Simple Strategies for Overcoming the Complexity of Buying a Home

Glenn is President of Ally home with over 35 years of consumer credit, mortgage and capital markets experience.

The combination of a lack of housing stock, increased construction costs and low rates has created an environment with high property prices and fierce competition among buyers. While this is one of the most competitive markets I’ve seen in my 30+ year career, now is actually a good time to buy a home. It can just take some persistence, patience, and education.

Today’s market

The factors that create the current housing market will not let up as the traditional spring home buying season comes to an end. There is currently a lack of balance between available inventory and buyers, and there is no short-term solution as home prices continue to rise. CoreLogic’s Home Price Index saw home prices rise 13% annually in April, the largest year-on-year increase since 2006. Although we are seeing record year-over-year gains in home sales, most regions saw existing home sales enter the third month in April consecutively due to lack of inventory, based on data from the National Association of Realtors. Construction of new homes slowed significantly as builders faced a shortage of manpower and building materials. Rising wood costs have caused the average price for a new single family home to rise by nearly $ 36,000. While timber prices have fallen from their record high in May 2021, strong demand will most likely keep prices above pre-pandemic levels for some time.

Why now is the time to buy

As long as the economic outlook for our country remains optimistic after the pandemic, mortgage rates are likely to rise steadily in the coming months. In the meantime, home prices will continue to rise until home demand subsides. This scenario threatens to crowd out certain home buyers, especially first-time buyers who do not yet benefit from existing equity in their homes.

As we know today, there is no real definition of “normal” in home finance, but at some point there will be a time when a seller or buyer market is less unbalanced. Stable interest rates will point to a return to normal in the years to come. While 2020 has proven that anything can happen, a consumer’s purchasing power is likely to be stronger today than it will be in twelve months.

Navigate the market

Our internal data shows that only 33% of first-time home buyers have confidence in the home buying process. Education about the steps to buying a home can help reduce anxiety. These buyers must first determine whether they can comfortably afford a home in addition to their other financial obligations. High rental rates can often make it difficult to save on a down payment. While a 20% down payment is a great goal and the cutoff point at which the PMI will activate, it is important for borrowers to understand that they can get into the home market for less money as a 20% down payment is for many a potentially major barrier can be to borrowers. Low down payment programs like FHA and HomeReady, which only require 3% to 3.5% down, can make it easier for first-time home buyers to save. Strategies such as temporarily relocating with the parents in order to save housing costs can also help a prospective buyer to build up a liquidity cushion.

It is important for first time buyers to remember that in today’s competitive marketplace they are not getting everything they want, so it is important to compromise. These buyers should keep in mind that a primary home doesn’t have to be an “forever home” but a way to get into the market and begin building equity. Considering locations further from urban areas or purchasing a fixer-upper are often more cost-effective strategies to help buyers enter the market. Working with a well-connected real estate agent who can advise you and offer insider knowledge about properties that are not yet listed can also give a buyer an advantage.

Buyers should also be willing to pay more than the asking price in today’s market. Many homes have competitive prices to spark a bidding war. The better strategy is to make a “best and final” offer right from the start. Failure to make the strongest offer upfront, or consider home sales or financing risks, can make an offer less attractive. Buyers need to make realistic offers based on their research into what similar homes in the area are being sold for.

What’s next

Consumers, lenders, and real estate agents need to consider the factors that are playing in the marketplace today and how it can change in order to prepare for the next 12 to 18 months. It’s a competitive market, but buyers will get more for their money today than they will a year from now, as interest rates are expected to rise as the economy improves. This means that in the near future, in addition to higher prices, buyers will also pay attention to higher property prices. However, with the right training, persistence, and luck, buyers can also step into today’s extremely competitive marketplace and build equity that they can tap into for years to come.

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