Back in 1990, I was a first-time home buyer and scared to death. I had a good job, but the thought...
Rent Vs Buy | Is It a Good Time to Buy a House?
Can you afford to buy a home in Denver right now? For many, it’s not an easy decision making the leap from renting to owning.
In July 2022, the median sold price for a house in the Denver metro area was $595,000 (attached and detached), according to the Denver Metro Association of Realtors’ August Market Trends Report. For a condo, the median sale price was $408,000; a single family home clocked in at $650,000. Based on the median prices, single-family homes sold for 8 1/2 percent higher that a year ago. However, prices dropped 3 percent from June to July 2022, and there is indication that the market is shifting in favor of home buyers.
Although mortgage rates are nearly double what they were last year at this time, buying still might be easier than you think, and the choice to rent or buy is about more than just finances. Rent in the Denver area continues to climb so it's important to consider the following questions if you’re weighing this decision.
Can I Afford a House in Denver?
Let’s say you want to buy a house priced at $510,000. Did you know you don’t need 20 percent down these days to get a loan? With 10 percent down and good to excellent credit, a 30-year, fixed-rate loan at 5.5 percent would give you a monthly principal and interest payment of $3,392.
This figure includes homeowners insurance and property taxes (both estimates -- check with your insurance company and local county government for more accurate quotes). You'll also have to budget for regular maintenance to cover your new home. Finally, you may need to come up with about 1 percent of the purchase price for closing costs in addition to your down payment, or you may be able to roll the closing costs into your loan, which increases your loan costs slightly.
If a 10 percent down payment isn’t doable and you want to buy soon, there are ways to get a home with a lower down payment. You could get an FHA loan with 3.5 percent down or a conventional loan with 3% or 5% down. In either case, you’ll be required to pay mortgage insurance premiums. Your monthly payment will be higher in this scenario since you’re borrowing more and paying the mortgage insurance premiums. The good news is you will get a break on your taxes and be building equity over time.
(Be aware that many lenders have tightened up their lending practices since the pandemic. Greater emphasis has been placed on your credit score and employment history).
If 20 percent is possible for you, knocking off that monthly PMI payment can do wonders for your monthly payment, see below:
Owning a home requires enough financial stability to keep up with the mortgage and associated expenses. Also, many people enjoy customizing their home with upgrades and remodeling projects, which can be rewarding but aren’t cheap. If your income is highly irregular, your current job looks shaky, or you’re considering a major career change, it might not be wise to add the stress of a mortgage.
Furthermore, because of the closing costs associated with taking out a mortgage and the transaction costs associated with selling a home, you might not come out ahead if you need to sell within a few years of buying. Continued home price appreciation might continue but not at the double-digit rate we've seen over the last few years. You need to be aware of potential changes in housing values.
If you buy a home and the value drops in another year or two, you could find yourself upside down on your mortgage — owing more than your home is worth — and unable to move. For these reasons, it’s best to postpone buying until you’re reasonably sure you’ll want to stay in the same home for years to come. If you might need to make a major move for work or family reasons, waiting until your circumstances seem more stable might be a good choice.
Let’s say you do have a stable financial and family situation, but you have an active social life or lots of hobbies. You might not want to become a homeowner. Renting means less responsibility, i.e. no yard work and no maintenance. It also means no repair bills and no need to come up with $10,000-$15,000 for a new roof. That being said, buying a condo with a well-run, fiscally responsible homeowners association can be a good compromise between renting and owning a house. The association will use your HOA dues to take care of all exterior and communal maintenance.
Also, renting comes with uncertainties that homeownership doesn’t. The landlord may not renew your lease. Rental prices can increase rapidly as we have seen in the Denver area. You might be forced to move for reasons beyond your control. With a fixed-rate mortgage, you’ll always know what your monthly payment will be for the life of the loan. Then again, you may still face some unpredictable situations due to the cost and timing of repairs, and potential insurance premium and property tax increases.
Is it a Good Time to Buy a House?
Home prices have been been on the rise in Denver for years now. However, the real estate market is starting to shift, and home sellers no longer have the upper hand. Depending on the location, asking price and the type of residence, home buyers are now able to negotiate with home sellers and price reductions are becoming more common. Typically during the fall, there are fewer people looking to buy so this type of year bodes well for the home buyer. However, there continues to be great demand for homes under $550,000, and residences meeting that price point sell quickly.
The truth is, no one can predict what will happen with housing prices because what happened in the past doesn’t necessarily foretell what will happen in the future.
Several factors could affect Denver rents and home prices in the near future:
- Denver's Population Continues to Increase: Denver continues to be one of the most desirable large cities in the country.
- Relocations of major corporate headquarters to the city continue to occur. Check out some of the companies that have moved to Denver in the last year. As a result, there is a huge demand for apartments and other housing near downtown Denver.
- Mortgage interest rates have increased since 2021. If you’re using a mortgage to buy your home, the higher the interest rate, the less you can borrow. With current rates for a 30-year mortgage around 5.75 percent, some people are no longer looking to buy which has created more inventory and given home buyers more power to negotiate.
Is Renting Better for My Finances and Lifestyle Right Now?
The high cost to buy a home in Denver and the major commitment it represents means that renting will be more appealing to many people, especially given the number of new apartments available. Renting can certainly be more affordable, especially if all you need is a studio. However, most people want a little more room than what a studio or micro-unit offers. According to Zumper, the average rent in metro Denver for a one-bedroom apartment is $1,697. Even though this is less than a mortgage, it's money that goes into the landlord's pocket and you receive no tax benefits or equity that helps you build wealth.
Newcomers to Denver and those who expect significant career or life changes in the next few years might be better off with the flexibility of renting while they see how their needs evolve. Rapid career advancement or getting married and having kids could have a big impact on what kind of housing you prefer.
The Bottom Line
Simple buy vs. rent reports and calculators don’t take into account all the costs associated with homeownership or all the emotional and lifestyle factors that play into the rent vs. buy decision. You can use them as a starting point, but they can’t make this major choice for you. If you are considering buying a house or condo and wonder how much you can afford, it's good to sit down with a lender and go over your options. If anything, a lender can help you put together a plan to make home-buying a reality down the road.
At Usaj Realty, we are clearly in favor of homeownership, but we aren’t in the business of helping people make decisions that they'll later regret. Feel free to reach out to us if you’re interested in learning more about whether buying a home in Denver is right for you.
(Editor's note: This blog was previously published in November of 2019. It has been completely updated to provide current information).