We’ve endured record unemployment rates. One study by Yelp reports that businesses have been closing at the rate of 800 per day. Iconic retailers, from luxury stores like Neiman Marcus to mainstream businesses like JC Penney, have filed for bankruptcy. And yet, the real estate market is exploding despite the grave economic impact of the COVID-19 crisis.
Huh? What’s Up with the Real Estate Market?
The driving force behind the housing boom is the record-low interest rates mortgage lenders are offering. The best mortgage rates—which are reserved for the most qualified borrowers— dipped below 3% this winter.
What created this happy state of affairs? Two economic dynamics working in tandem pushed interest rates down. The first was the Federal Reserve Bank’s decision to lower the rate it charges lenders to borrow money to under 1%. When lenders can borrow for less, they pass those savings along to home buyers. The second factor was rooted in the bond market. Investors flocked to the relative safety of the US Treasury bond market—particular the 10-year Treasury note. That drove bond yields (return on investment) down. Lenders, who are also investors, were able to earn more by loaning money than by investing in bonds, even when they charged very low interest rates.
Is Now the Time to Buy?
Judging purely on the basis of mortgage trends, you might think it’s a no-brainer: find a house you love and lock in a low fixed-rate mortgage. But there’s always a catch, right? The laws of supply and demand are at work in the real estate market. With so many people interested in buying homes, there are fewer on the market. And real estate prices have been steadily rising. Across the US, home values have increased by over 14%. The median price of an existing home in the US reached $303,900 in January 2021. The effect has been even more pronounced in smaller metropolitan markets from Picsburgh to Cleveland to Austin, where year-over-year increases topped 10%. Prices on urban dwellings, by contrast, have decreased, perhaps reflecting Americans’ pandemic insecurity: the suburbs may just feel less dangerous right now, due to major cites experiencing some of the worst COVID-19 infection and death rates.
So where does that leave you? If you already own a home, you may be in the most favorable position. Depending on your location, you may be able take advantage of the low-supply market and fetch a higher price for your house or apartment, while also snagging a great rate for your new mortgage. If you’re a first-time buyer, you’ll have to crunch some numbers to determine whether access to a lower interest rate is reason enough to buy in a seller’s market.
One more thing to keep in mind: some market analysts see a bursting bubble on the horizon. Artificially -inflated markets, like the one caused by the global pandemic, are historically subject to correction. Since hifng a record low in December 2020, mortgage rates have slowly increased. But low home supply persists and home prices are holding steady. That potentially puts a different spin on the home buying opportunity.
If You’re Ready…
Here’s how (not) to plunge in! Buying a home is a serious decision. There are some criZcal preparatory steps you should consider taking before you make so large a commitment.
The right mortgage is key to happy homeownership and can also make any home you buy a becer investment. Getting a great mortgage interest rate should be one of your foremost goals. Make as large a down payment as you can comfortably afford. Borrow less and you may shave a point or two off the interest rate you’re offered.
All mortgage lenders look at your credit profile before extending a loan offer. Getting your credit in tip-top shape should be a priority—ideally before you even start house hunting. Many lenders set minimum credit scores for borrowers. And all of them reserve their best rates for borrowers with excellent credit. If your credit profile is shaky, launch an earnest campaign to repair it. There are many ways to improve your credit score, from bringing all your credit accounts up to date, to dispuZng errors you may find in your report, to closing dormant accounts. But credit repair takes time. If your credit problem is serious, it could take years. Bear in mind that some sellers will only entertain offers from buyers who have prequalified for a mortgage. They don’t want to waste time negotiating with someone who may be unable to secure home financing.
Choosing the Right Mortgage
Variable-rate mortgages normally come with lower interest rates than fixed-rate loans—that’s their most lucrative feature. But variable mortgage interest rates are only locked in for a few years. After that, you are at the mercy of the many economic forces that influence the lending market. (Remember how the global pandemic changed everything?) Your monthly payment could go up (or down) considerably at the end of your initial loan terms (usually three to seven years.) Needless to say, no macer what type of mortgage you choose, you should be absolutely certain you can comfortably afford your payments. It’s tough to be sure, though, when your mortgage payment changes periodically. Some people prefer the predictability of a fixed-rate loan. But if you only plan to live in your home a short time, a variable-rate mortgage can make sense. If you sell your home within your initial loan term, lower monthly payments will decrease the total cost of your loan.
Refinancing Now May Make Sense
If you already own a home and you purchased it before the pandemic began, you may be able to reduce your monthly payments by refinancing into a lower-rate loan. Or, if your home equity has increased substantially, you could take out a larger loan, turn some of that equity into cash, and use it to build your dream kitchen, replace your leaky roof, or install the backyard pool you’ve always wanted. By the way, if you’re saddled with a lot of student loan debt, now might be the moment to refinance your student loans. These are crazy economic times, but if you consider your options carefully you may discover a great opportunity to improve your financial standing.
This article was written by Susan Doktor in partnership with Money Magazine. Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of topics, including finance, technology, real estate, and government affairs. Follow her on Twitter @branddoktor.
