How to Navigate a Red-Hot Housing Market (Article)

How to Navigate a Red-Hot Housing Market

If you are currently looking to buy a home, you may want to bring a pair of boxing gloves to your open house. Home prices have reached historic highs at the same time housing supply has reached record lows nationwide. Homes that go on the market usually have multiple offers within a few days, with the winning offer often over list price. Perhaps you’re a first-time homebuyer and you’ve heard about the financial benefits of building equity in a home and the lifestyle benefits of having a place to call your own – but it just seems that the dream of homeownership is getting farther and farther away. Yes – the housing market is brutal right now, but let’s give you a few tips on how to navigate this market so you don’t lose hope.

It’s helpful to understand the reasons why the housing market is currently on fire, so let’s ask the question: how did we get to this point? Let’s go back to the years before the financial crisis of 2008. Throughout the early to mid-2000’s there was a steady increase in the construction of single-family houses. This coincided with the boom in the subprime mortgage market, where borrowers with less-than perfect credit could still achieve their dream of home ownership. As these borrowers began defaulting on their mortgages, many could not sell their homes due to the negative equity and ultimately had to foreclose. As the housing market crashed, many home builders went out of business or greatly reduced the number of homes being built. As a result, the U.S. experienced years of low home construction throughout the decade of the 2010’s while a new generation of home buyers (known unofficially as Millennials) reached their home buying years.

Dial the clock forward to the early days of the COVID-19 pandemic. To curb the negative economic impact of shutting down the country, the Federal Reserve lowered interest rates to stimulate economic growth at the same time the Federal Government began to introduce new money into the economy (remember those stimulus checks you received?). In addition, the Federal Reserve began its plan of quantitative easing, which is a way to say they began purchasing government bonds to add money to the financial markets to encourage people to invest. On the housing front, many potential sellers delayed plans to place their homes on the market, further reducing the supply of available homes for sale.

Fewer homes on the market along with an increase in the money supply led to accelerated inflation in the housing market. In 2021 the year over year median sales price for a home increased by 13.8% nationwide. With inflation running rampant throughout the country, the Fed has shifted their focus from promoting economic growth during the pandemic to reigning in inflation as their #1 priority. This has resulted in a sharp increase in mortgage rates in 2022, with a 30-year fixed rate mortgage now fetching interest rates at or above 5%, a level not crossed since 2011.

So, what should you do in light of all this?

  1. Strive to save 20% for a down payment to avoid paying private mortgage insurance (PMI). If you are a first-time homebuyer, I’ll give you some grace to put down less than 20%, but realize that you will have to pay PMI on the loan. This down payment amount does not include a separate emergency fund, which should not be tapped for a home purchase.
  2. Regardless of the amount you put down, may sure your monthly mortgage payment is no more than 28% of your monthly gross income (before taxes and deductions). In addition, make sure your total monthly debts are no more than 36% of your gross income. Staying below those thresholds will help keep you from allocating too much of your monthly budget to housing (hence the phrase “house poor”).
  3. Another consideration is location. Perhaps the city you live in no longer has homes in your price range. Consider expanding your search location since homes that require a little extra travel will often be listed for lower prices.
  4. Don’t waive the home inspection! You are about to make one of the biggest purchases in your life, wouldn’t it be nice to know that the foundation is shifting, or that the furnace is on its last legs? While it seems waiving the inspection will make your offer more competitive, it isn’t worth it with the financial stakes so high.
  5. Lastly, if you crunch the numbers and it doesn’t line up, you might need to do more work to get into a better financial position to buy. While that may be discouraging, let it be refreshing that you don’t have to buy when it appears the market is in a perfect spot. Shore up your finances and get into the game when you are ready.

Wouldn’t it be helpful to have a professional look at your financial picture to see if you’re in a good spot to start house hunting? As an employee benefit, you have access to our team of sales free, independent financial planners with the MoneyAdvice@Work team. Contact us and schedule a personal Money Advice session. Together, we can help you achieve your home buying goals.

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MoneyAdvice@Work® is an employer-sponsored financial wellness benefit designed to connect employees to financial professionals who educate, advise, and coach without the sales pitch. Learn more about our service offering here. The summary/prices/quotes/statistics contained herein have been obtained from sources believed reliable but are not necessarily complete and cannot be guaranteed.  Past performance results are not necessarily indicative of future results. MoneyAdvice@Work® is offered through Francis Investment Counsel, a Registered Investment Adviser with the SEC. Francis Investment Counsel does not provide tax or legal advice.