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There’s been a big debate waging in the real estate world as of late — is now a good time to buy a house or should buyers hold off?
Let’s take a closer look at the current real estate market and how to navigate it, as well as some best practices for buying a home that will be relevant whether you choose to buy now or in the future.
Why now is a good time to buy a house
Spending extra time at home for this past year has made it clear just how important it is to live somewhere you love and feel comfortable. If you’re considering buying a home right now, let’s look at why now is a good time to do so.
Home prices are expected to keep rising
While home prices may seem high now in comparison to 2019, they’re only anticipated to keep rising. Luckily, prices aren’t expected to grow as much as they did in 2020. Forecasts from Fannie Mae, Freddie Mac, the National Association of Realtors, and the Mortgage Bankers Association predict that in 2021 home prices will go up by 5.9%, which is significantly less than the 10% jump seen in 2020.
Shopping for a home in spring may also be your last chance to snag a lower priced home for the next few months, as according to NerdWallet, June and July are typically the most expensive months of the year to buy a home.
Mortgage rates are low
Even though home prices may be higher than in recent years, mortgage prices dropped to historic lows last year and experts expect them to stay low in 2021.
Forecasts from Fannie Mae, Freddie Mac, the National Association of Realtors, and the Mortgage Bankers Association indicate that in 2021, the 30-year fixed-rate mortgage will rise to an average 3.15% compared to 3.025% in 2020. These low rates help save a lot of money over the life of your mortgage, which can balance out higher home costs. Shop around when it comes time to choose a lender to make sure you get your hands on the lowest rates possible.
Why now might be a challenging time to buy a house
There are of course some downsides to buying a home right now that can make the experience more challenging than you might like it to be.
COVID-19, travel, and social distancing limitations
Because social distancing measures relating to the coronavirus pandemic are still in place, touring homes can be more challenging than in the past. Open houses may have lines out the door to accommodate social distancing limits and in some cases you will need to make individual appointments to see houses which can make managing your schedule more difficult. While video home tours are now an option, they can’t quite replace seeing a home in person.
If you’re moving out-of-state, you may find it difficult or uncomfortable to travel to look at homes you’re considering buying which can add an extra level of stress to the process. Especially if you aren’t familiar with the area and are hoping to check out different neighborhoods before making a purchase.
Competition among buyers
Because so many people want to buy homes right now, there is more demand for homes than there are homes available for sale. When home inventory is low and you’re left house hunting in a seller’s market, you’ll have a lot more competition for your dream home.
Not only does this mean you’ll have fewer home options available to you, but there’s a good chance you’ll need to be able to move quickly, make compromises, or end up in a bidding war. The National Association of Realtors (NAR) found that in February 2021, 74% of homes that sold that month were on the market for less than a month.
Higher home prices
Increased competition for homes can hit your wallet hard. NAR also found that the median existing home price in February of 2021 was $313,000, which was 15.8% higher than the same month in 2020.
Are you ready to buy a home?
No matter what market you’re planning on buying a home in, it’s important to pause and analyze your personal readiness. As tempting as it may be to jump in if competition and prices are low, keep some of the following factors in mind when determining your readiness.
Buying a home is a major financial commitment. You’ll want your savings, credit score, and debt levels to make buying a home easier, not harder.
Savings-wise, you need to look past just your down payment and should budget for mortgage closing costs, moving expenses, and costs that can pop up after you purchase the home. The higher your mortgage is, the lower your monthly payments will be, so taking the time to save more might make managing your mortgage easier in the long run.
When it comes to your credit score, bigger is also better. The higher your credit score is, the better mortgage rates and terms you’ll qualify for. Generally, having a score of 740 or higher will get you the top terms, but you should be able to qualify for a mortgage easily enough if you have a score in the 600s.
If you have debt, you should be aware that mortgage lenders are going to consider your debt-to-income ratio (DTI) when determining if you qualify for a mortgage and what terms you’ll receive. A DTI represents the percentage of your monthly gross income that you spend on debt payments (auto loan, student loans, other mortgages, etc.). Ideally, you’ll have a DTI of 36% or below to keep lenders happy and in this case the lower your score is, the better.
Your stage of life
As important as it is to be financially ready to buy a home, you also need to be emotionally and logistically ready. Take some time to consider how buying a home will affect your life goals. You don’t want to sell a house too quickly, as that can lower your chance of profiting from the rising property values that happen over longer periods of time, so you’ll want to evaluate whether buying a home now makes sense long-term. Do you like to travel year-round? The responsibility of a large yard may slow you down. Are you hoping to have a bunch of kids? A two-bedroom condo may be a tight squeeze in a few years.
Buying a home comes with a lot of responsibility, which is something you may or may not be ready for. It is pretty convenient when it’s the landlord's problem if a pipe leaks or a drain clogs!
You can also take your career goals under consideration. If moving in the near future for work is a realistic possibility, purchasing a home now may give you less flexibility to pursue a new opportunity. Job security is also a key element of being ready to buy a home.
While we can’t predict every twist and turn in our careers, if you think there’s a chance you’ll get laid off in the near future (like if your company was greatly impacted by the pandemic), you may want to hold off on buying a home.
Buying in a seller’s market
If you are ready to buy a home and feel prepared to house hunt during a seller’s market, whether that be in 2021 or beyond, let’s look at some of the important questions you’ll want answers to.
Is it hard to buy in a seller’s market?
It can be, especially if you have various requirements for the home you’re looking for or have a strict budget.
If you have your heart set on an in-demand neighborhood or want to find a turnkey home that meets all your style and functionality requirements, you may find the home buying timeline is longer than you’d like.. Budget plays a big factor here as increased competition during a seller’s market can lead to bidding wars and the home you thought was in your price range can suddenly jump in price.
When will the seller’s market end?
It’s impossible to predict exactly when our current seller’s market will end, but housing markets can change quickly, so the end may be closer than it seems. This is especially true in light of COVID-19 when many made reactionary home purchases. Just because a city received an influx of new residents at the beginning of the pandemic when newly remote workers were looking to make changes, does not mean they will continue to flood into that city once the coronavirus pandemic is over.
How can you make your offer more competitive?
Having a pre-approval letter is a key step that will make house hunting easier and can help you make an offer quickly and effectively once you find a home you love.
A preapproval letter from a lender states how much that lender will likely be willing to give you to purchase a home. This isn’t a guaranteed amount, but it provides a reliable estimate of what your loan opportunities will look like once you apply. The lender looks at your finances, including your income, savings, debt, and credit score, to determine how reliable of a borrower you’ll be and what you can realistically afford to pay back. Sellers prefer to work with buyers who have preapproval letters as it indicates whether you’ll be able to follow through with the sale.
Aiming for a 20% down payment can also help you stand out as a buyer. Technically you don’t have to have a 20% down payment in order to buy a home, especially if you’re a first-time home buyer, but in a seller’s market it can be helpful. That’s because first-time homebuyers without 20% available often require the aid of a down payment assistance program, many of which have a reputation for slowing down transactions. If a seller is in a rush, they may choose to sell to someone who isn’t working with one of these programs.
No matter what the current housing market looks like, whether or not now is a good time to buy a home truly depends on your unique financial situation and personal goals. There are both pros and cons associated with buying a home in today’s market, but you’ll have to decide if the benefits are worth it or if you’ll want to hold off on buying.