There is no question that the housing market has been crazy lately. Prices increasing on what seems to be a daily basis, all cash offers, over asking price offers, and inspection contingencies being waived.

So, if you are ready to buy a home now, what should you be thinking about? First, it’s important to remember that nobody knows for sure what will happen with housing prices in the near term.

Yes, there could be a significant drop in prices. But prices could also stay flat for a period of time or even continue to increase. And you’d be left waiting for that drop in prices only to end up paying more down the road.

Usually, the best defense against financial uncertainty is diversification. But in this case you’re either in or out when it comes to buying a house. So you need to have other ways to minimize the risk of buying in this type of market.

How Long Do You Plan To Stay In The Home

The best way to reduce your risk is to only buy if you plan on being in your house for a long period of time. In this case, I think that means 10-15 years or more. In that time frame, the short-term ups and downs in prices are likely to be smoothed out a bit. And you minimize your chances of losing money on your house when you do go to sell.

If you’re looking to buy and you think you may move in the next 5-10 years, just be cautious. Have a plan for what you would do if the value of your home plummeted. And this is true at any point in time, not just when prices are as high as they are today. If you think you may move to a different part of the country, be even more careful because prices in one area could drop off while prices in other areas remain the same. And you don’t want to be paying top dollar for a new house while losing money on selling your current home.

Will Your Total Housing Costs Work With Your Budget

If you’re concerned about not being able to put down 20% as prices continue to skyrocket, don’t worry too much if this is your first home purchase. Just make sure the payments (including the cost of private mortgage insurance) fit within your budget and allow you to continue saving what you need to achieve your other financial goals.

A good rule of thumb is that your total housing costs shouldn’t exceed 25-30% of your gross income. This works well if you expect your income to increase over time since your mortgage payments stay consistent with a fixed rate loan. If you expect your income to remain flat for the foreseeable future, target something less than 25% of your income to give yourself some cushion.

Other Things To Consider

If you are already trying to buy and are simply being outbid in this wild market, you may just need to be patient. Eventually there will need to be some correction in this disconnect between supply and demand.

In the meantime, proceed with caution when it comes to making offers that push your budget to the limits. And if you plan to waive an inspection, make sure you have a sufficient emergency fund in case something comes up after you move in.

Overall, the current market can be intimidating, especially to a first time buyer. But with some consideration to the factors above, you can decide if this is the right time for you and your family.

Joe Calvetti is a CPA and the founder of Still River Financial Planning, a comprehensive, fee-only financial planning firm that specializes in working with young families and professionals. Click here to learn more about how we work with clients.

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Disclaimer: The information provided above is for educational purposes only and should not be considered financial, legal, or tax advice. You should consult with a professional for advice specific to your situation.