Is Now a Good Time to Invest in Real Estate?
Wondering if 2022 is the year to purchase another real estate property? Now could be an excellent time to buy – or not.
2021 was undoubtedly a unique year for real estate. With record-low interest rates, more work-from-home opportunities, and a great migration of people moving out of densely populated areas, Americans saw housing prices climb to all-time highs.
According to Redfin, 74.3% of offers involved a bidding war in April 2021. The demand for housing and low inventory drove prices upward, which is true over most of the country.
Here are a few reasons why you should – and maybe shouldn’t – consider investing in real estate right now.
Why 2022 is an excellent time to buy real estate
According to Clever, in Alaska, home prices are more than the national average and appreciating steadily.
It’s a buyer’s market in Alaska.
If you are considering purchasing real estate in Alaska, the good news is that it’s a buyer’s market right now. While prices are gradually rising and interest rates remain low, there is plenty of inventory available, and that leaves room for negotiation.
Unlike many areas in the lower 48, Alaska is not experiencing bidding wars that overinflate the housing market. As a buyer, chances are you will be able to contemplate your next purchase.
Interest rates remain low.
As mentioned, interest rates for mortgages remain low. While it is expected that rates will rise later this year and into 2023, buyers can still borrow money at reasonable rates.
As of Friday, March 18, 2022, current rates in Alaska are 4.75% for a 30-year fixed and 3.75% for a 15-year fixed.
Knowing that rates are only expected to rise, if you are considering investing in real estate, locking in a still-low rate may make now a good time to buy.
With housing prices on the rise, so are rental prices.
Forecasted home appreciation may not be as high in 2022 as in 2021, but it is still steadily increasing. Due to rising home values, rental prices continue to grow as well.
According to rentdata.org, in 2021, “Alaska (AK) had the 10th highest rent in the country out of 56 states and territories. The Fair Market Rent in Alaska ranged from $788 for a 2-bedroom home in Yukon-Koyukuk Census Area, AK, to $2,022 for a similar property in Juneau City and Borough.”
If you are considering buying a property to rent it out, the rental potential for Alaska remains positively forecasted through 2022 and beyond.
Why 2022 may not be a great time to buy real estate
As a financial advisor, I know that determining if it’s a good time to invest in real estate isn’t just a matter of what the housing market looks like. Your individual financial situation and goals are a much better indicator of whether now is the right time to buy a home or not.
Here are some financial planning considerations all buyers should think through before making a real estate purchase:
Can you afford it?
The question of whether or not you can afford to buy a house seems like an obvious one. The problem is that many people can be overly optimistic about their ability to afford a home they want. Regardless if it’s your primary residence or an investment property, you will have obligatory costs from mortgage payments, property taxes, energy bills, and maintenance costs.
If it is an investment property, you most certainly want to make sure you can pay for the home even if you go without renters for a while. Crazier things have happened, and you don’t want to be in a position where you can’t pay the bills.
I advise my clients that total housing costs should not exceed 20% of adjusted gross income. You’ll read elsewhere that some professionals recommend no more than 30% or the 28/36 rule, which states your mortgage alone shouldn’t exceed 28% of your income and 36% of your total debt. But I know that my clients in Alaska want more financial margin in their lives to afford experiences and other things beyond the cost of homeownership.
How long until you break even?
Knowing how long you need to hold onto a property to break even when you sell it is one of the most important questions to answer. If you think you may not live in Alaska for a long time or if it’s an investment property, treat a real estate purchase like a business decision and know your numbers.
Selling a home comes with some steep costs. You will pay somewhere near 6% of your property’s sale value in commissions to your selling agent to sell a home. And that is just the commissions. Go here for a full list of closing costs commonly associated with selling a home in Alaska.
Typically, you don’t want to purchase real estate unless you plan to hold onto it for a minimum of 5 years. On average, that is how long it takes to break even and start building equity in a property. This process may be accelerated depending on current market conditions. Still, it is a good idea to run the actual numbers with your financial advisor with best and worst-case scenarios first.
Does it fit with your overall life goals?
Ultimately, any major financial decision should align with your values and overall goals for your life. If buying a home right now does, great! In that case, current housing market conditions may play a limited role in your deciding factor.
If buying real estate right now doesn’t align with your goals, then it’s valuable to take a pause and reassess if this is the best way for you to direct your money at this time.
Many of my clients wind up making second home purchases somewhere in the lower 48, either because they like to vacation for part of the year or they are getting ready to transition elsewhere after retirement. The decision to buy a second home outside of your home state certainly deserves an even closer look at your overall financial situation and its impact on your total financial outlook.
As with any major financial decision, don’t make a real estate choice in a vacuum without consideration for how it will affect the other areas of your life.
If you are ever uncertain if your financial life aligns with your life goals, or if you know that it isn’t but aren’t sure what to do to get things reorganized, reach out to your financial advisor – or reach out to me at Frontier Financial Planning.