I work with home buyers of all shapes and sizes, showing homes in the last several days from the $200,000 range to more than $2 million. Working with first-time buyers is both rewarding and challenging. I love helping people get into their first home, but one of the issues I often run into is whether to buy now or wait and save for the down payment.
Many of the potential buyers qualify for nothing down mortgages, such as Utah Housing, USDA Rural Housing or loans backed by the Veterans Administration. And may also qualify for a down payment assistance grant.
I can understand young buyers wanting to have a better down payment when they buy a home. They are not alone in thinking that way. But let’s take a moment and assess how that thinking applies to current market conditions. In 2018 Utah County home prices increased some 9.2 percent, including all residential types. Home prices will likely go up about half that much this year. But even if they go up just 5.5 percent, that’s more of an increase in wealth than they’ll get stashing their money away in a bank, no matter which saving instrument they use.
You see, accumulation (saving) is the most inefficient way to gain wealth there is. If they qualify for a no-down Utah Housing loan, even though the interest rate may be a bit higher, their newly purchased home will likely gain them much more wealth (equity) quicker, then if they wait to buy. In just a few months the home they wanted will be more expensive than if they bought it now, and interest rates may continue to rise.
Down the road as the home builds equity (wealth) the likelihood of refinancing to a lower interest rate increases. There are no signs of a housing bubble like 2008. We are in a very different market now.
Another issue with waiting and saving, rather than buying now, is that they have no tax advantage with socking money away in a normal savings account, which is taxed as ordinary income. On the other hand, homeowners get a huge tax write off on the interest they pay on their mortgage. Think of the advantage a first-time buyer has with a no-down program like Utah Housing, Rural Housing, VA or even a grant program. Paying a mortgage becomes a form of forced savings.
Also consider inflation. While money is sitting in a savings account it is likely losing more value than it is earning in interest, but buying a home is a more wealth-building investment as it gains value. A dollar buys less tomorrow than it does today.
Let's look at it another way. If you buy a home now for say, $350,000 for example, and put nothing down using one of those available programs, and have a couple of thousand dollars invested in inspections and appraisal and maybe a little in closing costs (unless the seller agrees to pay them for you) and in a year that home is worth 5 percent more, or $367,500, would you be better off than if you waited and saved?
Dividing the Utah County market into two categories, single family and attached housing (condos, townhouses and twin homes) appreciation (wealth) becomes a bit more defined.
From January 2018 to January 2019 the median sales price for a four bedroom, three-bath, 2,800-square-foot home rose from $320,790 to $345,000, an increase of 10.3 percent, according to the Wasatch Front Multiple Listing System. The average market was 45.3 days with sellers getting 97 percent of asking price.
In the attached home market, condominiums, townhomes and twin homes, the median sales price for a three-bedroom, two-bath, 1,628-square-foot residence rose from $213,715 to $239,900, an increase of 12.2 percent, according to the MLS. The average market time was 24 days with sellers getting 99 percent of their asking price.
So before you decide to wait it out and save for a higher down payment, especially if you qualify for a no-down mortgage, carefully consider your next best step.