The pandemic has created a work-at-home and school-at-home situation that has made our houses feel smaller, or at least less functional. However, homeowners looking to upgrade their space are learning that their choices are fewer because there just aren’t many houses on the market.
The National Association of REALTORS® (NAR) Existing-Home Sales numbers showed that inventory levels for December 2020 were down 23% from December 2019. This is the lowest inventory levels have been since NAR started tracking data in 1999.
Deciding whether or not to buy when inventory is low and demand is high can be tricky, but not impossible. Here’s how to decide if you should buy or wait until the housing market has more to offer.
When to Buy
1. You’re Financially Secure
The current low-interest rates are making homeownership more affordable overall. Before you enjoy these low rates, make sure you’re prepared to financially shoulder your down payment, closing costs, home maintenance surprises, as well as your monthly mortgage payments.
Being financially secure when it comes to buying a home means:
- You have a consistent income.
- Your debt-to-income ratio is less than or equal to 43 percent.
- You’ve saved enough for a solid down payment: industry standard is 20 percent.
- Your credit score is at or above 620.
2. You’ve Done Your Research
First-time homebuyers as well as those looking to downsize should consider how the low-inventory is affecting specific price points, what mortgage rate projections look like, and what median existing-home price trends reveal. If new home construction is not on pace to meet demand, mortgage rates are expected to stay low, and median existing-home prices are holding steady or rising then you can expect steady market conditions and should feel comfortable making a move.
The Philly Voice article Selling your home in 2021? The market says go for it notes, “If you’re looking to sell your home in the near future, make sure you take some time to research your current and future neighborhood where you hope to buy.”
3. You’re in it For the Long Haul
There’s a popular saying in the world of investing: buy low, sell high. If you follow this line of thinking, buying a home in a low-inventory seller’s market would be ill-advised. However, while your home is undoubtedly an investment, this adage doesn’t really apply if you’re planning on living in your home for many years.
Your home, after all, is not a standard investment that generates a cash flow while you’re living there. So, unless you plan to buy and sell in precise coordination with the ups and downs of the real estate market it can still be a smart investment to buy a home when prices are up. Your home is where you’re spending your time, so it’s as much an investment in your happiness as it is a financial one.
4. You Can Make a “Clean Offer”
A “clean offer” means your offer to buy the home doesn’t contain any contingencies. If you’re comfortable buying a new home without needing to sell your old home, covering your own closing costs, and not asking the seller to pay for any necessary repairs, you’re in a good place to buy during a seller’s market.
Other common contingencies include a property appraisal and an inspection. Typically, you shouldn’t remove the home inspection contingency from your offer. However, if the seller has reputable and recent inspection reports, you may consider even removing this contingency making your offer that much more appealing.
5. You’re Working with an Experienced REALTOR®
Buying at a time of low inventory can be tricky. Homes sell fast and for top dollar. An experienced REALTOR® can help you gain access to pre-market listings and alert you as soon as new homes hit the market.
When you do decide to put an offer on a home, it’s easy to get swept up in the emotional process of a bidding war. Prices can quickly escalate but it’s important, even in times of low inventory, to have a solid understanding of a home’s worth and your budget. A seasoned REALTOR® will understand the market and be able to help you craft a strong offer and set firm spending limits.
When to Wait
1. You’re Compromising Too Much
Searching for a home during a time of low inventory means you’re likely to get a little less “bang for your buck.” As you search for a home, you might find what you can afford and what you need in a home are on opposite ends of the spectrum.
For most people, buying a house is the largest investment they’ll make in their lifetime. While you can expect to make compromises during any home search if you’re consistently finding the homes in your price range are ticking less than half of your requirements, it may be a sign to wait.
2. You’ll Be Moving Again Soon
It’s impossible to predict exactly when the real estate market will shift but economist Fred Harrison’s research shows “economic recovery occurs in two halves – a 7 to 8 year gradual rising, then a 7 to 8 year rapid rise.”
You can work backward from the last market crash (2008) to understand where in the cycle we currently are. If you plan to move before the next predicted recession, you may still see a return on your investment. However, moving after the next recession but before the next upswing will result in a potentially large loss.
It may seem counterintuitive to buy a home when inventory is low and prices are high. However, if your finances are secure, you plan to stay in the home for a while, and you have an experienced REALTOR® to help you make a clean offer, it can still be a smart time to buy.