The news that U.S. inflation has hit 7% not only makes people recoil at the sticker shock at the gas pump and in the grocery store aisles, but it also leads to some questions about what’s the best housing option right now: buying or renting. Although, to some, it’s more what is the least painful option than what is “best.”
Buying a house has deterred some budget-minded people since the pandemic sent real estate into a frenzy. While the market isn’t as red-hot as it was a year ago, it still seems like a seller’s market. However, taking a wait-and-see approach on buying may no longer be the safer choice, with worrying inflation-fueled increases in rent.
Related: 31 real estate terms decoded
How Does Inflation Affect Rent?
Inflation itself is not considered a bad thing by analysts. The Federal Reserve believes that its 2% target inflation rate encourages price stability and maximum employment. However, 2% is not where the U.S. is at.
Regarding the rise in “shelter” costs shown in the latest Consumer Price Index, it may be bad news, but it’s not surprising news. Anyone who has a landlord is aware of the trend. A study showed rents for a one-bedroom are jumping an average of 11.6% in 2021, with the average two-bedroom going up by 13.6% over the same period, according to Fortune.
The rent increase is … complicated. Increases are believed to be driven in part by a scarcity of supply. During the pandemic, when houses were being snapped up, properties for rent were converted into properties that could be sold (or turned into Airbnbs), particularly outside cities and in places attractive to the “laptop class.”
Another factor: Landlords who held back from increasing the rent through 2020 and much of 2021 are now trying to recover their losses. That could be why new leases are showing such sharp increases.
Of course, some people are more than satisfied with renting regardless. To make the best of things, they’re launching rental-friendly updates or renovations, many of them budget-friendly, too. While rising food and fuel costs definitely put the pressure on, these folks are working to keep their rent expense at the desirable percentage, which is no more than one-third of take-home pay.
The Advantages to Buying a House
In 2020, stories circulated of frenzied bidding wars for houses. Hours after a property went on the market, buyers were offering figures way over the asking price. To some degree, these days are over. For one, a great deal of desirable stock is gobbled up. Supply-chain issues and labor shortages have slowed down new construction.
Where does this leave first-time homebuyers? Danielle Hale, Realtor.com’s chief economist, told The New York Times last August that there are more entry-level homes for sale. “I still wouldn’t say those homes are plentiful, but there’s more of them for sale now than there was a year ago,” said Hale.
The inflation spike – one that’s seeing prices rising at their fastest pace in 40 years – is leading some people to say buying real estate is the smart move. A flurry of headlines over the last few months reminds us of the adage “real estate is a hedge against inflation.” This means for someone considering selling their house, the temperature could be warmer than ever.
As for buyers, interest rates have stayed near zero throughout the pandemic. This definitely encourages more applications for mortgages and refinancing.
The question is, what will happen if the Fed raises interest rates? Fed Chairman Jerome Powell recently indicated the central bank could raise interest rates this year as the U.S. economy didn’t need emergency support any longer.
If that happens, it’s possible that mortgages could have more issues, say some observers. But others say higher interest rates could lead to demand for new housing, and a very welcome boom would begin.
The Takeaway
A 40-year high in inflation spells bad news for renters since a rise in “shelter” costs is prominently mentioned in the new Consumer Price Index. The time may be right for buying a house, with interest rates remaining low and the red-hot real estate market cooling a bit.
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This article originally appeared onSoFi.com and was syndicated by MediaFeed.org.
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The homebuying process, explained
Purchasing a house or condo can be pretty complicated, but having a blueprint of the normal process can steady your nerves.
The journey can seem especially mystifying if you’re a first-time buyer since everything is likely to be new to you. First-time buyers made up 31% of all recent home buyers, according to the 2021 generational trends report from the National Association of Realtors (NAR).
The report also found that what it defines as millennials, buyers ages 22 to 40, continue to make up the largest share of homebuyers, 37%.
Related: Open house tips for homebuyers
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First, you’ll want to keep it real in your real estate search. To that end, here’s a home affordability calculator. Then here are the steps you can expect in the home-buying process.
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Before you start the search, consider the type of home you’d like to buy and what neighborhoods you’d want to live in. Then do some research to see what similar homes have sold for in the recent past. That should give you an idea of whether your resources align with your dream house or whether you need to reevaluate.
It’s good to know how much of a down payment you’ll need and what it will take to qualify for a home loan.
Lenders typically give great weight to your credit score and debt-to-income ratio. Most will also be looking to verify your income and at least two years’ worth of steady employment or consistent and ongoing income.
Most conventional mortgages—those originated by private lenders—require a down payment of at least 3%. An FHA loan requires as little as 3.5% down, and a VA loan, usually nothing down.
Putting less than 20% down on almost any purchase will mean ongoing fees or, in the case of a VA loan, a one-time fee.
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Next, you’ll need to figure out what kind of home you can afford. One way to do this is by getting prequalified with a mortgage lender. Using self-reported information, the lender reviews the basics of your financial situation and provides an estimate of how much you may be able to borrow and at what rates.
Getting prequalified with several lenders can help you get a sense of what kind of home you can afford and allow you to compare monthly payments and interest rates.
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It’s not required, but the vast majority of house hunters purchase a home through a real estate agent or broker.
You can hire either a Realtor or a real estate agent to assist you in your search. Both are licensed professionals. The main difference is that a NAR member is required to stick to a code of ethics that includes putting a client’s interests before their own.
Agents only get paid when you close on a home. The seller typically pays the real estate commission for both the listing agent and buyer’s agent.
A real estate agent will help you find property listings that fit your preferences, visit them to make sure they’re up to snuff, write offers and counteroffers, attend inspections, help you negotiate, and work with you to deal with any obstacles that emerge.
When looking for an agent, you can ask people you know for recommendations, note the names on signs in your area, and read reviews online. You may want to speak to several agents until you find one who feels right and may be considered an expert in the area where you want to buy.
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Once you’re ready to start seriously looking for a home, unless you’re a cash buyer you’ll need to lock down funding. You can do this by getting preapproved with a mortgage lender. This is a more involved process than prequalification.
You’ll fill out a detailed application and allow the lender to do a hard credit check and verify your finances.
When you’re preapproved for a mortgage, you will know exactly how much you can most likely borrow and at what terms. That’s because the entire credit portion of the loan has been verified.
Remember that you don’t have to take out the highest amount you qualify for if you find a more affordable home. In that scenario, you’d just ask your lender to adjust the preapproval letter based on the actual bid you’re making on a home.
Showing a seller the lender’s preapproval letter (typically valid for 90 days) can help you rise above the pack if multiple offers are in play.
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Next, it’s time to start shopping for a house or condo or buying into a co-op. If you have an agent, you’ll probably sit down and outline the parameters of what you’re looking for. Then the agent will start bringing to your attention properties that might fit the bill, and you’ll attend viewings and open houses.
But these days, there’s also a lot more you can do to jumpstart your home search on your own. Websites like Zillow, Trulia, Redfin and others can help you find out about properties as soon as they’re on the market.
If you’re moving forward without an agent, you can consider exploring platforms that have cropped up to help buyers who don’t have agents.
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Once you find the perfect home, you’re ready to make a formal purchase offer. This involves not only letting the seller know how much you’re willing to pay but providing evidence that you’ll be able to afford those costs and when you expect to close on the house. The offer also details what you expect the seller to do before closing.
At this stage, many buyers also provide earnest money, a deposit that can be up to 10% of the negotiated price. The offer might also include contingencies, which are conditions that need to be met in order for you to proceed with the transaction.
Some contingencies, like a home or roof inspection, are usually at the buyer’s discretion. Others, like a home appraisal, can be tied to the loan approval.
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Once you and the seller are on the same page about a price, the house goes into escrow. That involves a third party, namely an escrow officer, making sure that both of you meet the conditions you’ve agreed to.
Your real estate agent will help make sure any home inspection you ordered takes place. If there are unwelcome surprises, the agent might need to help you renegotiate the selling price. Depending on the severity of the surprise—if a significant home repair is needed, for example—the lender might require a complete fix before escrow closes. Once that’s all set, and all income, assets, and property conditions are signed off on by the underwriter, you will be issued final loan approval.
Next, you’ll sign the needed paperwork to take out the mortgage and finalize the home purchase. It can take a few days for the purchase money to reach the seller and for the county records to reflect the transfer of the sale.
And then the house is all yours! Move in and enjoy.
Vladimir Vladimirov
Buying a home isn’t a cakewalk, but the path is much smoother when you know the steps involved.
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This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636. For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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