Owning a home invariably brings a sense of pride and accomplishment. Many of us pursue home ownership as a life goal.
The COVID-19 crisis has had mixed effects in the property market. Here’s a look at the pros and cons of buying a home this year.
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| Key Considerations for Buying a Home in 2020: eAskme |
Other people are reading: 7 Crucial Things That You Must Check Before Buying a House
Mortgage rates are lower than ever
The recession caused by COVID-19 has seen interest rates slumping across the board.
According to the World Bank, the American economy is experiencing the worst recession since World War II. As a result interest rates are lower than ever before.
Bankrate, a comparison service for financial products and services, reports that mortgage rates averaged close to 3% in August, compared to an average APR of 4% last year.
These discounted rates ease the financial burden on potential buyers, and let you purchase a house for less.
Having a good credit score
With better credit scores home buyers can get more competitive interest rates. This is especially important at a time when the pandemic has reduced the availability of affordable homes.
According to myFICO, a company that offers credit services, those with credit scores of 760 or higher can get a 30-year mortgage at a fixed annual percentage rate (APR) of just 3.301%. That translates to a monthly payment of merely $876 for a home that costs $200,000.
Buyers can easily send money online to make these payments even while living or working abroad.
Having a steady income
While your credit score is one side of the equation, a steady income is the other. To have a stable source of income and enough savings is important.
Motley Fool, a financial advisory company, recommends that buyers should have enough money saved to make a 20% down payment on the new property. This allows buyers to avoid expensive private mortgage insurance. Savings should also be able to cover 5-6 months of living expenses.
Most banks, including Bank of America and Citibank, require buyers to have this much in savings before approving a mortgage deal. Many banks also stipulate that buyers give proofs of having a regular source of income.
This gives banks the confidence that buyers have the ability to honor their monthly mortgage payments. Those with good credit scores, enough savings, and stable incomes can buy homes at some of the best rates ever.
Starter homes in short supply
The term 'starter home' refers to a buyer's first purchase of a residential property. There seems to be somewhat of a shortage of starter homes in 2020.
Motley Fool reports that in 2018 only about 21% of all homes sold in the real estate market were starter homes, compared to 23.5% in 2017.
Since then the availability of such homes has been in a steady decline. This decline is owed to reduced real estate construction activity, with fewer builders constructing new houses.
The reduced availability of starter homes produces two negative effects for prospective buyers. The first is higher housing prices. Fortune Magazine reports that the cost of single-family homes rose by nearly 6% between 2019 and 2020.
This happened because of a widening gap between the demand and supply. The demand for starter homes remained more or less constant while the supply declined.
Secondly, the consistent demand and short supply created a seller’s market. This means it is more difficult for home buyers to negotiate better prices.
Job losses and furloughs
Job losses and salary cuts have been among the most devastating economic effects of the pandemic so far. As per CNN 3.7 million Americans lost their jobs between April and July.
Many more are dealing with reduced working hours and salary cuts. One study by Thomas Reuters found that non-executive employees of 22 private and public technology companies have faced an average salary reduction of 15%.
This diminishes the ability of millions of Americans to afford a new home in 2020.
Final thoughts
The COVID-19 situation has created factors that can be either positive or negative for would-be homeowners.
A lot depends upon your circumstances, and more so, upon your preparedness. The present situation only highlights the importance of sound long term financial planning.
It is a reminder to us that opportunity favors the prepared.
About the author:
Hemant G is a contributing writer at a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.
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