So you're considering buying a house, but you're not sure if it's the right time - well, you're in the right place. Here's everything you need to consider before making this decision.
To answer this question, experts typically cite national statistics on home inventory, sales, and prices.
In 2019 (the most recent year not impacted by the pandemic), US single-family existing home inventory peaked in June (1.70mm homes), as did prices ($289k median home price). This implies that if you want the highest number of options to choose from, June is the best month; but if you want a lower price and less competition, September – December is the best seasonal period.
After peaking in June 2019, home prices were lower the remainder of the year but were still higher than April 2019 and any month prior.
In other words, your end of year “discount” could be measurable vs. peak home price levels; but when compared to prices from the beginning of the year, it may not be a discount at all.
1. Before getting into more advanced strategies such as managing seasonality, make sure you have educated yourself thoroughly about homeownership (we've included a checklist of concepts at the end of this post).
To summarize, it's important that you choose a set of locations (counties, cities zip codes, neighborhoods) to narrow down your search and that you’ve confirmed you can afford the prices for the size and condition of homes you want in those locations.
2. Look at the historical seasonal patterns in the zip codes you are considering buying in; ZeroDown’s “Markets” section is a great place to find this detailed info. Identify what time of year has the highest inventory, and what time of year, if any, has the peak and trough prices. If you find yourself in need of more data, it can usually be accessed via the local MLS which a real estate agent can help you obtain and interpret.
3. Decide which is more important to you: getting a few percentage points discount on a home, or winning your absolute favorite home even if it means overpaying. A helpful mental model for making this decision is known as the Regret Minimization Framework; it's what helped Jeff Bezos decide to start Amazon. Maybe the view of the bay from the living room window is exactly the inspiration you need to start the next Amazon yourself, and that's priceless! On the other hand, maybe you are not the type to get at all emotional about a home, and this is purely a financial decision; you will regret more having passed up a “great deal”, and should focus on timing the market during the seasonally weaker periods.
4. If your goal is to avoid any competitive situations that could lead to overpaying – you will likely want to avoid the spring and summer months in most markets. If you are determined to win the home you are most passionate about, regardless of timing – then you should be aware that more attractive properties tend to list early in the year and get snapped up early, and you may have to be prepared to do the following to win one:
5. ZeroDown has amazing tools to help with your home search process - see the end of this article for more details!
Your lease maturity may not correspond to the best time for you to buy a new home. Try to get your landlord to be flexible, either by extending your lease for a short time period to line up with when you want to buy, or allowing you to assign your lease to someone else so that you are free to move on your own timeline.
The best time to sell your home is typically in the first half of the year - this means if you also decide to buy in the first half of the year, you may have to buy before you sell; and if you buy later in the year, you may even have to move twice.
Buying before you sell usually incurs more costs than selling before buying, so only make this decision if you understand and can afford the costs. These can include having to carry two sets of loan payments on the two residences simultaneously; or, leaving money on the table by selling your existing home to the buyer who can close the quickest.
The good news is there are now a variety of solutions to this problem in a lot of markets; generally known as iBuyers, these companies will effectively purchase your old home quickly and/or help you make a cash offer on a new home before your old home is sold. If your buying preference is to take advantage of the less competitive seasonal period in the second half of the year, then you should try to avoid having to move twice by requesting a lease back from your buyers.
Home sales and inventory were abnormally low during the restricted activity periods of April-May 2020. It appears this housing activity did not disappear, it was just delayed until the restrictions were loosened; September 2020 experienced a record seasonally adjusted annualized amount of existing home sales, at 5.87mm. However, inventory levels have not rebounded, and are 22.5% below prior-year levels, down to 1.24mm from 1.60mm. The month's supply of homes (inventory to sales ratio) is extremely low, at 2.5.
According to Redfin, median days on market dropped to 29 days from 41 days, and 33.9% of homes sold above list price, up from 22.6% the previous year. The pandemic has resulted in an unusual seller’s market late in the year, and it is not likely to become a buyer’s market until there is a reversal in the work-from-home trend, and/or an increase in new home construction. Higher mortgage rates could also potentially reduce competition amongst buyers, but the impact on home affordability for buyers would be mixed because the higher monthly interest payments could take up a higher share of their income, offsetting the impact of any discount on home prices.
The worst time to buy a home was in the years leading up to the last major global financial crisis in 2008-2009.
For instance, if you bought a home in Pittsburgh, Pennsylvania anytime between 2004-2007, your forward five-year cumulative return based on the FHFA Index would have ranged from -3.3% to +3.9%. If you had bought near the local peak in the second quarter of 2006, and your home matched the performance of the index, then even 5 years later in the second quarter of 2011, you would still be sitting on a 3.3% loss in value.
It would have taken another year, into 2012, before you would have started to show a profit, based on the index. And, Pittsburgh was the second-best performing of the top 50 metro areas tracked by the FHFA during that time!
In Riverside, California, a home purchased in the second quarter of 2006 lost 55.6% of its value based on the index. Of the top 50 MSAs tracked by the FHFA, the best-performing metro area from 2006 – 2010 was Austin (+0.9%), and the worst-performing was Las Vegas (-58.5%).
There was systemic fraud permeating the banking and mortgage industries; if you have ever seen the movie or read the book “The Big Short,” by Michael Lewis, then you are familiar with this.
US prosecutors convicted 324 mortgage lenders, loan officers, real estate brokers, developers, and others for events that contributed to the crises, and most agree they barely scratched the surface of criminal activity.
The period before the crash is described as a “housing bubble” because there were rapid home price gains in some areas driven by a large number of buyers that were investing solely on the belief of ever-increasing prices, and this investor demand was elevating prices beyond where they would be if driven solely by core demand from buyers using them as primary residences.
The impact of the fraud was to create a housing market where a large number of homes were owned by people that could not sustainably make the monthly payments on their mortgage loans from income independent of those homes and was counting on extracting the equity gains from the appreciation on their homes in order to avoid defaulting either while living in the home, or before they intended to sell it as an investment.
Circling back to the home price example above, it should come as no surprise that the market share for subprime mortgages in Pittsburgh in 2005 was only 1%, but in Riverside, it was 14%.
Homebuilders had reacted to the false demand signals from the market by constructing record numbers of units. A downward spiral occurred, where the oversupply of homes and tighter mortgage conditions (higher interest rates) caused home prices to flatten in many parts of the country. Without increasing home prices to bail them out, borrowers began defaulting on their mortgages.
This increased the inventory of homes for sale and contributed to a massive supply/demand imbalance in the market. On the demand side, all of the delinquent borrowers could now no longer qualify as new homebuyers, and banks reacted by further limiting borrowing even to highly qualified borrowers. With a huge increase in the supply of homes for sale previously owned by delinquent borrowers, or unsold by homebuilders, and fewer qualified buyers, prices corrected downwards.
Monitoring imbalances in the system is the best way to know if there is a potential housing bubble. When the imbalances that are contributing to higher home prices normalize, that has historically resulted in home prices reverting to a lower level without support from the abnormal factors.
1. Unusual, new, or fraudulent mortgage products.
2. Abnormally low interest rates and mortgage rates.
3. Temporary influx of foreign demand.
4. A hidden or misunderstood buildup of excess home inventory.
5. A frothy labor market that is over-inflating incomes.
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