Mortgage Rates Reach Record Lows – Is Now The Right Time To Buy A House?

Real Estate

There’s been a lot of analysis and debate on exactly where the stock market is headed in the post-COVID-19 environment. But much less attention has been focused on the housing market. Or more precisely, on whether now is the right time to buy a house.

On the plus side, house prices have held steady and even increased slightly in the face of the economic shutdown that followed the pandemic. And interest rates are near all-time lows and could potentially go lower still.

But on the negative side, employment – though recovering since May – remains a question mark. And with housing inventory remaining tight with tens of thousands of homes having been withdrawn from the market during the shutdown, prices may go even higher, lowering affordability.

Is now the right time to buy a home? Let’s consider both possibilities.

The Case for Buying Now

Prices are Continuing to Rise

Any thoughts of bargain-hunting in the aftermath of the coronavirus shutdown have proven to be a losing strategy. While it seemed likely that house prices would decline due to lack of sales activity, the opposite has occurred.

According to recent statistics issued by Realtor.com, median listing prices are 5.6% higher than one year ago, and more than a full percentage point above the levels just before the COVID pandemic shut down the economy.

“Housing prices have risen steadily over the past two decades,” stresses Michael Frick, President of Avalon Capital Advisors. “On average, housing prices nationwide have doubled since December 2000 according to Freddie Mac. Some people think they should wait to buy until home prices go back down; however, it is nearly impossible to time pricing in the housing market in order to buy at the bottom of the market trend.”  

With the economy opening up since May, it’s likely any delay in purchasing a home will result in paying a higher price.

It’s Easier to Sell Your Current House than Ever

Having a house to sell is a common complication when looking to buy a new home. But if you’re looking to trade-up or make a move to a new location, it may be easier to sell your current home than at any time in recent memory.

Since so many sellers either removed their properties from the market as the pandemic unfolded, or chose not to list them at all. It’s made inventory is tight in many markets. That not only makes it possible you’ll get a higher price on the sale of your current home, but also that you’ll sell it quickly.

For example, a couple I know who are in the early 50s wanted to relocate from Florida to the Nashville area to be closer to family. They contemplated waiting for things to settle down with the coronavirus but decided to go forward anyway. A relocation program through his employer required only that they get an offer on the current home, and the company would handle all the details. They got an offer on their Florida home within just a few weeks, then luckily found a home in the Nashville area at the same time.

But as tight as inventory is, that strategy can also backfire.

A young couple I know of similarly wanted to move closer to family. They couldn’t find a house in the area they were looking to move into, but they did find a lot they felt they could build on. Fearing it would take a long time to sell their current home, they put it on the market months before the new house would be completed.

The house sold within one week. Since the new home wasn’t ready, they had to move in with the wife’s parents until it was.

And in the strange way life often works, the couple who bought their house was in a very similar situation. It was an older couple who were forced to rent an apartment because their previous home sold much more quickly than expected.

The lack of inventory means existing homeowners are unlikely to face many obstacles in selling their current homes to buy new ones.

Mortgage Rates are Near All-time Lows

Buying now will give you an opportunity to lock-in the lowest mortgage rates in history. According to Freddie Mac, the rate is 3.13% on a 30-year fixed-rate mortgage, and 2.59% on a 15-year mortgage. (Both numbers are as of June 25.)

For comparison, the rate on a 30-year fixed rate mortgage was 3.72% on January 2. That kind of decline results in a significant drop in your monthly payment.

For example, a 30-year fixed rate mortgage for $300,000 at 3.72% gives a monthly payment of $1,384. But the same loan with an interest rate of 3.12% falls $1,284, saving you a full $100 per month.

“With interest rates at the lowest level in decades, if you’re in the market for a home, now is a good time to buy,” advises Barbara Friedberg, MBA at Robo-Avisor Pros. “Just remember to lock in the low rates with a fixed rate mortgage. You’ll find mortgage brokers attempting to sell you a variable rate – but stick with fixed to lock in the low rates. Also, depending upon the competitiveness of the real estate market in your region, you may be able to negotiate a lower price.” 

Though it’s possible mortgage rates can fall even lower from here, there’s no way to know that will happen. But what we do know for certain is that interest rates are better now than they’ve ever been, making buying now more compelling than ever.

The Coronavirus Shutdown Didn’t Kill the Housing Market

When the coronavirus first began making the news in February and March there were dire predictions of the impact it would have on the housing market. Speculation abounded that both sales and prices would collapse in the face of a crushing recession and the uncertainty it would bring.

But we’re now in the middle of 2020, and not only is the housing market showing signs of a recovery, but a strong one at that.

The fact that the housing market successfully weathered the coronavirus and the shutdown that followed are a strong indication of positive price action going forward.

The Case for Not Buying Now

Current Housing Strength May be Temporary

It’s often difficult to see radical changes in the course of any market, especially one that’s moving convincingly in one direction. But it’s possible the housing recovery from the shutdown may be temporary.

One contributing factor in recent weeks may be pent-up demand from the shutdown itself. Many thousands of homes were removed from the market, and buying activity plummeted. But the decline in sales lasted only about three months. If there is pent-up demand it’s probably very limited.

Low interest rates have also been a contributing factor, but as we know from history, they can prove fickle. An increase of 50 basis points or so can change the whole dynamic of the housing market.

But perhaps the biggest catalyst of all in the housing recovery has been one that has a predictable end. That’s the $3 trillion or so pumped into the economy by the federal government. This has largely been done through the Paycheck Protection Program, the $1,200 stimulus checks back in March, and a $600 per week federal unemployment program. All have either expired or are set to do so in the coming weeks. The impact of the disappearance of those stimulus programs on the housing program has yet to be seen.

“At least by certain measures, there has been a “V”-shaped recovery in home sales, as well as amazing resiliency in the apartment market, but what happens after the music stops?” asks Forbes Contributor, Brad Hunter. “It’s not clear whether the supplementary unemployment payments are going to get extended, or whether they will be reduced, but there will be a time when that program, along with the other measures listed above will get phased out. Nobody can forecast the timing and magnitudes with confidence, but it certainly is a good time to start thinking ahead about the likely impacts.”

The Economy is in a Recession of Unknown Duration

The US is officially in a recession, and by all accounts it’s a very unusual one. We went from a record stock market and record low unemployment in February, into a deep recession in a matter of weeks. Entire industries – airlines, travel companies, retail, restaurants, and many others – took swift and severe hits. Bankruptcy filings by major companies have become regular events. And even state and local governments are looking at budget crises brought on by sharp declines in tax revenues.

The combination is making the likelihood of the much predicted “V” shaped recovery no better than educated guess.

Because of the unique nature of this recession, it’s not known how severe it will be or how long it will last. And while buying a home late in a recession has often proven to be a winning strategy, buying too early often means buying at the price peak of the previous boom. Only time will tell.

As Goes Employment, So Goes the Housing Market – At Least Historically

Despite low interest rates, activity in the housing market has always been closely associated with employment. As we’ve seen in recent years, low rates of unemployment coincide with brisk housing sales activity and rising price levels. But the last recession, which featured double-digit unemployment, not only caused home sales to slow, but also prices to crater.

It’s been estimated that as many as 47 million people went through a period of unemployment since the coronavirus pandemic shutdown began. But while many have been called back to work since the economy began reopening in May, more than 20 million remain unemployed.

More recent figures are showing new unemployment claims are averaging about 1.5 million per week. Given that the economy began reopening in May, continued job losses since may be hinting at a more permanent situation. Put another way, the newly unemployed aren’t being let go because of a mandated shutdown, but more likely due to employer distress.

Unless the number of new unemployment claims improves dramatically, it could have negative implications for the housing market.

Low Inventory

If low housing inventory is a benefit to property sellers, it’s a definite disadvantage for those looking to buy. Low inventory will obviously limit your ability to find your dream home.

“One issue buyers will face in these markets is inventory constraints,” observes Forbes Contributor, Ellen Paris. “Consider the number of new homes for sale was down 45 percent year-over-year in April. Sellers will continue to hold off on listing their homes given pricing challenges.”

“Low inventory continues to be an issue right now,” cautions Franklin, Tennessee, real estate agent, Matt Bogosian, “The buyers are out there but there just aren’t enough homes for them to choose from. Therefore, prices are going to continue to rise for the foreseeable future until we see more listings hit the market. I would advise you to buy if you can find the right home.”

At least until the housing market reaches some level of equilibrium, buying a home now may be presenting a double-edged sword of limited choice and inflated prices.

Some Housing Markets May Become Less Desirable Post-Coronavirus

The housing market may see something of a changing of the guard in the coming months and years due to the coronavirus. Metropolitan areas like New York City, San Francisco, and Boston, which experienced sharp price increases due to heavy demand prior to the virus, are now seen as less likely to recover. This is due to high population density, and the greater vulnerability it presents in the face of pandemics.

Conversely, second-tier cities, like Salt Lake City, Boise, Idaho, and Durham, North Carolina, seem poised for faster recoveries. The reason is lower population density, in combination with advances in technology that make remote work more possible and desirable than ever.

The widespread use of systems like Zoom, Skype and Microsoft Teams have enabled workers to connect nationwide, with far less dependence on corporate office space. These technologies aren’t new, but the coronavirus has forced them to prominence along with home-basing of millions of workers. And if millions of workers can now work remotely, they may also abandon higher costs areas in favor of less expensive environments.

The shift toward lower density, second-tier cities, and away from the high-priced coastal giants, may create an uneven housing recovery. If you’re living in one of the metropolitan areas likely to experience a decline, you may want to avoid buying that next home.

Final Thoughts

We’ve analyzed the post-COVID homebuying decision primarily based on financial and economic factors. But the decision to buy a home is often driven by a need or desire more than anything else. That will of course vary by each individual considering whether or not to buy.

Overall, if you find the right house and it fits neatly within your budget, it’s best to buy now. When it comes to making major financial decisions, we engage in a lot of speculation about what the future holds. While that might be a natural reaction to uncertainty, we can never know for sure how things will play out.

Sometimes it’s better to just work with what you know now than to wait on an unknown future.

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