Yahoo Finance Is Kevin O’Leary Right About When To Buy a House? Experts Weigh In
According to Redfin, housing prices were up 4.8% on an annual basis in March, with a median selling price of $420,401. With higher interest rates as the Fed continues to try to cool down the economy, buying a home has become a larger financial commitment.
Kevin O’Leary published a video five years ago in which he shared his thoughts on when to buy a home. While economic conditions have changed since then, the message is about trying to remain debt-free. O’Leary stresses that a mortgage means you owe someone hundreds of thousands of dollars. He urged viewers not to purchase a home because of interest rates because low rates don’t mean you should enter the real estate market.
Is Kevin O’Leary right about when to buy a house? Here are five key considerations about interest rates and home ownership.
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Purchasing a House in Cash Is Not Realistic
O’Leary said that one should try to buy a home without a mortgage to avoid dealing with debt and interest. However, a cash purchase of a home is highly unrealistic in this market as most people don’t have over $400,000 in savings. In a perfect world, a potential homebuyer wouldn’t be stressed about interest rates, but in reality, every percentage point makes a huge impact on monthly payments.
“His advice isn’t applicable to the vast majority of people since homeownership without a mortgage is seldom a financial option for Americans,” said Seamus Nally, CEO of TurboTenant. “Since a mortgage is almost always going to be necessary, it’s worthwhile to prioritize getting one with a rate that you find acceptable for your financial situation. Locking in a good rate can help ease the financial burden in the long run.”
Since most people can’t purchase a home with cash, interest rates must be considered since this is what you’ll pay monthly with your mortgage.
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Interest Rates Significantly Impact the Housing Market
“Rates will continue to affect the market in some ways, like many sellers delaying an actual need to make a move given they like their current interest rate and with affordability issues, buyers could reconsider plans and try to wait out the rates,” said Amy Lessinger, president of RE/MAX LLC.
You can’t ignore interest rates because they significantly impact the real estate market since they determine if people are willing to buy and sell. For example, someone with a low mortgage rate locked in may not be willing to sell their home when rates are high because they don’t want their payments to increase.
“People should buy a home based on how much the house cost, not based on interest rates,” said Steven Andrews, a real estate investor and business coach at SOARX Consulting. “When interest rates are higher, you have less demand, which means you can get a better deal on a property. If you can afford the higher monthly payment, due to higher interest rates, then I would pay now.”
You’ll want to ensure that you’re comfortable with the purchase price because you’ll have to deal with this mortgage for the next few decades.
Andrews provided an example of how interest rates can alter your home’s price:
“When interest rates are lower than there is a bigger demand, the price of a home could go up. Sure, interest rates will affect the monthly payment, but how much you pay for a house will determine if you got a good deal or if you’ll be upside down in a house. You can always refinance a house to get a lower interest rate, but you cannot do anything with the amount you bought the house for, so if you overpaid for it, you’re stuck with it.”
Your Financial Situation Should Be the Most Important Factor
“Timing the real estate market is less about predicting rates and more about understanding your personal financial readiness,” said Greg Clement, founder and CEO at Realeflow. “Interest rates are crucial, but the right time to buy is when you’re financially prepared to commit, regardless of the market swings.”
O’Leary is correct that no matter the interest rates, a mortgage is still a significant amount of debt. When interest rates are low, it doesn’t mean that you should automatically decide to buy a home because you want to be confident that you’re financially prepared for this commitment.
“It’s important to realize buying a home shouldn’t just be about timing the market perfectly; it should be based on whether right now is the best time for you,” Lessinger said. “Homebuyers should shift their focus from timing the market to instead on whether a home aligns with one’s needs and financial goals both now and in the future.”
Every Real Estate Market Is Different
The local real estate market conditions of where you want to live should influence your decision to buy or not. Since every market is different, it’s difficult to develop a one-size-fits-all solution to home ownership.
“In areas where property values are expected to rise, buying even at a higher interest rate might make sense if the asset appreciates quickly,” said Paul de Langen, a real estate investor and founder of Wealth Winder. “On the flip side, in a declining market, securing a low-interest rate might not offset the loss in property value.”
You’ll always have to take into account the local real estate market because if you want to build a life in a certain community, you’ll want to find the right property that you can afford.
Other Factors Impact Your Decision To Buy a Home
“The decision to purchase a home should also take into account other economic indicators such as employment rates, economic growth and inflation, as well as personal circumstances like job security, long-term income stability and readiness to settle in one location,” de Langen said.
As a potential homebuyer, you’ll want to consider your financial health and ability to commit to a mortgage, as O’Leary suggests. You also want to be certain that you can handle economic shifts as the home’s value could drop, or you could lose your job. You want to work with a financial advisor to make an informed decision.
Mortgage Debt May Be Unavoidable
“It doesn’t matter what interest rates are, debt is debt,” O’Leary said in the video. He suggests that people should do their best to avoid mortgage debt, which isn’t a realistic option with current housing prices and inflation. While most people would want to be debt-free, you can’t enter the housing market without a mortgage in most cases.
Interest rates are crucial in deciding when to buy a home, but they shouldn’t be the only thing you take into account. You’ll want to consider your financial health to make a decision that makes sense for you.
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