Feeling nervous about buying a home?
With home prices high, mortgage rates rising, and low housing inventory, today’s homebuyers are a bit fearful — and it’s no wonder why.
“Here we are in 2022, and the market has yet again evolved to become even crazier,” said mortgage expert Shivani Peterson in a recent episode of The Mortgage Reports Podcast. “There are lots of concerns out there that I’ve been hearing, not just so far this year, but over the past couple of years. This year, though, they’re really being amplified.”
What are these fears, and are they justified? Those are just the questions Peterson sought to answer. Here’s what she had to say.
Listen to Shivani on The Mortgage Reports Podcast!
Fear #1: There’s a housing bubble that’s about to pop
“The biggest concerns I hear from buyers are related to whether or not the housing market is headed toward a bubble that’s going to pop,” Peterson said. “In my opinion, we aren’t.”
While home prices are at all-time highs, Peterson says the conditions just aren’t there for a bubble — or a burst.
“The number one thing that would have to happen for this said bubble to pop would be that home prices crash,” Peterson said. “The only way that’s going to happen is if there are mass defaults like we saw in 2008 during the Great Recession.”
Fortunately, a wave of defaults isn’t in the cards for a number of reasons.
First, mortgage loan quality is much higher than it was during the early 2000s. In the pre-recession years, mortgage lenders were much less strict about who they’d loan to. This meant when times got tough and borrowers lost their jobs, they no longer had the funds to cover their mortgages and, unfortunately, defaulted on their loans, losing their homes in the process.
“The biggest concerns I hear from buyers are related to whether or not the housing market is headed toward a bubble that’s going to pop. In my opinion, we aren’t.”
“To get a mortgage these days, as compared to 2008, you have to prove that you can actually repay that debt,” Peterson said. “As lenders, we put you through the wringer to make sure that, even in the worst of times, you’ll be able to afford that payment.”
On top of this, homeowners are now sitting on huge amounts of equity. At the end of 2021, the average homeowner had a whopping $185,000 in tappable equity, according to Black Knight. This equity protects borrowers in case of job losses or other financial struggles — and also if home values depreciate.
As Peterson explained, “This is a stark difference from 2008.”
Finally, there’s supply and demand to think about. Even though rising mortgage rates are pushing some buyers out of the market, demand from Millennials — many of whom are just now reaching prime homebuying age — is far outweighing supply.
“That’s a huge demographic of buyers flooding into the market,” Peterson said. “We’ve been under-building since the great recession, so there’s just not enough homes to meet the demand. That’s just simple economics and math.”
Fear #2: Losing a job and being unable to pay your mortgage
After the pandemic and the financial losses it brought for many, this fear is natural.
“Many of us who are of homebuying age have lived through the Great Recession, we saw what that was like,” Peterson said. “We graduated into a job market that was non-existent; it was really hard to even find a job after finishing college. And then we go through a pandemic, which again, turned everything upside down, so I think a lot of people are hesitant to purchase a home, especially when prices are high.”
Again, stricter lending practices help here. Unlike in the early aughts, mortgage lenders aren’t loaning money to just anyone these days. They’re looking at assets, employment, income, savings, and much, much more to ensure you can repay your debt — even if things get tough.
On top of this, a home can actually be quite a smart safeguard, particularly during times of inflation like we’re currently experiencing.
“Look at purchasing a home as your safety plan because it combats inflation,” Peterson said. “You never know what your rent is going to go up to when the lease ends. When you purchase a home and take out a [fixed-rate] 30-year mortgage, you’ve set your housing expense for the next 30 years. You know what to expect and what you’ll need to pay to keep a roof over your head.”
Your home can also offer protection if you lose your job or see your income cut back.
“Odds are your home would come to your rescue in that situation because of that homeowner equity,” Peterson said. “So, if you’re sitting on a good amount of equity in that house, and things really did hit absolute a worst-case scenario — you lost your job, you had no other investments or passive income streams, no way to make that payment — you could sell your house and most likely for a profit.”
Fear No. #3: You may have to live somewhere you don’t like
With home prices high, particularly in big cities and the surrounding suburbs, many buyers are being forced to buy outside their ideal neighborhoods. As Peterson put it, “If you’re currently renting, and you like where you live, you like the neighborhood, and your rent is comfortable, why would you ever buy?”
For one, buying offers protection from future rent hikes. When inflation rises, landlords are forced to increase rents to keep up with costs. This means you’ll likely see housing costs increase from year to year for as long as you choose to rent.
“You’d be building equity, and you can use that equity down the line to move up... It’s going to be much harder to get to that point just by renting and saving money each month.”
“You don’t know how much your rent could go up — that’s up to your landlord,” Peterson said.
“It’s not a fixed expense. You’re at risk every time your lease ends of having it renew at a higher amount.”
Buying, on the other hand, allows you to lock in a consistent monthly payment for years, despite where inflation is trending.
It also gives you a chance to build wealth and buy in your ideal neighborhood faster and more efficiently.
As Peterson explained, “You’d be building equity, and you can use that equity down the line to move up. So maybe two or three years from now, you can buy in the neighborhood you like and live where you want to be. It’s going to be much harder to get to that point just by renting and saving money each month.”
Don’t try to time the market
At the end of the day, it’s important not to pay too much attention to market conditions but instead to your own financial picture and goals.
“It’s not necessarily about timing the market,” Peterson said. “It’s about being ready for the opportunity. So address your fears and concerns, so that you can make a less emotional and more logical, financially sound decision about whether or not now is the time for you to buy.”
If you think you might be ready to buy a home, but you’re unsure about the logistics, connect with a mortgage advisor who can talk you through your options and help you get started on the right foot.