Unless you’ve been living under a rock, current events can be summed up as “weird.” No facet of life has escaped the ripple effects of this weirdness – this is particularly the case with housing. 2020 may have been “unprecedented times,” but the question of where to live is as old as time itself—and with it, comes the same cast of variables and considerations.
With that in mind, we’ll break down some of the most prominent factors that may play a large role in your homebuying decision.
First, let’s set the scene: The year is 2020. COVID-19 has just gone international, and the world has locked down. With the lockdown came an 8.0-scale magnitude shake-up to every industry and market you can think of. The housing market braced itself for another dark age similar to the aftermath of the Global Financial Crisis of 2008. And for the first few days, activity was down… but then it started going up—way up. But why?
It’s the story we all probably know too well, chances are you were there: With lockdowns came a legion of people all cooped up in small apartments and nowhere to get out and about to. Suddenly, city life didn’t sound so charming. Suddenly, things like “a yard” or “more than one room to live in” sounded really, really appealing. Between the “work-from-home” craze sweeping the nation and historically low mortgage rates, suddenly everyone wanted to be a homeowner.
The caveat to this demand was: Supply was also historically low. Every facet of homebuilding—from lumber to sawmills to construction—had stayed relatively muted since 2008. Those businesses that had survived the Global Financial Crisis had done so by being even just a fraction more cautious than their now-non-existent counterparts. There was a scarred-mentality at play in the entire home construction supply chain, and the result is a yearslong build-up of reduced supply.
Don’t just take our word for it: According to a June report from the National Association of Realtors, “decades of inadequate homebuilding have left the country with a shortfall of up to 6.8 million units.” Additionally, “Contractors would need to reach an annual construction pace of 2 million units to fill the gap in 10 years. But with building starts sitting at an annualized rate of just 1.57 million as of May, price pressures are set to linger well into the economic recovery.” Exacerbating this are the various supply chain constraints. Everything—and we mean everything—is in a crunch right now, and until homebuilders can source materials and labor in a cost-effective and timely manner, you can expect the pace of housing supply to be slow.
So the big question is, where are we currently at now? The world seems to be slowly reopening after COVID. Many would-be first-time homebuyers have looked at the cost of homes and said, “that’s too high.” So the housing market has cooled some. It has not cooled all the way off, and it likely won’t do so for quite some time, because there just aren’t enough houses being built.
The other side of this story is renting. As the world reopens from Covid, cities suddenly don’t seem that bad again. The other contributing factor is a sizable portion of the population is moving out from their parents. They’re ready to strike it on their own! The world is their oyster! They’re seeing house prices and saying “no!”
If they can’t buy a house, but they have to leave their parent’s nest, the only place to land is… a rental property.
Landlord (land·lord, /ˈlan(d)ˌlôrd/ noun – the owner of the home that you’re paying for.
Many landlords have seen this surge in demand and, coupled with the now-expired eviction moratorium, have either channeled their innermost Bond-villain to increase prices nationwide, or (unfortunately) simply have to follow the market to stay competitive. According to Apartment Guide’s Annual Report, the conclusion is “rental prices are responding to increased demand in the housing sector as the shortage of housing stock continues.”
A quick snapshot of the results are bleak:
So, all that being said – where we’re at currently is: Some landlords have seen the chance to make a couple extra bucks or they’re simply trying to keep up with the market, and a lot of people are likely to be priced out of their rentals, while others are going to, unfortunately, pay higher costs for a place to live.
With all the information, data, and context shared above, the big decision many are facing is simply deciding where to put their money to live. If you find yourself in this particular boat, you might feel like you’re between a rock and a hard place. Home prices are high, and likely to keep climbing. Apartment prices are high, and likely to keep climbing.
The difference between the two really boils down to this:
*Your monthly mortgage payments may still fluctuate if escrowing for taxes and insurance
If you’re in a financial situation where you can afford it, a home may help you a lot more in the long run.
This leads to the next question. How can you tell if you can afford to buy a home? Typically, the following variables are used to decide if now’s the right time for you to buy.
This should be the foundation of your financial situation and the absolute first variable to consider if you’re ready to buy a home: Unless you have three to six months worth of expenses saved in an emergency fund, you’re not in a good position for homebuying. It is also important to clarify: Your emergency savings are not to be used for the down payment. It’s for emergencies only!
While a 20% down payment is generally a good goal to aim for, down payments do come in all sizes. If you’re not ready to put 20% down, but you’re more than ready to own a home, 100% financing options are also available to those who qualify.
While it’s easy to mentally group closing costs in with the down payment, it is in fact “it’s own thing.” You’ll need 3% to 6% of the purchase price of the home as cash on hand!
DTI (Debt-to-Income) might not be at the top of your mind when considering if you’re ready to buy a home, but it is at the top of mind for your mortgage lenders—which makes it well worth your consideration too. Lenders will look at both your “front-end” and “back-end” DTI.
Generally speaking, most lenders like to see a front-end DTI below 28% and a back-end DTI below 36%. If you can calculate it out yourself and know where you stand heading into it, you’re one step ahead!
Even if this is your first venture into homebuying, chances are you’re at least aware of your credit score. While you might think of it as an annoying number tied to your credit card usage, it’s more accurately a representation of how well you’ve managed your debts in the past. While there are plenty of tips and tricks out there for improving your credit score, the overall guiding light is simply doing whatever you can to boost your score—even if that means taking additional time to repair your credit. Remember, a lower interest rate upfront may mean saving a lot in the long run.
Keep in mind that even if you don’t feel like your credit score is great, this is a perfect opportunity to speak with your trusted mortgage lender. Your lender may be able to provide you with tips on how to improve and boost your overall credit score.
In the age of micro-investment apps and no-commission-fee trading, use of investment accounts are far more widespread than they used to be. You can liquidate some portion of your investments to help make a down payment on a home, you just need to be aware you’ll be paying taxes on any unrealized gains.
Now, maybe in your situation, “investment account” means a type of retirement account. Broadly speaking, it is unwise to use that to buy or put a downpayment on a home. Withdrawing from a retirement account comes with fees, early withdrawal penalties, taxes, and ultimately costs you the chance for compound growth on your savings.
Assuming all of the above looks good and you feel like you’re in a great spot to buy your dream home, ask yourself this one simple question—where do you see yourself in five years? Can you nail it down to one geographic area?
If the future is pretty clear-cut, then homebuying might be the right idea. Homebuying conventionally works well for you if you can live in it for five years and there are two big reasons why.
Firstly, closing costs: You’re going to pay closing costs when you first buy the home, and you’re going to pay a realtor’s fee when you eventually sell the home. That’s 2% to 6% the value of the house upfront, and then maybe 5% to 6% when you sell. Add in additional taxes and fees (the “dot your i’s and cross your t’s” sort of fees), and you might pay 15% of your home’s value in transaction costs and fees! That might sound like a lot, but with a national average home appreciation rate between 3.5% and 3.8%, historically speaking, it may take around five years for your home’s value to compound to the point of paying off the transaction fees.
Secondly, principal vs. interest: Mortgages are amortized in such a way that it can take a few years of mortgage payments to pay down interest (the fee the lender is charging you for borrowing money) before you start paying down principal (the loan amount itself). Ballpark guesstimate – it would generally take five years for your monthly payments to start paying off more of the principal than interest.
If all of the above is any indication, buying a home takes some effort on your end. It’s important to be honest with yourself: How much do you want to buy a home? The advantages are hard to put a price on – this will be your home base for a good chapter of your life and this will likely be the setting for many of your most cherished memories down the line. At the end of the day, it doesn’t matter if it’s your first home, next home, or investment property – what matters is that it’s your home.
No matter your next steps, you’ll want a dependable mortgage lender on your side. That’s where we can help. Our team of trusted, local mortgage loan originators have helped thousands of homebuyers just like you achieve their dream home. With a reputation for delivering a simple, easy, and stress-free experience, we take pride in our ability to help you make the right decisions, at the right times, so you can achieve your homebuying goals. We also provide a seamless digital and mobile experience that provides a faster homebuying process, with a personalized touch from our mortgage professionals that you’re sure to love. With over 12,000 reviews and positive rating of 4.9, don’t just take our word for it—check out what our clients have said about their own personal experiences here.
No matter where you’re at in your homebuying journey—whether it’s asking your first questions, or signing the final dotted line—our people-first approach means you’ll never have to navigate your homebuying journey alone. We’ll be here to guide every step of the way. If you’re ready to take the next step, reach out today and we’ll connect you with one of our trusted mortgage loan originators or click here to find your loan officer or here to find a branch near you.
