Buying In 2021 and the Hard Truths Of It
Good Will Hunting is my favorite movie. I knew it the first time I watched it that it was a classic that would carry on throughout the rest of my life. Basically, we have a genius living in Boston, working as a janitor, hanging out with his other Townie friends who don’t have much ambition to amount to anything more than they already are. A professor and a psychiatrist find Will and realize that he’s unbelievably bright, but he has to be pried out of his thinking that he’s not meant for something better based on the life that he has been handed. Will is not about that life. Why do the rules that have been followed in the past not get to apply to him? Why must he change to live a different life with different results? Right now, I feel like Sean Maguire, Will’s psychiatrist, that is constantly working to challenge Will’s ideas to help him live up to his potential. Real estate is hard right now. Buying is near impossible. There aren’t many buyers that are winning deals. Even winning right now looks like losing compared to usual standards.
For a long time, a “win” for an agent on a buyer’s side has been coming in just below asking price, playing with some wording that might save their clients a few thousand dollars, getting some closing costs paid for. Every buyer wants this and it became the benchmark for what was expected of buyer agents to try and get. I was even able to get a couple of these in the summer and early fall of 2020. There weren’t many, but if I could present a strong case for my buyer following through with the purchase among the COVID uncertainty, it was possible. All through last year, inventory was dropping off the table. My searches for homes on the market dried up (as did everyone’s) and as the numbers for COVID were moving up, people stopped selling and inventory plummeted. Searches that would bring 20 to 30 homes a week pre-pandemic would give me one a week. I’m running a search for a Clarksville client right now that has given me one new listing in three weeks. It’s sort of hard to put the necessary emphasis on that in text, so let’s try this: ONE HIT IN THREE WEEKS. TWENTY ONE DAYS AND ONE HIT. So, what do we do about this? How do thousands of agents facing the same problem find the solution first? Step into my doctor’s office and listen to some hard truths.
I need to preface what is coming next because I still have some active clients that I’m working through these problems with, so I hope this comes across in a friendly and respectful manner of your ideological thinking. The time of offering below what might seem like a ridiculous price is over; at least for the foreseeable future. If you see something at $350,000 that just went live but was bought a year ago for $250,000 and you refuse to even consider it on the principal of the price unjustifiably jumping in twelve months, you’re wrong. You’re wrong because the market dictates price; now more than ever. In a different time, with more inventory and other options, that line of thinking definitely makes sense and I’d be going along with that thinking. But in 2021, that seller is 100% going to get that price (and probably better). Look back at the same property two days after going live and be totally shocked when it’s under contract. We’re in an unprecedented time that the purchase price that the current seller bought at does not matter. Buyers are desperate, because they’re basically all in the same boat where they’ve been waiting for six months for the right thing to pop up and they don’t care that it might have issues. Buyers are even getting to the point of waiving appraisal contingencies and giving parts of earnest money as non-refundable. We have to come to terms with the fact that you’re probably going to overpay for the home you want right now. The plus side of that, I don’t think that this equity growth and squeeze is going to slow down any time soon; so if you do buy something that you feel like is a tad “inflated”, it’ll work itself out.
The other concern of trying to wait out the thinness of the market right now is mortgage interest rates. For the past 12+ months, rates have been insanely low as I’ve talked about a few times. Hundreds of dollars a month potentially in savings compared to prior years. That’s probably going to change throughout the year as markets fluctuate, more money trends back toward stocks and away from bonds. There are a few factors that trend back towards a bit higher interest rates. If that’s the case, you’re looking at potentially paying an even higher price for a home (aka higher principal monthly amount) as well as a higher rate. Even a half-percent higher in rate can result in over $500 a year. If the price of a $350,000 home raises 5% by summer (which will happen) that’s over $120 a month higher mortgage payment if you combine a raise in rates with price increases. You might be complaining about maxing our your mortgage payment budget today but it’s going to really suck a few months from now.
For anyone that is a current homeowner and has even had the slightest thought about selling and seeing what you could make in a net return on your home, reach out ASAP as possible (if you don’t get this reference you probably think I’m an idiot but I probably think similar of you for not watching the greatest sitcom of the 2000s). Over the last year I’ve gotten really into the stock market and trying to dabble and see if I know what I’m doing. If you’ve followed stock market news at all in 2021, you’ve probably heard about the Reddit craze over Gamestop. Basically, some internet bros decided that they were going to start buying up tons of shares of GME in a short period of time, driving the price up and forcing shorts- people who value the stock as overpriced and put in orders for lower prices- to cover at the higher price and buy shares that are even more overvalued. Some people made millions off of it, but a lot of people lost a lot of money by “bag holding” aka holding on to their shares hoping for even higher profit returns. That’s my opinion of homeowners that are considering selling right now. Yes, there’s a chance that if you continue to hold your investment that it could yield you a higher return this year. But the problem that goes hand-in-hand with that- the home that you’re considering buying afterward is going to continue to move up as well. So if you’re considering upgrading your home (adding a bed or bath) you have to look at it from a percentage perspective. While your $300,000 home might go up 5% in that timeframe- $15,000- your upgrade with a $400,000 home would go up $20,000. A rising tide lifts all ships. While you’re pumped about gaining massive amounts of equity, the homes you’re looking at are doing the same thing. Wouldn’t you want a larger percentage of an equity pie?
As I’ve been working on this write-up for the last week, I’ve been trying to think of what the safest possible solution is for my clients. How do I safely convey to someone that it’s a prime seller’s market, while also helping them to not be financially stuck in a lateral move due to the heightened market? The only answer I have right now is to look at new construction. Yes, prices are somewhat elevated there due to ridiculous material costs, but if you can lock in a contract right now at “X” price, you can rest assured that by the time the home is complete that you’re going to be buying into a good chunk of equity once the home is complete. It also gives you a nailed down timeframe of when you’ll be selling your current home or getting out of a current lease. It’s not the most desirable thing to have to wait a few months to move into a place you put an offer in on, but it’s the safest thing right now in my opinion. Especially if there is a continued squeeze on buyers due to limited inventory. I do think that market inventory will try to start leveling out soon, but I also thought the same thing a couple of months ago once the election was ironed out. So it’s basically a toss-up at this point, making the idea of locking in a contract now for a future date even more attractive. All of this to sum up my main point: Buy as soon as you can at the lowest price you can.