Now that spring has finally arrived and optimism about returning to normal life in the near future is realistic, should you go ahead with your postponed plans to buy a home this year?
If you have perused the multitude of websites to see what is currently available for sale, you are probably shocked to see that there are very few homes on the market. Even if you find one that went on the market today, there’s a good chance that it will be under contract by tomorrow, sometimes selling for $10,000 to $50,000 above the listed price!
So why is this happening? The simple answer is that demand is significantly higher than the supply of homes that are available, a classic example of the “Law of Supply and Demand”. In simple terms, if the number of people looking for homes exceeds the number of homes that are available, the price of the supply will increase. As of now, the Existing supply of available homes is at an all-time low of <3 months verses what is considered a balanced supply of homes for sale of 6 months. If you remember 2008, the opposite occurred as available homes out stripped the number of buyers, causing a 20% to 30%+ drop in prices for existing homes.
Will this situation continue long term? While none of us, including myself, can predict what is going to occur in the housing market, the consensus among various real estate resources including the National Association of Realtors®, Zillow and Realtor.com, is that average home prices for 2021 will increase by 3% to 5%, depending on the market. As available homes for sale increase during the remainder of this year, prices should stabilize and the need to pay more than the listed price should be significantly reduced as there will be more choices for buyers.
So, here are 3 questions you should be asking yourself:
Do I have to buy a home now or can I wait for a few months to see what happens to the housing market in my area?
Right now, because the demand for homes far exceeds homes that are available, inflated prices coupled by bidding wars amongst buyers, has resulted in selling prices that are 6% to 10% more than their realistic market values.
Besides demand, according to the Freddie Mac’s weekly summary of mortgages, a 30-year fixed rate mortgage is currently around 3%. Rates for the remainder of the year are expected to continue to remain stable at 3% to 3.25%, allowing buyers to wait for the supply to increase with minimal impact of potential increases in mortgage interest rates.
Therefore, if you really need to buy a home right now, do not buy into a bidding war! While the supply of homes is at historic lows, home inventory will increase this year, giving buyers more choices. Additionally, as mentioned above, interest rates are expected to remain at the current 3% to 3.25% levels, so waiting until things “cool down” later this summer, to buy an existing home will probably eliminate much of the current buying frenzy of paying $10,000 to $$30,000, or more, over the listed price.
Are you wishing to build your new home?
Buying a new home could be a viable alternative but does have some drawbacks. Reputable builders base their pricing on profit criteria aka bottom-line dollars to them. They also understand that 75% of their business comes through Realtors®, meaning that they are reluctant to play the highest bid game. Also, from the buyer’s viewpoint, you will be locking in a price point now versus 4 to 6 months from now when the home is finished. With this said, builder concessions and incentives will be limited due to the current seller’s market, although, in most markets, closing cost incentives offered by the builder, if you finance through their “recommended” lender(s), will likely remain.
Am I going to be in the house for less than 3 years?
If your answer is yes, here are some facts that you need to consider before signing on the dotted line as there is a good chance that your home will sell for less than your investment when you close 3 years from now, especially if you finance >95% of your purchase price.
Let’s look at this example:
You just closed on your home and paid $25,000 over the asking price as this was the only home that met your realistic needs. Your total purchase price was $375,000 plus closing costs (as sellers in this market don’t need to offer closing cost assistance) of $8,000. Therefore, your total investment in the home is $383,000.
Three years from now, you sell your home for $385,000, 10% higher than the actual market value of your home when you purchased it. The costs to sell your home will generally be in the 4% to 8% range covering commissions, (even if you sell your home without a listing broker) and closing fees. In this illustration, we will use 6% for closing costs, which means you will net $362,000.
Original investment $383,000
Sale price after 3 years $385,000
Less Closing costs @ 6% (23,100)
You will net $361,900
Let’s now look at your mortgage balance –
Your borrowed 95% of the purchase price or $356,000
You now owe $343,540
Your net proceeds $18,460
Your original investment
(down payment and closing costs) $ 18,750
Your net loss $(290)
In closing, why not consider investing in one of our home buying guides which provide some great tools to guide you in making the best decision(s) for you.
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