As the pandemic winds down, 2021 finds us in a strong seller’s market for home buying. Because we believe that homeownership is a crucial goal for anyone looking to build a secure financial future, we’re advocating more people consider taking the leap toward becoming homeowners this year.
June is National Homeownership Month, when we kick off the home-buying season and provide free education and resources, home buyer education, and personal coaching to help people achieve the dream of homeownership.
But this is no normal year, and the market isn’t anything like what we might normally see in June. While we do want everyone to be working toward homeownership, we want to make sure to offer some perspective on the current situation.
Why is everyone buying a home this year?
Right now, it seems there’s a buying frenzy, causing all sorts of effects on the market that make it unique:
Mortgage Interest rates are low
Interest rates are extraordinarily low, making it a good time to get a mortgage loan and lock in a low rate for the long haul. Anyone with the ability to get a home loan should be looking at their credit reports and making sure they’re credit picture is completely ready to get pre-qualified for a mortgage.
More millennials are buying homes
We’ve been practically begging millennials for a decade now to make homeownership a priority, but it’s been a tough sell up until now. Before the pandemic, the memory of the 2008 housing crash was fresh in everyone’s minds and scared off an entire generation from becoming homeowners.
But since the pandemic, millennials are realizing the benefits of homeownership like never before. They’ve reached the peak age to become homeowners, and they’re out there shopping for their first homes. We think this is a positive development, and one that should be encouraged, but there are some things to be cautious of.
2021 home buyers should be cautious
The market is hot, and people are ready to buy. But what’s the downside of the recent uptick in property sales?
There’s low inventory of available homes
Sellers are staying put, holding off moving AND because of low mortgage interest rates and more qualified buyers are in the market, there are not many homes available for sale, and the ones that hit the market are selling quickly, sometimes for much more than the asking price.
Property values are climbing
When we say much more than the asking price, we’re not kidding. Anecdotally, this year we’ve heard of houses getting competing offers that are tens of thousands of dollars over the asking price. Various cities have different sale-to-list ratios (that’s the average selling price compared to the initial asking price), with many cities exceeding 100%.
Typically, homes sell for less than the initial asking price, with sale-to-list ratios in the 90th percentile. But the national average is nearly 100% right now, with some cities exceeding 110% sale-to-list ratios.
Should you worry about a market crash?
Are these high prices cause for concern? What happens if the market crashes?
Here’s how we think about this topic: first off, it’s critical that you never buy a home as a short-term investment.
Buying a house isn’t a get rich quick scheme. You should buy a house so you have a long-term way to store wealth and prepare for the future while keeping a roof over your head. If you get into homeownership with the intention to sell soon and make a quick profit, then you WILL be affected if the market crashes.
But if you buy a home for the right reasons, locking in a low rate and settling in for homeownership over the long term, then fluctuations in the market may not affect you.
According to the National Association of Realtors, the current median length of time a homeowner stays in one home is 13 years. That’s a long time for the market to rebound and recoup any value that may be temporarily lost if there is a correction.
That’s why we think if you buy a home the right way, for the right reasons, a crash is less likely to affect you. Your loan and interest rate are locked in, and nothing changes for you unless you suddenly need to sell your home.
If you are considering an ARM (Adjustable Rate Mortgage), things may be different. A market correction or fluctuations in interest rates could very well cause you financial distress, and you might regret paying top dollar for a home if your mortgage payment suddenly gets much larger.
While we don’t think you should let some potential housing market crash dissuade you from homeownership, we do think you should talk to a housing counselor before considering any kind of adjustable rate mortgage.
What about home equity?
If the market were to decline and you own a home, you might lose out on the ability to tap into your home equity. Some people feel great about having a lot of wealth they could access by refinancing or taking out a home equity loan, and a housing market crash would devastate that untapped equity.
Is that something you should be worried about? Maybe, but we think too many people rely too much on home equity when they shouldn’t. Over the decades, we’ve seen a lot of people refinance their homes to pay down credit card debt, and this is a mistake. Refinancing to pay off revolving debt trades “good” debt (a mortgage) for bad (credit cards).
We’ve long urged people not to tap into their home equity in this way, because it jeopardizes your financial future to get through a short-term crisis.
Once you’ve cashed out the value of your home, you aren’t going to be able to rebuild it quickly.
For that reason, we’re not as concerned about untapped equity should the housing market fall—that equity should stay untapped anyway, and be given time to rebound.
If you’re very worried about losing the ability to cash out equity in your home, we think you should take a hard look at your financial situation. If a housing market correction would really sever your only lifeline, then things aren’t as good as they should be, and it’s time for some careful budgeting, paying down debts, and creating a more stable financial foundation for yourself.
Get home buyer assistance and coaching
Ultimately, every individual situation and location is unique. If you think your local real estate market is too inflated, then it might well be. Entering into homeownership is a huge decision and one that should be taken with care.
Get one-on-one coaching from a HUD-certified counselor if you’re getting ready to become a homeowner, and attend a first-time homebuyer education class as early in the home buying process as you can.
But don’t let the current condition of the market dissuade you from making homeownership a long-term priority—the sooner you become a homeowner, the better, and National Homeownership Month is the perfect time to start.