Why is home buying so competitive, and what can I do?

The US real estate market has been doing something unusual over the last year: average home values went up 8-11% (depending who you talk to) from 2019-2020 and are on trend to do so again in 2021. In 2019, the average sale price of a home in the US was 310k, in 2020 it was 330k.

For comparison, inflation is around 3%, average stock market investment returns are 8%, and the 40-year average return on home ownership has been 4-5% until last year. 

What’s happening?

  1. The pause – last spring, no one was allowed to buy homes, so demand pent up
  2. Low stock – with COVID less people want to have strangers in their homes, with mortgage forbearance why would you sell or you can’t sell — and the less homes are for sale the less likely someone who might have sold optionally will do so
  3. Low interest rates – borrowing for a mortgage is cheaper than ever, with rates around 3%, so buyers have more buying power which means people can offer more for homes and have the same monthly payment
  4. Cash buyers – aside from regular people seeking housing or small-scale investments, there’s a wave of pension funds, investment funds, and “prop tech” investors coming in with cash to either create their own portfolios, or offer cash on behalf of live-in homeowners

The challenge:

The first thing I think about is How the F is everyone who wants a house going to handle this? Policy and tax breaks to incentivize *sellers* to sell to individuals  – in particular, those with FHA or VA loans – and not firms is one way, and catching up on new home building to increase supply is another. Both are longer-term plays.

The silver lining for individuals:

It’s hard – but NOT impossible to buy these days. Not EVERY location’s market is operating this way. People ARE still buying homes, even in competitive markets.

Since it’s more competitive than ever before to buy a home, I’ve been catching up on the strategies for how to increase the odds of winning a bid on a place. The most important parts of your strategy are being prepared and having an experienced team – your realtor and mortgage broker – to help you. 

Being prepared is something you can start doing months to a year or more ahead of time, specifically working towards making it possible to qualify for a conventional mortgage loan by:

  1. getting your credit to at least 630 (and ideally over 740 for the best interest rates), 
  2. and saving/finding gifts/planning to sell to have at least 5% of the house cost as a down payment plus saving extra cash for closing costs and to have on hand if needed to cover a gap, renovations, moving, etc etc. 

I go into the specifics on down payment vs closing costs vs startup costs in my workshop: Money Tips to Buy a Home, including exactly how you can estimate the variable expenses to prepare for. 

Of course your mortgage broker’s estimates for a specific property are the final word for money to bring to the table – just know to also prepare for all the other costs!