It is a tough time for decision-making among first-time homebuyers this year. There is so much information to consider, and the market is steeply competitive for buyers. New families are especially affected because the pandemic has put on pressure on them to find bigger living spaces and yard areas.
Rents Increased Year on Year
Another pressure-point for new families that are still renting is the increase in rents this year. Across the country, rents increased by 5.4 percent from 2020. In some areas, rents increased by as much as 15 percent. These included Las Vegas, Phoenix, Fresno, Stockton, Riverside, Albuquerque, Spokane, and Boise.
Rents decreased, however, in New York, Boston, San Francisco, San Jose, and Washington D.C. This is because many renters moved out of these places during the pandemic to seek accommodations elsewhere. This became possible as most employees shifted to remote work arrangements.
For families in high-rent areas, the issue comes up about “throwing away” money on rent versus investing it in mortgage payments instead. Of course, mortgage payments will always be higher than rents, but the money goes into homeownership equity instead of the landlord’s pocket.
Mortgage Rates Still Historically Low
According to Business Insider, the average mortgage rates as of June 20 rose from the previous week and the previous month. If compared to the previous years, however, current rates are still low. The Insider recommends taking a mortgage at these rates.
The increase in mortgage rates came after the June 16 Federal Reserve statement that it will raise interest rates twice in 2023. This is something that potential home buyers must consider. The question, however, is whether monthly mortgage payments will be affordable for them now, given the current housing prices.
Potential buyers must realize that the mortgage rates published are averages. Different lenders will offer them different rates that will also depend on their credit scores. It is essential to approach several lenders and compare their offers. This can be complicated, and a home loan interest rate comparison service will help simplify evaluations.
Home Prices Hitting New Record Highs
In May 2021, the price of the typical home reached $287,148. This is a 13.2 percent increase from 2020 and a record high in Zillow data since 1996. The highest increase was in Austin, where prices rose by about a third. There were also large increases in Phoenix and Salt Lake City.
According to Zillow economists, home prices will rise by an even higher percentage in 2022. Potential buyers must decide whether they will grab an opportunity now before prices go even further out of reach.
Housing Inventory Is Not Enough
The good news is that for the first time since July 2020, the total inventory of homes for sale across the country showed a month-on-month increase in May. On a year-on-year comparison, however, inventory is lower now by about a third compared to 2020.
The low inventory comes from builders not building enough housing units. They are constrained by supply shortages and rising prices of materials. Lumber prices soared, and while prices dropped in recent weeks, they remain higher than usual. Some builders are waiting until the end of their projects before listing homes so that they can include their higher costs in the selling price. Some are putting a pause on projects until supply and prices of materials stabilize.
Another stumbling block for first-time home buyers apart from the overall low inventory is the lack of properties smaller than 1,400 square feet at the low end of price brackets. According to a Freddie Mac report, these types of homes comprised up to 40 percent of total home construction in the 1980s. In 2020, they comprised only seven percent of homes constructed.
Demand Continues to Increase
Demand for homes is relentless. In April, listed homes stayed on the market for seven days. In May, they stayed for only six days before being sold. In Kansas City, Cincinnati, and Columbus, homes for sale stayed listed for only three days.
To get ahead of the competition, affluent buyers are paying higher than the listed price for the homes they want. This accounts for almost half of all homes sold across the country in April. In Austin, Sacramento, and Denver, 70 percent of homes sold in April were bought at higher than the listed price.
Another tactic that buyers are doing to win over others is to offer an all-cash payment. This accounts for about a quarter of all homes sold across the country in April. First-time buyers who must rely on a mortgage are up against these types of competitors.
Making a Decision
First-time home buyers must do a financial audit on their capability to buy a house in 2021. The bottom line is whether they have enough disposable income monthly to afford a monthly mortgage payment to replace rent and still be able to save for home maintenance, emergency needs, and their retirement fund. If there is enough for this, the outlook of ever-increasing prices and upcoming mortgage rate increases point to the advisability of buying now.