Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from David in AR: Hey Brian, I changed careers late last year to become a mortgage broker. I’m doing a lot of research to get up to speed with others that have been in the field a lot longer than I have. I’m comfortable that I have a handle on the basics. What I’d like help with is some foresight about what to expect in the coming months and year as a whole. I want to show confidence (and build my reputation) when I tell customers what to expect. You are one of several people that I’m reaching out to for your point of view. Thanks in advance.
Answer: Hello David. Buyers will certainly see changes in 2021. After all, 2020 was like no other year before it. One thing to expect is that a big distinction between first-time buyers and repeat buyers will remain. As it always has, affordability problems for first-time buyers will continue. In 2021, the affordability challenge will be influenced by increased worker mobility that seriously gained momentum in 2020. Large numbers of people will continue working from home. Many Millennials already own their first home and can now choose to relocate to a place of their preference. When they relocate, the existing equity in their home will give them a financial advantage over first time buyers. Regardless of the affordability problem for first-time buyers, home prices are expected to further increase in 2021. Even if mobile workers don’t upgrade to a bigger home, they will be able to leverage the equity in their existing home to pay a higher price for another entry-level home. Logic says that this will compound the affordability problem for first-time buyers.
A positive development for first-time buyers is that the refinancing boom is likely to slow down significantly. Rumblings can be heard that mortgage interest rates are likely to edge slightly higher in the coming months. The increase in rates isn’t expected to be huge but rates will probably move higher from the historic lows that they have experienced. The result will be a decrease in refinance loans. What this could mean to buyers is that within a couple of months, lenders will be looking for new mortgages to put in their pipeline. Although the qualification standards won’t ease, lenders are likely to be willing to work harder with first time buyers to qualify for the strict standards. Still, affordability will remain a challenge for first time buyers because the higher interest rates mean higher monthly mortgage payments.
Another positive note is that Millennials are moving up in years. Many are now 36 or 38 and have established careers. These are the critical criteria for moving up from starter homes to larger homes. This could be the year when more starter homes become available for sale. We also know that many potential sellers have been on the sidelines throughout the pandemic. Vaccine distribution should encourage more of these homes to come on the market. We also don’t yet know what might happen with houses facing foreclosure. Likely, some type of workout program will become available but if it doesn’t, many of these houses could be on the market in 2021. After balancing the positives and the negatives, the market will continue struggling with an imbalance between supply and demand.
David, more specifically about what you can tell your customers to expect, is for the house buying process to take months rather than weeks. A good estimate would be five to eight months for buyers that have their finances in order. Of course, that will vary depending on market activity in a specific location. This might not be your role, but buyers need to rethink how they define a “bargain” home. People that bought a home four or five years ago consider a bargain to be priced 10% or 15% below market value. In this highly competitive market, a good definition of a bargain is a home that you want, at a price that you are willing to pay, and that will appraise for a mortgage.
This is not all negative thinking. In 2016, homeownership hit a low of 63.7%. Since then, it has increased each year to 65.1% in 2019. Indications are that the percent of people that own their homes will continue going up. But there have always been hurdles on the path to homeownership. Those who think they can start and finish the process in a month are going to be disappointed. But homeownership is worth several months of emotional and financial lows and highs.
What highs and lows do you see for buying a house in 2021? Please comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].