2020, what a year! Obviously, there are multiple topics from this historical year that would lead one to make that simple statement. This year may truly go down as one of the most historically significant in human history, unfortunately. With that said, I think that the notion of "fear" is one that has been an overwhelming emotion for many, and again unfortunate, but rightfully so. Believe me, for our first blog post, I am not looking to poke at any controversial political or social issues, nor am I belittling the direct effect that COVID-19 has had on the world, but I am here to tell you to fear not, in regards to the Real Estate market conditions currently in play.
- Crazy...hot...extreme...difficult... These are some adjectives that are commonly used by consumers that have or are entrenched in an experience with buying or selling a home in 2020. Different descriptions will be used if you are on the buying side compared to the selling side. The reality is, the same feelings have been playing out over the course of the last 3-4 years even before 2020. These are the dynamics of a "Seller's market", which can easily be defined as there being more buyers with strong demand to purchase a home than there are available homes for sale to meet that demand. Simple supply and demand economics, in play with the market conditions that we have been experiencing the last few years, as well as the emotional feeling in 2020 around the market that has been heightened because the inventory of available homes for sale has been further reduced. I think the best way to describe the sense of the current/past market is that there are 10-20 buyers ready to make a strong offer for every 1 home available for sale at any given time. This leads to the multiple offer situations and over asking, and many times significantly over asking price scenarios playing out to the benefit of sellers and the frustration of buyers.
So far, what I have described may be very desirable for potential sellers but fearful for potential buyers. Well, fear not, if you are a potential buyer heading into this market condition. We'll need to dive into the answer and justification to the question "why would I ever want to buy a home in this market when you are telling me that I am going to be competing against multiple other buyers that will drive the price up and potentially leave me exposed to being in a situation where I am overpaying?". The biggest aspect to this answer is a significantly and historically low mortgage interest rate. Buyers have had the luxury in the past few years of taking advantage of a lower than "normal" interest rate when purchasing a new home with financing. Generally and historically speaking, we can look at anything below a 5% interest rate being pretty advantageous for buyers.
- Take a look at the historical interest rates in the last 40-50 years and you'll see spikes to where the rate was in the double digits! Can you even imagine buying a home with a 12% or 16% interest rate? Play around with a mortgage calculator and you will quickly realize what that high of a rate would do for the cost of homeownership. Throughout 2020, Buyers have had the luxury of taking advantage of rates at, or around, or even below, 3%. No one has the crystal ball, but I'm willing to go out on a limb and say that this will end up being a monumental low rate in the grand scheme of overall history. Herein lies the opportunity for buyers in this market, and the main element for overcoming the notion of fear.
I will add an asterisk to this point by saying that this best applies to buyers that have a long term plan for owning the home they will be purchasing now. Here is my challenge to you, the fearful buyer - take a mortgage calculator and run the numbers for the price range you are targeting at a 3-3.5% interest rate, in comparison to a 5% interest rate or whatever other higher rate you want to compare to. Take the difference in monthly payments from the higher rate to the lower rate, then multiply that by 12 (months) and then multiply that by 15, 20, or even 30 (years).
So if you are a potential Buyer, are you fearful for a competitive market that drives up the price, or are you more concerned about buying a home at a time when the interest rates are much higher?