Should I Save or Should I Buy?

• February 3, 2022

Way back in 1982, British punk rock band The Clash famously wondered “Should I stay or should I go?”

These days, many prospective homebuyers are wondering something similar, albeit with a little twist: Should I save or should I buy?

While there are certain benefits to waiting it out and saving, including building up cash reserves to make a greater down payment or allowing your current home to ride the real estate market’s anticipated rise, getting in the homebuying game now with some decisive action has a few clear benefits.

The Case for Buying Now: You Gain Enhanced Buying Power.

Interest rates are still remarkably favorable for homebuyers, but they are climbing, according to data from Freddie Mac. Fueled by inflation and the Federal Reserve, the average rate on a 30-year fixed mortgage has jumped from 2.77 percent in August 2021 to 3.55 percent at the end of January 2022. That’s a 28 percent increase in six months.

Let’s say you want your monthly mortgage payment – excluding any taxes or insurance – to be $2,000. At a 3.5 percent interest rate on a 30-year mortgage with the standard 20 percent down payment, you could afford a home around $540,000.

Now, let’s say the rate jumps a modest half percent, a realistic projection given many industry forecasts. If you want to stick around that same $2,000 monthly payment, your housing budget now tops out at about $504,000.

If interest rates rise even a bit as this example shows, sitting on the sidelines will cost you $36,000 in buying power.

The Case for Buying Now: There’s an Actual Cost to Inaction.

If rates continue on their current trajectory – again, no guarantee, but strictly for illustrative purposes – your monthly mortgage payment, excluding taxes and insurance, on a $450,000 home with a 3.75 percent interest rate and a 20 percent down payment would be $1,667.

Let’s say you wait a bit and the interest rate you secure is 4.25 percent. The monthly payment on that same $450,000 home now rings in at $1,771. That means you’ll be paying:

• $104 more per month
• $1,248 more per year
• $37,440 more over the life of your 30-year mortgage

Today’s interest rates are advantageous for buyers. Tomorrow’s rates, while still comparatively low are unlikely to be as advantageous.

The Case for Buying Now: Savings Rates Can’t Keep Pace with Rising Prices.

The truth of the matter is that the value of home prices and inflation (currently running about 7 percent) will far outpace that of your savings account, money market, or certificate of deposit, all of which deliver meager returns.

But what of the stock market and its growth potential, you rightfully ask?

While there’s no way of knowing what the stock market is going to do in 2022, it’s possible home prices could well outpace Wall Street as well, especially if the close of 2021 is any indication. While the Dow Jones Industrial Average gained a robust 18.7 percent in 2021, the year’s fourth quarter saw slower growth of 7.4 percent. The first four weeks of 2022, meanwhile, saw the Dow Jones tumble more than 6 percent from its record high.

Experts predict prices of homes on the resale market will rise upwards of 11 percent in 2022. In short, stocking money away in savings or investments, frequently a sound idea, could prove unfavorable for prospective homebuyers as returns slow and costs escalate.