Buying a new home can be a necessity, a dream come true, a financial investment, or a combination of any or all of those reasons. Despite the groups of people out there that don’t want to own any home for any reason, home ownership is still a big part of the American dream, as it has been since the days of the pioneers.
Think about it for a second. Have you ever seen any of those old movies where the wagon trains rumbled across the country and hundreds of folks loaded up a covered wagon, risked their life and limb, and tried to start a new life out west somewhere? Part of that new start always involved building a future with a new home at its core. I still believe that rings true today, minus the wagon train part of course. So now that the pandemic is winding down and life is beginning to resemble what it was way back in the beginning of 2020, is this the right time to buy a new home that you have been waiting for?
Are You a First Time Homebuyer or a Seasoned Veteran?
When you buy a new home, it can be super exciting. It can also be super stressful, frustrating, scary, and exhausting.
If it’s your first time looking for your own new home, the challenge of finding the right home in the right neighborhood at the right price is even more daunting than it is for someone who has been to that battlefield before. I have purchased my own home four times over the past 50 years and I can testify that it did get easier as I went along. Knowing the what, how, when, and why’s of homebuying really helps, but those facts just don’t come to you in a dream. Experience teaches you and that means sometimes you do make mistakes.
Even though you may have a realtor “helping” you in this process, always remember that their goal is to sell and close a deal. I’d like to think think that they are always above doing only that, but they’re trying to make a living here so don’t just count on it.
It does require you to go with someone who you feel has the track record and gives off the vibrations that you can get confidently in tune with. If not, then find someone else to help you.
But as you go into this summer season, you’ll be grappling with some financial questions that are unlike those you may have faced before no matter whether you were a renter or a homeowner.
What Are Things Looking Like Out There Right Now?
The U.S. enters this summer with pandemic fatigue but that hasn’t slowed down homebuyer activity. The first six months of the year have seen rapid growth in home prices as low inventory of houses on the market combined with high buyer demand has created fierce competition in suburban areas and medium-to-small metro areas across the country.
The fast rollout of COVID-19 vaccines is making many hopeful that an end to the pandemic is in sight. Because of that, the housing market trends caused by the pandemic are expected to continue. But newer trends are now beginning to bubble up to the surface:
- Interest rates are rising slightly, but still are expected to remain relatively low
- Home inventory will increase, but it will remain a seller’s market
- Homebuyers will still be focused in the suburbs, but interest in city living will see an increase
Who Wants to Buy a New Home?
The pandemic drove mortgage interest rates to historic lows in 2020, and this year started off with a new record low for interest rates for 30-year, fixed-rate mortgages (Freddie Mac reported the average interest rate was 2.65% in January 2021).
The largest share of homebuyers across the U.S. right now are millennials, the “thirty-somethings”. Many young people out there remain committed to buying a home.
Mortgage Rates Are Going Up and Inventory Is Not!
Right now, mortgage rates are going upward, but still remain low from a historical standpoint. Now in June, Freddie Mac reported the average interest rate for a 30-year, fixed-rate mortgage was 2.93%, an increase of over 10%.
Low interest rates, the continued creation of new households across the U.S., and a desire for more space among existing homeowners have driven demand through the roof. Many areas are seller’s markets, meaning there just aren’t enough homes available to match the number of active buyers.
How much lower is the inventory? The number of homes on the market is about 50% lower than last June (2020), according to Realtor.com. With such competition, prices can be driven up higher and that also means that a search for your new home will take longer too. You can lose out to competing offers on a home before your offer is accepted.
Why Is It a Seller’s Market?
The main reason for the shortage of homes is that many homeowners chose not to relocate, especially if they were already in a house with plenty of space for remote work and virtual schooling. Low rates of construction also contributed to the shortages.
Sellers will continue to have the upper hand throughout the summer of 2021, and it’s reasonable to expect home prices will climb as a result. Last year in 2020, home prices increased 15.8%, according to the National Association of Realtors.
If You Are Looking to Buy a New Home, Keep These Things in Mind
1. Don’t buy a home *primarily* as an investment
Even if you live in an area where prices typically have appreciated, you can’t be sure that will continue. Owning a home is as much a personal investment as a financial one. Before you commit, assess your job stability and desire to stay in a particular location. As a rule of thumb, unless you plan to own a property for at least five years, buying may not work in your favor from a financial perspective.
2. Know what you can afford
You can use a mortgage calculator to get a sense of how much you can afford to borrow based on your monthly income and other financial obligations. There are no hard-and-fast rules for how much debt you can take on—though if your mortgage is insured by the Federal Housing Administration, your housing costs generally shouldn’t be more than 31% of your gross monthly income.
3. Check your credit score
Having a better credit score can mean lower mortgage rates. If you’re concerned about your score, you can always take steps to boost it before you start hunting for houses. Paying your bills on time and keeping your credit card balances low can help.
4. Understand all the costs in owning a home
Buying a home could involve more than just monthly mortgage payments. You will also have to pay property taxes and will likely have to carry some kind of homeowners’ insurance. You may need to do repairs such as a new roof or foundation, not to mention routine maintenance costs and any upgrades.
Condos or homes in a community that offers shared facilities such as a pool, also have monthly homeowner association fees. Such expenses could become a real headache in the event of a job loss or financial setback.
5. Plan to put down at least 20%
Most lenders won’t require you to put at least 20% down these days, but it’s a good idea to do this anyway. Otherwise, your lender will probably require you to carry private mortgage insurance (PMI). That means you’ll pay monthly PMI premiums in addition to your mortgage payments until your loan-to-value ratio reaches 80%. In general, the higher your down payment, the easier it will be to qualify for a mortgage loan and negotiate the lowest rate.
Also, the more you agree to put down, the likelier the chance that your offer is competitive with other bids, as financing can be a key consideration when sellers review multiple offers.
6. Know what documents you will need for your loan
Some of the more commonly requested documents include a fully executed agreement of sale for the property being purchased, financial statements for bank and brokerage accounts, pay stubs, previous W-2s, IRS Form 4506 (which authorizes a mortgage lender to obtain copies of a borrower’s tax returns directly from the IRS), and homeowners’ insurance policies.
7. Get pre-approved for a loan
Getting pre-approved lets you know how much home you can buy before you go house hunting. Plus, it lets real estate agents and sellers know that you’re a serious buyer because your financing is already arranged—which can be an advantage when making an offer.
The process to buy a new home may seem arduous, but for many people, the stress of home buying is outweighed by the pleasures of home ownership. Just remember that a little advance planning can make the buying process much easier.
Home buying isn’t going away anytime soon. Growing families need space and want space. If you find yourself in this market, there are always opportunities out there. Sometimes it’s just harder to find them.
Are you a buyer or seller in 2021? If so, what are your needs and goals? Have you done the math on this transaction and will you be able to afford it?