Is This the Worst Time in History to Buy a House?

Jun 7, 2021

In April 2021, Zillow reported nearly half (47%) of homes were on the market for less than a week before a pending sale, with 76% on the market for less than a month. Many houses are selling above asking price! All potential sellers and buyers are impacted. What does this mean for you and how can you benefit from this housing boom?

Imagine you are a family of five in search of your forever home. You've spent the last five years frugally saving a down payment and the feeling of buyer's bliss is moments away. Your starter home is busting at the seams and space is a necessity.

Then you and your family walk into house after house, only for each to sell within three days of being on the market and for 20% above your anticipated budget. The feelings of anxiety, frustration, and the urgency to "make a decision now" without proper inspection and due diligence run strong. Some may call these first-world problems, but the struggle is real for nearly an entire generation of young Americans.

How Did We Get Here

Low housing supply, historically low interest rates, 72 million Millennials, soaring lumber prices, and institutional investors created the perfect storm. Couple that with a pandemic lockdown that made some Americans say, "I'm not moving" due to fears of an economic recession and others to say, "I need a bigger home". Again, welcome to first-world issues.

When the cost of building is high, it becomes difficult for supply to keep up with increasing demand. When interest rates are rock bottom, mortgage payments are lower, allowing buyers to pay a higher price for a home while keeping their overall mortgage payment within budget. When our country's largest generation is starting families, housing demand will naturally increase. When pandemic lockdowns hit and business transactions become virtual, housing demands quickly intensify.

The Quiet Investor Sitting in the Corner

When a big opportunity presents itself, big money follows. To add to the high demand and short supply, large investment groups around the country have been snatching up single-family homes, either to rent out for income or to fix-and-flip. Florida, Arizona, and other attractive remote work destinations have seen private equity and other investment groups step in as cash-offer buyers.

In December 2020, Fundrise, an online property-investing platform, paid $32 million for a community of 124 recently built houses in Conroe, Texas. All for rental income. With interest rates at historic lows, investors are desperate for higher-yielding investments than traditional bonds. In some instances, the purchase price is less of a concern, even if it means overpaying. The investors believe the high rental income outweighs the risk of reselling the house at a loss in the future. All investments come with different risks and rewards.

How Can You Benefit?

It is good for existing homeowners when housing prices go up. Your asset is worth more while your fixed mortgage payment and other housing expenses stay relatively the same. And, if you are looking to downsize, there's never been a better time to do so. However, if you are looking to upsize, you may get more for the home you are selling, but you will likely pay more for the house you purchase. It’s a “relative” pricing environment!

The challenge comes when looking to make home improvements and upgrades. Since building material costs have soared by 30% to 50%, renovations can stretch your remodeling budget. However, if you are short on cash, now may be an opportune time to tap into your home equity. With high valuations and low interest rates, you may be able to access cash through a home equity line of credit (HELOC), home equity loan, or a cash-out refinance.

Summary

Home prices have been soaring across the country and there are new institutional investors entering the market to compete with traditional buyers. The economy is bouncing back and inflation is affecting building costs. The housing supply cannot keep up with demand and many Americans are struggling to find a home.

However, with interest rates near all-time lows and home equity at all-time highs, current homeowners may enjoy a benefit when it comes to cashing out equity. We recommend working with your financial advisor or mortgage lender to find the best option for your financial situation.

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