Mortgage Charges Are At Historic Lows — However Does That Imply This Is Truly The Proper Time To Purchase?
Whether you live in a Grecian palace or a Bushwick basement apartment with four roommates, there have undoubtably been times this year when your home fell short. Maybe you lacked a designated workspace. Perhaps you struggled to share a “workout area” with your partner. Maybe your kitchen is really more of a kitchenette. Either way, it follows that plenty of us are weighing our real estate options right now. And fortunately, if you happen to be in the privileged position to upgrade and buy a home in the current market, mortgage rates are historically low — currently around 3% (in 2010, average rates were around 4.7%). In fact, for plenty of folks who’d previously ruled out home ownership as an option, the present market might offer some unique opportunities. But don’t jump just yet — there’s plenty to consider first.
Purchasing in a market as fickle as this one can be a risky move, which is why we tapped Wells Fargo’s head of home lending, Kristy Fercho, for some advice. With nearly 20 years of industry experience, Fercho not only understands the potential value (and joy) of buying property (see: building generational wealth and securing a place to care for loved ones), she also comes to the market with in-depth knowledge of the ways it’s ebbed and flowed this past year — and in several instances of financial crisis prior. “Everything in the housing market is redefined when peoples’ financial situations change as starkly as they have this part year,” says Fercho. “And even right now, the market is still fluctuating.”
Fortunately, in the interest of helping you find your “perfect” home — or determining whether or not now is the right time to be looking — Fercho has some solid counsel. Ahead, we sat down with the home lending expert to ask all our most pressing questions about the nature of new mortgages in 2021.
How do you think the pandemic has changed the criteria of what people are looking for in a home?
“Home this past year has been completely redefined. Your space became more than a habitat. It became your office, your gym, your kid’s classroom, your movie theatre, everything. So I think people are thinking about the whole concept of ‘home’ in a different way. If your kids can’t go out on playdates, having a swimming pool or swing set in the backyard becomes crucial — even if those felt like unnecessary luxuries before. When looking for homes, I think people are looking for their spaces to check more boxes. They want homes that can satisfy all of their needs, rather than spending more money on things like travel or clothing.”
Are there any trends you’re seeing among first-time homebuyers right now?
“Homebuying priorities really do vary so much, person to person. But the one thing that’s uniformly a concern for nearly all first-time buyers is affordability. ‘How much house can I buy with what I have? What kind of monthly payments does that entail? And most prominently, how much can I afford to shell out as a down payment?’
“There’s also the question of longevity. Let’s say you’re a first-time homebuyer, you’re recently married, and you’re planning to have kids. Maybe you can’t afford a ton right now, and you don’t need space for kids just yet, so the idea is that you’ll trade-up in a couple of years. In that case, you don’t need a 30-year or fixed-rate mortgage — although we’re at historic rates. I’m seeing this among more and more first-time homeowners. It’s important to find the right mortgage product for your budget, so you can make your payments while also saving for that next trade-up in a couple years. Buying doesn’t necessarily have to mean you’re settling into your forever home.”
For potential first-time homebuyers, what crucial advice do you have before getting started?
“I always encourage people to survey their financial situations before they even start looking. Oftentimes, people will go out and fall in love with a house that’s way over their budget before they’ve really clarified for themselves what they can and can’t afford — and because they’re so infatuated, they’ll try to figure out how they can make that work. Right now, this is particularly dangerous because everyone is telling you that mortgage rates are going to spike back up again so, if you don’t act now, you’ll regret it. But if you truly can’t afford a place, it’s often not worth taking that plunge. So, I suggest getting really clear about what you can actually afford, and what’s going to fit in with your monthly budget, and then going in and finding a home that’s going to meet your needs.
“The second thing is to make sure you have your priorities identified: What really is important to you in a home, and what are the tradeoffs? What are the must-haves versus the nice-to-haves? It’ll make negotiating, working with an agent, and narrowing down your options (within your price range) so much easier if you’re firm on your essential needs from this house.
“And then, lastly, I always advise arming yourself for that homebuying experience with a pre-approval letter. Based on your income, home lenders like me will determine how much you can afford on a monthly basis, and provide you with a letter spelling that out, and noting that you’ve been pre-approved — without having a specific home address yet. While the market is working to your benefit financially right now, it’s also in short supply. More folks are buying than ever before, so without a pre-approval letter at the ready, you’re certainly risking losing out on a property you love to someone who’s farther along in the process.”
How does that advice change for folks selling existing homes, and purchasing new ones?
“For starters, I think everyone can take some cues from HGTV. They’re always telling you to declutter your home and embrace minimalism, and when selling your home, I think that’s great advice. Of course you always want to garner the highest value you can for your property, so just removing any distractions to ready your home for sale is always really important. Obviously, working with a professional from the National Association of Realtors can help you navigate the market and tackle some of the legwork of selling. Plus, they’ll help you determine whether the current market is an excellent time to sell, or just the opposite.
“That aside, the same pieces of advice I give to first-time homebuyers still apply: If you’re selling your home and trading up, what are you trading up to? What are you looking for that your current home doesn’t offer? What do you love about your current home? How much do you realistically think you’ll make on the sale, and how can you put that toward your next property?”
Knowing that houses for sale are in short supply right now, what steps should potential homebuyers take (beyond pre-approval letters) to prepare themselves?
“It depends on the location of the market you’re searching in. I’m in Michigan and my partner and I are looking to relocate down to Charlotte, and the last couple of places we’ve looked at have gotten multiple offers and have sold well over what was asked. Being out-of-town buyers, we haven’t been able to jump on planes and see every property we’re interested in, so we’re reluctant to put down any immediate offers. But it seems like, if we don’t make an offer on a place we love instantly, we’re going to be outbid within the first day. We almost have to act impulsively — but that’s the nature of the market right now.
“So, you have to be aware of what’s happening in the market when you decide on your angle of approach. When we talk about ‘buyers markets’ and ‘sellers markets,’ we mean that there are certain geographic markets, Charlotte being one of them, where sellers hold all the cards because, in that area, housing is competitive. There are more buyers than there are properties, so every spot is getting multiple offers. That means, if you love a house and you want it, you’re going to have to pay for it — which will require negotiating and potentially paying more than the asking price if you get into a bidding situation. Contact professionals in whatever area you’re looking in — whether you’re buying or selling — about what the market is like. If you can wait a year or two, it might be in your best interest. Or, on the flip side, now might be the ideal time to pull the trigger.”
Does that mean buyers should be prepared to adjust their budgets?
“I don’t often recommend that people adjust their budgets or ‘stretch into a home’ as we call it, because that’s where people get into trouble. Pandemics are unpredictable, life events are unpredictable, and if you stretch too thin, you leave very little room for insurance. And that’s a hard place to live every day. That’s why I always start with affordability. So, in a market like Charlotte, if you thought maybe you could afford an $800,000 house but the market’s so hot everything in that range is going for $1,000,000, you have to think about maybe going for the $600,000 house. Keeping that safety buffer — staying within your outer limits — will always be smart. ‘House poor,’ as they call it, can be a dangerous thing! So, even if you have to stretch and get competitive about what you’re paying, be sure you’re still paying an amount you feel comfortable with.”
As you mentioned, mortgage rates are at an historic low. Do you think that should be a motivator for someone who was planning on buying something maybe two, three, or four years from now to act sooner?
“There’s no question these historically low rates are something to take advantage of, but the more important thing is not getting in the front door, but rather, being able to sustain those home payments over time. So, I always go back to the same question: Is this buyer ready? No matter how low the interest rate environment is, are they ready to be able to sustain that home? Have they saved? Do they have their budget in place? Have they managed their credit and debt in a way that leaves enough reserve, even after the down payment? To me, that should always be the more important thing — because if you can’t realistically afford a home, low interest rates aren’t going to change that.”
“On the other hand, if you find yourself sitting on the sidelines, and you’ve already done that work, then yeah, it’s a great time to jump on in. Usually, in the classic rent-versus-buy analysis in the majority of markets, the long-term value of homeownership is way higher. You’re actually building toward your own wealth. It allows you to build equity in your home, generational wealth, and the confidence of knowing that this is your home where you can plant roots and grow and love and nurture your family — or yourself. So don’t be scared off by a fluctuating market place. Instead, use it to your advantage.”
In your experience, how long do you estimate we may feel the effects of the pandemic on the housing market?
“I have no idea! None of us saw this pandemic coming, and none of us know when it’ll truly be over. But if you look at the last housing crisis in 2008, one of the things that actually happened was that new construction stopped. It took years, almost a full decade, for new construction to start up again, and so that’s part of the supply challenge that we’re experiencing now. Coming out of the foreclosures we had in the last crisis, you had this flood of single-family homes that the market really needed to absorb, so the big trend in 2015-2018 was single-family housing for rent. That’s the same challenge we’re facing right now: Construction is starting to ramp back up, however lumber prices are at an all-time high, and there’s a back order on nearly all appliances. Everything in the supply chain is essentially backlogged. You’re going to see that pick back up, and eventually, that’ll make the market less competitive, but it takes a while.”
Is there such a thing as a “perfect” home? Is there a definition buyers should hold onto — or get rid of?
“Beauty is in the eye of the beholder and that certainly applies to the ‘perfect’ home. Everyone has their own ideas about what works for them, so people have to get really honest with themselves about what’s important to them and what is a ‘no-compromise’. Is it proximity to work? Or if you don’t have to go back to the office, is it space for an in-home office? Review your own internal checklist.
“At the same time, you need to recognize that ‘perfect’ changes over time. Right now, you need a home office, but you might not always. What are the things that will stay important over time? And on that note, I always remind people that everything can be changed inside of a home. You can paint, you can knock down walls, you can remodel the kitchen, so you should prioritize other considerations: Is the school district good for resale? If you’re a runner, are there good places for you to run outside? Do you need proximity to a city for your mental health?”
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