2 home-buying mistakes I’ve seen during the pandemic

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In 2008, the housing industry was spiraling out of control in the wake of the financial crisis that led to the Great Recession. For me, it doesn’t feel like very long ago that US housing prices were down 30% or more from their peaks, and more than 20% of homeowners were underwater on their mortgages. 

But what a difference a bull market makes! Fast-forward to 2019, and we know the housing market didn’t just rebound; it looked stronger than ever last year. Although some feared it would only take one triggering event to derail the market again, in 2020 we’ve seen that even a global pandemic that caused havoc elsewhere in the economy didn’t put a dent in residential real estate.

In fact, life with COVID-19 on the loose has only accelerated the growth of the US housing market.

Purchases of both new and previously-owned homes recorded their strongest pace since December 2006 (which was the peak before the housing crisis). US home values are 28% above the peak set in April 2007 during the housing bubble, and currently stand 63% above their lows in May 2011. 

If you are one of the many Americans wondering what to make of the real estate market today — or are thinking about buying into it — here are my pointers for you.

The housing market during the Great Recession, in my opinion, was a once-in-a-lifetime kind of landscape. The likelihood that housing prices will fall more than 30% from their highs is about the same as CD interest rates rising back to 18%, like they did in the early 1980s. 

If you are one of those consumers convinced you can “time” another real estate pullback, don’t hold your breath! 

Traditionally, real estate has consistently kept pace with inflation. Homeowners can expect to receive an annual 3-4% appreciation to their home on average. 

In addition, we’re seeing historically low interest rates right now. I know you have heard that line before, but this is officially the lowest rates have been in nearly 50 years. The US 30-year mortgage rate has even fallen below 3% for the first time. 

Finally, as long as Congress keeps pushing out unprecedented trillion-dollar stimulus packages, foreclosures will continue to stay in check. At one point during the housing crisis, foreclosures and short sales represented 26% of all homes sold in the United States.

Trying to time the real estate market can easily put you in a position where your dream home turns more into a pipe dream if you are waiting for the perfect time to buy.  

Some homebuyers may be tempted to purchase a more expensive home thanks to mortgage rates sinking to all-time lows this year.

If you targeted a monthly mortgage payment of $2,000 (excluding taxes and insurance) back in March, you could have secured a rate around 3.5%. That would allow you to buy a home valued at $445,000, based on a 30-year mortgage. 

If you wanted to keep the same $2,000 targeted mortgage payment today, you could buy a home valued at $483,000, assuming you could secure the current best interest rates of 2.86%.

That’s a difference of $38,000!

Although increased spending is a benefit to the American economy and the real estate industry, I’ve been telling my clients to keep that savings in their pockets rather than use that money to buy a bigger, more expensive home.

I recommend that you do the same, by keeping to your initial price range and using a lower interest rate to lower your mortgage payments. A $445,000 home with a 2.86% rate on a 30-year mortgage yields a new payment of $1,843. That is a monthly savings of $157.

No matter how tempting increasing the price of your home will be during this new, low interest rate environment, the optimal way to take advantage is to enjoy lower monthly payments or possibly even use the opportunity to put extra cash toward your mortgage balance to knock a few years off the length of the loan.

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