Feeling Lost in this Housing Market? A Primer for Buyers in 2021
The red-hot U.S. housing market has continued to surge well into 2021. Conditions in Greater Philadelphia are no different, with skyrocketing home prices and a historically low number of homes on the market leading to fierce competition that’s frustrating both new and experienced buyers alike. Whether you’re entering the market this year or just want a better understanding of what’s going on out there, here’s what you need to know about buying a home in 2021.
What’s driving all this competition?
“Right now, you’ve got a perfect storm of record low inventory and record low interest rates combined with a post-pandemic reevaluation of people’s housing needs after working remotely,” said real estate agent Greg Parker, who leads a Keller Williams Real Estate team in Blue Bell, Pa.
-
Low inventory
Due to uncertainties around COVID-19, many people who had planned to put their home on the market are choosing to stay put. But the record-low inventory is also an effect of the Great Recession, which caused homebuilders to stop banking land to build on in the future. Today, builders don’t have enough lots and aren’t building fast enough to keep up with demand—and it could be a while until they do.
“It’s had a ripple effect throughout the market,” Parker said. “Up-or-downsizing opportunities are no longer there. More people are staying put in their homes and those who were counting on new construction have had to reevaluate.” -
Low Interest Rates
While they’re up slightly from the start of the pandemic, interest rates are still historically low. Lower rates can mean lower monthly payments, so buyers may be able to stretch their budget further or enter the market when they otherwise wouldn’t have been able to.
“To put it into perspective, the last time we had a hot sellers’ market was 2005-2006 and rates were in the 5 to 6 percent range. At the start of the pandemic in 2020, rates fell almost a full percent overnight and we went from the high threes to the high twos,” Parker said.
Making an Offer 2021 Style
Given the stiff competition, buyers have had to get crafty with their offers. Here are a few of the tactics that have become common in 2021:
-
Escalation clauses that automatically increase the bid by a certain amount to surpass competing offers
-
Rent backs that allow sellers to stay in the home after closing in exchange for rent
-
Waiving appraisal and home inspection contingencies, which can be risky for the buyer since they don’t have full knowledge of the home’s value or its condition
-
Making offers that aren’t contingent on financing by leveraging equity in their current homes, retirement statements, or even by using their parents’ bank statements, even if they plan to eventually get a mortgage
“The key is having your real estate agent reach out to the sellers’ agent to find out what they’re looking for,” Parker said. “A lot of times it is price or a specific settlement date, but sellers are also looking for certainty and the least amount of aggravation. Agents can help their buyers create that certainty, while also ensuring they’re protected.”
Tips for savvy buyers in this market:
-
Meet with a lender and get pre-approved first before going to a realtor. “Coming prepared with lots of questions and knowing what you can actually afford versus how much you qualify for makes you a much better buyer,” said Andrew Kossman, Senior Home Loan Program Officer at Ardent Credit Union. “More listing agents are now calling loan officers to inquire about the buyers they’ve preapproved before moving forward.”
-
Hire a home inspector out for a pre-offer inspection if you’re planning to waive the inspection contingency.
-
Consider homes at least 5 to 10 percent below your maximum budget to account for bidding wars or listing price markup.
-
Look for homes that have been on the market for longer and may have a motivated seller to avoid some of the competition.
-
Don’t wait too long to make an offer. “Make it a strong, aggressive offer out of the gate,” Parker said. “The seller could end up canceling pending showings and accept your offer before you have to compete.”
-
Prepare to be in it for the long haul. It may take five or 10 offers before yours is accepted.
-
Know when to fold. You may want to wait if this is a shorter-term move, since your home value would need time to catch up with your purchase price if you got into a bidding war. You may also want to consider waiting until you have more cash saved, which will enable you to have a more competitive offer.
Is there a risk to buying now?
Perhaps the most common concern among prospective buyers is whether we’re in another housing bubble, where prices could come crashing down like they did during the Great Recession.
Given regulatory changes in the financing landscape, Kossman is skeptical this is a repeat of the Great Recession.
“Today, you need higher credit scores and more rigorous documentation of buyers’ financials, but the biggest difference is that the appraisal process is more scrutinized. Loan officers must go through a third party to order an appraisal, so the appraiser isn’t under any pressure to meet a certain number,” Kossman said. “Yes, prices are high, but that’s the market today. They’re not artificially driven by ill-equipped buyers and poor appraisals.”
With less speculative building taking place, Parker isn’t convinced we’re set for a repeat of 2009 either and sees this sellers’ market lasting at least into next year. But even if there is a market correction coming, time could still favor buyers who plan to stay in their homes for longer.
“It took a while, but many people who bought in 2005-2006 at the peak of the last sellers’ market and found themselves underwater are actually in more equitable positions now,” Parker said.
Ultimately, the buyers most likely to succeed in this market are the ones who make decisions based on their specific circumstances and avoid getting caught up emotionally in the desire to own a home at all costs.