Lower inventory means higher prices for buyers, and less selection.
Mortgage rates are historically low this year — but so is housing inventory. In June 2020, there were 18.2% fewer homes available for purchase than there were in June 2019. And the number of home sales in June 2020 was 11.3% lower than it was the year before, according to new research by The Ascent into average house prices by state. This is actually very bad news for buyers for a number of reasons.
Why declining home sales spell trouble for buyers
You’d think that a drop in home sales might work to the advantage of home buyers. After all, low sales volume would seem to indicate, at least at first glance, that buyers aren’t biting. In this case, sellers might be desperate enough to lower their asking prices.
But when we dig deeper, that’s not what’s happening here at all. Rather, home sales have fallen because inventory is low. And because inventory is low, it’s turned into a sellers’ market. That means sellers can command top dollar for their homes. Buyers who want to capitalize on today’s low mortgage rates have no choice but to overpay for the limited number of properties that are available.
But that’s not all. Limited inventory also means that buyers are more likely to settle for a home that doesn’t check off all, or even most, of their requirements. And in those scenarios, buyers risk spending a small fortune on repairs and updates, thereby adding to their costs.
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Home prices have climbed
As of June 2020, the median home price in the U.S. was $295,300. That’s a 3.5% increase from the year before. For this reason, many of the homes on the market today do not, in fact, constitute a good deal, even though mortgage rates are extremely attractive.
Imagine you buy a home for $310,500 that would’ve cost $300,000 a year ago when average prices were 3.5% lower. You may get a lower mortgage rate, but the higher asking price may offset the amount you save on your mortgage. You’ll also have to fork over a higher down payment.
This is why it may not actually be a great time to buy a home, despite the appeal of competitive mortgage rates. What you save in one area, you’ll pay more for in another. Worse yet, you could get stuck with a property that doesn’t meet your needs or requires major work. And that could negate your mortgage savings even more.
If you’re not under immediate pressure to move, it could pay to sit tight and see if the housing market opens up in 2021. If things improve with regard to the ongoing pandemic, more sellers may be willing to list their homes. And if mortgage rates stay low next year — which could very well happen — the wait may save you money.
Remember, a lot of sellers aren’t motivated to list their properties right now because they don’t want to deal with the hassle of showing a home — and hunting for a new one — during the pandemic. If things get better, you may get the best of both worlds — a low mortgage rate and an affordably priced home you’ll be happy to live in.