The pandemic had a real winner amid its destruction: residential real estate.
In May 2020, when the National Association of Realtors surveyed members on the impact of COVID-19 on their markets, 68% of respondents said that no sellers had reduced listing prices to attract buyers.
Then in December, the national median listing price—$340,000—was higher than the previous year, Realtor.com reported. Interest rates hit record lows several times recently, and economists suggest a housing crash is unlikely.
So when is it a good time to buy a house? It will depend on your unique financial circumstances and local market dynamics.
Determining When You’re Ready to Buy
Before you assess the current real estate market and pay close attention to interest rate fluctuations, it’s important to understand your financial and personal situation.
By evaluating your unique situation, you can decide if you’re in good standing to make the move.
Here are a few factors you may want to consider before deciding if a new home is a good play right now.
Making Room in the Budget
Buying a home comes with a lot of expenses. For starters, you need to come up with a down payment.
While 20% of the home’s value is the benchmark, you may only need 3.5% if you apply for an FHA loan. But even 3.5% can be a chunk of change. If you want to buy a $200,000 house, 3.5% is $7,000.
Therefore, your budget should be big enough to cover a down payment as well as closing costs, which typically include homeowners insurance, appraisal fees, property taxes, and any mortgage insurance.
Count on buyer’s closing costs of 3% to 5% of the home’s purchase price.
Remaining Consistent
How long do you plan to live in the city where you’re eyeing a home? It’s important because staying put will give your home time to appreciate (subject to market fluctuations).
Since mortgage lenders pay close attention to job consistency and a steady income, you may also want to consider your job security. Especially during uncertain times, it’s crucial to feel confident knowing you can make your mortgage payments every month.
Checking Your Financial Profile
It’s a good idea to check your financial profile. Doing so may help you secure better financing terms when you purchase a home. Lenders will review your credit history, debt-to-income ratio, and assets, among other factors, to determine your eligibility for a mortgage.
Lenders review your credit history to gauge your creditworthiness and the level of risk to lend you money. They look at your DTI to indicate how much of your income goes toward debt payments every month.
If your ratio is high, it can show you’re overleveraged, which may mean you’re not in a position to take on more debt like a mortgage. You may also face a higher interest rate.
Last, a mortgage applicant can list assets like cash and investments. The more assets you have, the less risky lenders view you.
Weighing Renting Vs. Buying
You may want to compare renting vs. buying a home.
If renting a home in your community is a lot less expensive than buying, you may want to hold off on a home purchase. Conversely, if renting is more expensive, you may be more enticed to purchase a new home.
Zillow offers a calculator to compare renting and buying.
Overall, if you find that these factors point you in the direction of homeownership, it’s possible you’re ready to buy a home and can begin determining the perfect time to pounce.
Observing Interest Rates
When determining if now is a good time to buy a house, buyers should look closely at interest rates.
Financial institutions charge interest to cover the costs of loaning money when they offer you a mortgage. The interest rate they charge is influenced by the Federal Reserve, but mortgage-backed securities are considered to be the main driver.
When interest rates are low, borrowing money is less expensive to the borrower. As interest rates rise, borrowing money becomes more costly. The government has been slashing rates to keep buyers in the market.
But keep in mind that the rate and terms you qualify for will depend on financial factors including your credit score, down payment, and loan amount.
Timing the Real Estate Market
Essentially, to time any market, you want to aim to buy low and sell high. If you’re going to buy a property, you’ll want to ideally buy when there are more sellers than there are buyers—a buyer’s market.
In a buyer’s market, buyers have an abundance of homes to choose from. This may also give you leverage to ask for more concessions from sellers eager to close a deal, such as a seller credit toward your closing costs or help covering the cost of repairs.
Conversely, in a seller’s market, real estate inventory is low and demand is high, which may drive up home prices.
To identify the current market conditions, you may want to visit real estate websites like Zillow, Redfin, Realtor.com, or Trulia to look at inventory in your area or ZIP code.
Typically, it’s a buyer’s market if you see more than seven months’ worth of inventory.
If you see five to seven months of inventory, you’re in a balanced market that isn’t especially beneficial to buyers or sellers.
It’s a seller’s market when there is less than five months’ worth of inventory.
To calculate inventory , Zillow recommends taking the number of houses for sale in your desired location and dividing that by the number of sales in the past 30 days. So if there were 10 houses for sale in a target area and only one sold in the last month, that would equal 10 months of inventory, indicative of a buyer’s market.
In addition to inventory, it’s best to look at new construction as well. When fewer houses are being built, the demand and prices are higher. To view current trends, you can visit the U.S. Census Bureau .
Understanding Local Economics and Trends
Because prices can vastly vary from area to area, real estate is often considered a location-driven market. This means that general rules of thumb might not be valid in every region or city.
Also, local economics may play a role in housing demand. For instance, if a large company decides to move its operations to a city, that city may experience a housing boom that creates a spike in house prices.
That said, hopeful buyers will want to pay close attention to the economic happenings and housing trends in their desired location.
The Takeaway
If you find a home that seems right for you, your employment is stable, and you can get a home loan at historically low rates, buying may make sense. Then again, when home prices continue galloping upward, comparing the costs of renting and buying may be called for.
If you’re ready to buy, shopping around for the right mortgage and getting prequalified are first steps.
SoFi offers mortgage loans with a variety of options and no hidden fees, and the process is all online.
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