Last Updated on August 25, 2023 by Prakash Kolli
Buying a home is the American dream because it is often viewed as a path to building wealth. The common mantra is that renting throws away money while purchasing a house builds equity and, thus, wealth. Homeownership does add to your wealth, but like all other asset classes, valuation matters in real estate. In fact, there are many reasons to buy a home, but there exist reasons not to buy a house too.
For instance, suppose you buy a home near the top of the market; such an action can destroy wealth. Previously, home prices appreciated upward on average each year. But many homeowners who bought during the last peak from 2005 to 2006 waited years to break even on their purchase. Why? Interest rates were low, lending standards weaker, and inventory too high.
Consequently, people purchased homes and condominiums, thinking prices would continue their upward trend. But unfortunately, they did not, and when these trends changed, it took many years for prices to recover. Keeping that in mind, below are 5 reasons not to buy a house now.
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5 Reasons Not to Buy a House Now
House Prices Are Near a Record
House prices have soared in the United States during the COVID-19 pandemic, especially in small cities and rural areas. The Pew Research Center reported that 49% of Americans said, “availability of affordable housing in the local community is a major problem.” Another 36% of Americans said it was a minor problem.
The reason why is not surprising. Home inventory is down partly because homebuilders are building less. Next, according to realtor.com, the number of US active listings has declined from about 1 to 1.5 million before the pandemic to about 500,000 – 600,000 during the pandemic, although the number is now rising. Lastly, housing and rental vacancies are down to about 5.6% and 0.9%, respectively, in 2021.
The result is higher home prices. For example, the median listing price in 2017 was $250,000 to $280,000. In 2022, the median listing price was $435,500 in August 2022, slightly below the record from May to July 2022.
Mortgage Rates Are the Highest Since 2008
Americans attempting to purchase a house today are also facing higher mortgage rates. For example, the 30-year fixed rate mortgage (FRM) is now over 6%, the highest rate since 2008. However, many first-time homebuyers have not experienced rates this high. Similarly, the 15-year FRM is more than 5%, and the 5/1-year adjustable rate mortgage (ARM) is nearly 5%.
Higher mortgage rates mean higher monthly payments. For example, a buyer pays $2,398 per month on a $400,000 loan at a 6% rate on a 30-year FRM, while a 5% rate lowers the monthly payments to $2,147. The $250 difference is $3,000 annually.
The double hit of higher mortgage rates and higher prices have put new and existing homes out of reach for many first-time buyers making it a powerful reason not to buy a house now.
The Tax Advantage is Lower
One advantage of owning a home is the mortgage deduction incentive. However, the tax advantage is not the same as before. The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction to $24,000 from $12,700 for those in the married filing jointly status. The deduction is now $25,100. As a result, many new homeowners no longer benefit from itemizing their tax deductions.
Homeowners who pay more than $25,100 in interest benefit, especially if their state and local property taxes are high. This is because the TCJA caps tax deductions at $10,000. The bottom line, though, is if your mortgage loan interest totals a small amount, you are probably not itemizing and, instead, are taking the standard deduction.
Interest on Savings Is the Highest in Years
Some homebuyers think of houses as investments. Despite the decline during the Great Recession, home prices, on average, increase over time. Moreover, savings accounts have been paying a meager interest rate for years. However, high inflation has reversed the trend, and interest on savings accounts and, more importantly, short-term US Treasury bonds and US Government-issued Series I Savings Bonds (I Bonds) are the highest in years.
The US Treasury website lists the 1-year rate at almost 4%. So, if your brokerage allows bond purchases, the rate is solid and the highest in more than a decade. Similarly, I Bonds are paying a 9.62% composite rate because of high inflation. Series I Savings Bonds are inflation-protected savings bonds issued by the US Government. So, if inflation rises further, the I Bond rate will also increase. However, with I Bonds, your money is not accessible for at least one year, and there is an interest penalty for cashing savings bonds before 5-years.
Save for Retirement Instead
Considering high house prices and mortgage rates, it may make sense to save for retirement instead. So far, 2022 has been difficult for those invested in the stock market between poor total returns and enhanced volatility. As a result, the stock market’s valuation has declined compared to 2020 and 2021. In addition, investors are fearful about rising interest rates and recession risks, so this year will likely not be a good one.
Eventually, though, the stock market bulls will return. As a result, investors who can tolerate the volatility may find this year a good one to add to their portfolio instead of buying a house.
Final Thoughts on 5 Reasons Not to Buy a House Now
Buying a home is a personal and complicated decision. Many reasons exist to buy a house, like schools, living near grandparents, tax benefits, access to healthcare, etc. However, there are reasons not to buy a home, especially when prices are near a record and mortgage rates are the highest in a decade. Potential home buyers may want to wait if they view a house as an investment rather than for other reasons.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.