that?
And the best time to think about that is before you own that house. It's no longer an exit option to rent it out when you have to pay $600 a month to be able to rent it to somebody else.
A really great, and I want to clarify what a rule of thumb is —it is not a set in stone rule, it is a guideline —If it fits this parameter, you should look into it further, but if you know what rents are in your area the 1% rule means that you will rent it out for 1% of the purchase price. So $120,000 house would rent for $1,200 a month. If you know that rents in the area are $600 a month, a $120,000 house doesn't make a lot of sense
One of the things that I see a lot of people doing right now is, you know, oh, everybody else is buying a house. I have to buy a house too. No, you don't. If it wasn't in your plans before, now can be a time for you to think about it, but you need to do a lot of research and you need to educate yourself exactly what is it going to cost me to [own this house and what happens if, and when fill in the blank. There's a lot of ifs out there. What happens if there's a global pandemic and I lose my job and I don't have any other job
I really don't want people listening to jump into home ownership without a big safety net, a big emergency fund, because I like to say something always breaks when you buy a house.
Stefanie O'Connell Rodriguez: Are there signs that "yeah, I am ready to buy a house" financially speaking and emotionally speaking?
Mindy Jensen: You have a stable job, you have money in the bank. Like I said, it costs money to purchase a house, 2 to 4% of the cost of the house, but then you also need a buffer for unexpected repairs. Or you move and you're like, ooh, I need to paint that wall right away. Or, oh, this is broken or it's not working properly, so I need to repair it or replace it altogether.
I need to mow my lawn, but I'm going to be gone for six weeks now. So I have to hire somebody to do this. And there's just a lot of little things that you don't think about.
Know what you're doing and have a good real estate agent. Have a lender that you can talk to that speaks to you with respect and answers the phone when you call and answers your questions. Have somebody who is on your side, helping you through this most expensive purchase you're ever going to make.
Stefanie O'Connell Rodriguez: [How do I even know what person to trust to tell me what to do? 'Cause there's a lot of noise out there.
Mindy Jensen: So I would start with your friends who own houses. Who did you use as your real estate agent? And did you like them and would you use them again? I have bought and sold a lot of houses. I've only ever used the same agent twice.
So interview people, you can talk to as many real estate agents as you want to.
If you don't feel comfortable with them, don't continue the conversation. If they say, well, I will only show you 17 houses and then you're on your own.
No, don't even see one house with that person. If they have time for you now they'll have time for you when you're in the middle of the biggest purchase that you'll ever make. And the same with your lender. There are lenders out there who won't even answer their phone. Don't call them back, talk to all of your friends and, you know, talk to your colleagues at work. Ask for recommendations. I've got an awesome lender. I sold 15 houses last year. I used him 10 times.
Stefanie O'Connell Rodriguez: Now I'm going to throw one more wrench into this scenario because our listener is also potentially interested in buying property and building their home from the ground up.
Mindy Jensen: I strongly encourage her not to do this. Building your own house has this romantic connotation that you're going to get everything that you've ever wanted.
And it will take three times as long as you think it will. And it will cost at least twice as much as you think it will. It's so much headache and heartache and stress.
Unless you just have the cash sitting around, you're going to need a construction loan. And that construction loan comes with a big down payment because the bank is giving all of this money to your contractors to build a house.
They don't want to own that house. They want you to make the mortgage payments. That's what they want. So you're going to need like a 20 or 25% down payment. You're going to need architectural drawings and all the plans. And you need to have your guess on how much it's going to cost.
I mean you need a lot of paperwork. So you can't say today, I'm going to build a house and then tomorrow you get your loan.
I would say there's probably six to 12 months of prep work before you break ground. There's a lot involved and you need a construction, a GC, a builder who has done this before.
I've known several people who were like, oh, we're just going to build it ourselves.
We're going to DIY. And you know they're building their house for 10 years, 15 years. I knew a family that they built it for 15 years, and then as soon as they were done, they had to sell it. That was 15 years of stress. So it is this romantic notion that it's going to be so amazing and wonderful, but I bet you can find a house that hits 90% of your buttons for so much less heartache, so much less stress. And so much less time.
So if that doesn't sway you, then get a construction loan with a lender who specializes in construction loans, who can help you through the process.
Start talking to them now, hey, I'm thinking about this. What do I need? I bet that lender has a big old sheet here. This is all the stuff you need. Okay, great. That's a lot. I'll get started. Read it all, always read everything, but read all of the stuff that the lender wants and start trying to get it together.
You'll need an architect and plans and building materials and an estimate of costs. And you probably want to build in like 30 or 40% cushion there because costs keep going up.
You don't want to spend $500,000 to build a house that's worth $450,000. Yeah, you're underwater automatically. And just because you spend $500,000 to build it, doesn't make it worth $500,000.
Stefanie O'Connell Rodriguez: It's so hard. I think it's so emotional.
Mindy Jensen: It is. Even if you're just buying then you're back to this bidding war. Make an intelligent offer based on what you think the property is worth with the comps that you have received from your agent.
Because that's how a house is appraised based on what similar properties located nearby have sold for recently. So if everything's selling for $500,000, you don't want to make a $750,000 offer.
Now, something that is going on in offers right now is you are covering the appraisal gap in a lot of offers, which [means you are saying I'm offering you $650,000, but if it only appraises at $625,000, I'll bring that $25,000 to closing. Now that's in addition to your 2 to 4% closing costs. In addition to your other down payment that you were planning on making, and you just bought a house that's worth $625,000 for $650,000.
Stefanie O'Connell Rodriguez: [So many of these people are making these huge decisions around this idea that not buying a home is some kind of horrible financial decision.
Mindy Jensen: It's the great American dream to buy a house with a white picket fence and three beds and two baths and a two car garage. And you can live in the suburbs and be happy forever, but that is not everybody's dream. Not everybody can afford it. And America is much more mobile than when the great American dream was first invented.
If you're going to move frequently, it's going to cost you a lot of money to sell this property. I'm trying to think how much It cost me $36,000 to sell my house. probably more like $40,000 'cause they had the commissions and the title insurance and all the things.
That's a lot of money. When I sell a stock, it costs, what is it, a dollar 25 or something?
So you have to take a lot of your gains to cover the way that you're selling the house.
I just think that a lot of people are jumping in with both feet based on all the hype that you hear in the news today, that the market is appreciating and you know, you should, you should cash out. It's real easy to hear about the guy who made $300,000 on his house. You're probably not going to do that right now.
Maybe if you hold onto it for 10, 20, 30 years, but that's 30 years for $300,000. That's not a lot.
Stefanie O'Connell Rodriguez: We've talked about a lot of different aspects of real estate from having a rental property to purchasing a home, to potentially building your own home from scratch. And every single piece of it has so many pieces within it and it feels so, so, so overwhelming.
If I'm somebody in any of these buckets, where do I begin and how do I get to a point where I'm not just making a decision under pressure under a deadline, under emotion, and I'm being informed.
Mindy Jensen: I would say that reading everything you can about your local market is going to be super helpful.
You're also going to go on Zillow and realtor.com and Redfin and Trulia and all of the places where you can see all these pictures.
You want a three bedroom, two bath house in Longmont, Colorado for $450,000. How many of those have sold in the last six months or the last three months? Oh, one. Okay. That's not a very realistic option for me then.
I should either expand my search area, my numbers, or otherwise alter it. Let's go up to $500,000 oh 26 have sold in the last three months. That's a more realistic price range for this. That's a search that I can be comfortable with. Talk to a lender. See how much they think that you can be approved for and ask them to run numbers.
And what does that look like in a monthly payment or tell the lender? How much am I going to have to put down? Is what I want reasonable? And can I afford this thing that is actually there? Start looking.
And then you start narrowing things down. Go to open houses. Don't think that you're going to have to make a purchase tomorrow.
That is a frantic emotional decision. Give yourself the opportunity to do some research and understand just exactly what you're getting yourself into. You are signing up for 30 years of mortgage payments. And of course, if you sell, then you don't have to make them anymore, but 30 years, that's a lot. Do you really, really, really want that house that much?
You have to know what you want because if you're looking at everything, you're just going to be overwhelmed.
You just need to know what's a must have, what's a nice to have and be realistic with what you want to spend on that.
Stefanie O'Connell Rodriguez: So is now a good time to buy a home? If the only reason you find yourself asking that question is because everyone else is doing it, the answer is probably not. But if, like Jasmine, you see a home purchase as part of a long-term lifestyle plan —one that you hope to commit to for at least 5-7 years —then it's certainly worth looking into your options
The challenge is not letting the emotional rollercoaster of FOMO and bidding wars in a hot real estate market push you off track from making an offer that makes financial sense for you. Find a real estate agent and lender you can trust to guide you through the process and remember to account for a large emergency fund savings buffer to cover the major expenses that accompany buying and maintaining a home.
A home is one of the biggest purchases you could ever make, so it's worth dedicating the time, energy and resources to making sure it's the right decision for you.
This has been Money Confidential from Real Simple. If, like Jasmine, you have a money story or question to share, you can send me an email at money dot confidential at real simple dot com. You can also leave us a voicemail at (929) 352-4106.
Come back next week when we'll be talking to a 46-year-old single mother from Northern Arizona who is struggling to set boundaries with her siblings.
Be sure to follow Money Confidential on Apple Podcasts, Spotify or wherever you listen so you don't miss an episode. And we'd love your feedback. If you're enjoying the show leave us a review, we'd really appreciate it. You can also find us online at realsimple.com/MoneyConfidentialPodcast.
For more Real Simple news, make sure to sign up for our newsletter!
Read the original article on Real Simple.
