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There is no doubt about it, the real estate market is on fire right now. The demand for homes is up significantly, especially in the Midwest and South, as many people are looking for more space. Home sales are up 17% year over year, median home prices are up 19.1% year over year, homes are selling quickly with multiple offers above asking price, and even the cost of materials has increased exponentially. (Fun fact: The price of lumber is up 250% year over year).
This all presents a serious challenge for prospective homebuyers. I recommend reconsidering purchasing right now, mostly since many of these issues are temporary (I would anticipate that the supply of lumber will improve and lower prices, for example).
Here are a few decision points if you're not deterred and are still considering purchasing a home in this market.
1. Consider why you want to buy right nowThe past year caused many of us to reconsider our living arrangements. Dining tables doubling as conference room tables and classrooms, conflicting schedules for Zoom conference calls as parents balance childcare, and bandwidth limitations of multiple screens streaming at once pushed many of us to seek immediate relief through increasing our living space and perhaps finally having a dedicated workspace. It's especially understandable since many of us anticipate remote work being a permanent part of our lives.
However, I'd recommend not overcommitting yourself long-term just for temporary relief. For those who are renters, I'd consider alternatives like upgrading rentals to a bigger place, or even renting a second living space. That can be significantly easier than purchasing a home in this environment and comes with a lot of flexibility since many landlords in major metropolitan areas are offering short-term rentals or cheaper long-term rental rates.
If you already own your home but find it's too small, coworking spaces can be a good option to escape from home and maintain productivity.
2. Sitting on a lot of cash due to lower expenses in 2020? Consider where you can put that besides real estate.The truth about this "K-shaped" economic recovery is that many people are doing better financially than they have in years. Minimal travel, reduced commuting expenses, and little to no childcare costs have relieved a lot of financial pressure. Many have paid down a significant amount of debt and are now looking for places to invest their excess cash or have newfound wiggle room in their budget and are considering investing in real estate or upgrading their home as an alternative to putting the money in the market.
However, I think rushing into purchasing a home just because you have excess cash sitting around right now is a mistake. This is a good opportunity to save a bigger down payment, pay down "good debt," such as student loans, or front-load long-term investment goals such as college education or retirement. At the end of the day, you have more options than real estate.
3. Proceed, but I'd recommend using more reasonable valuations as a guideLet's say you've considered all of the above and remain committed to purchasing a new home right now. In that case, I would recommend adding to your down payment fund and recalculating what an affordable mortgage would be for your family. Come up with a firm upper limit between all decision makers to ensure you aren't tempted to bid too high.
In the meantime, keep a keen eye on the real estate market in your desired area. If a property you really like comes on the market, be mindful not to succumb to excessive price pressure. For example, if homes in that area are going for rates significantly higher than list price, then be sure to consider what the comparable sales were a year ago and stay within that range instead.
I completely understand the temptation to buy a new home right now as my husband and I have shared a workspace for the last 16 months. However, it is never a good idea to rush into a huge financial obligation without properly considering the alternatives.
Anna N'Jie-Konte is the founder of Dare to Dream Financial Planning, a fee-only, virtual financial planning firm that serves the needs of 30/40-something women of color.
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