Smart Moves by Ellen James Martin

Should Homebuyers Play the Waiting Game?

As the country grapples with the economic impact of the COVID-19 pandemic, millions of Americans are losing their jobs. Yet many more continue to work uninterrupted.

Among the securely employed are numerous young adults who’d planned to buy a first home this spring but are now torn between proceeding and postponing. One reason is that housing analysts themselves are unsure how real estate will play out during the balance of 2020 and beyond.

“We’re still in the early stages of understanding exactly what effects the coronavirus will have on the housing market in the long term,” says Alexander Casey, a senior policy analyst for Zillow, the data-driven real estate company.

Arlen Olberding, a Colorado-based financial planner who counts many aspiring homeowners among his clients, encourages those well positioned financially to go forth with the purchase of a house that’s a near perfect match for their desires, particularly if they have very narrowly defined tastes.

Still, he’s convinced that many wannabe first-time owners who have yet to find the home of their dreams would be well advised to delay their full search for three to six months, on the assumption they could get a better deal after the worst of the COVID-19 crisis has passed.

In the midst of the outbreak, countless would-be home sellers have withdrawn from the market due to health concerns. Though they could go through the selling process with video tours led by their listing agent, they prefer the convenience and perceived safety of waiting for a more normal market, perhaps as early as this autumn.

The assumption of these postponing sellers is that their property will fetch as strong a price later this year as it would have this spring. Many housing analysts support this view on the basis that property remains in very short supply, particularly for entry-level homes in popular, close-in neighborhoods. They assume that buyer demand will bounce back after the worst of the outbreak has cleared.

But other analysts are skeptical. These include Richard Curtin, the renowned economist who tracks consumer sentiment through regular surveys for the University of Michigan. He argues that consumer demand for big-ticket items, including homes, will lessen for the remainder of the year and that even many with secure jobs will back off in coming months.

“The post-coronavirus economy will not immediately return to the discretionary spending patterns that prevailed just a few months ago at the end of the longest expansion on record,” Curtin says.

Olberding isn’t predicting that home values will drop sharply during the latter part of 2020. But he does anticipate that as the months pass, sellers will become more motivated and open to negotiation. He also anticipates that mortgage rates could fall in coming months.

Here are a few pointers for first-time buyers who’ve decided to postpone:

-- Use the time to amass more funds for your down payment.

Olberding says that for those whose finances remain sound, this is an excellent time to fortify their down payment accounts with extra savings.

“If you can put down 10% rather than 5% on your mortgage, you’ll reduce your monthly payments going forward. You might even qualify for a better interest rate,” he says.

-- Crunch numbers to set a realistic housing budget.

Dale Robyn Siegel, a home loan broker and author of “The New Rules for Mortgages,” says that at a time of economic uncertainty, it’s especially smart for buyers to make a realistic assessment of their living costs.

“I always tell clients that before they choose a property and take out a mortgage, they should run the numbers and make sure they stay skinny on their overhead,” she says.

Your core living costs are expenses you must meet on a regular basis. Among other things, they include outlays for food, transportation, child care and insurance coverage. They may also include any financial commitments you’ve made to a religious institution or charity. Together, these expenses constitute what many in the financial field call your “nut.”

“Prior to making any major financial decision, your first task is to ensure you’ll have the funds to meet your nut every month,” Siegel says.

How should you go about determining your nut? Olberding advises buyers to take a step-by-step approach. As a first step, he says you should carefully review your checking and credit card statements to see where your money has gone in the past six to 12 months.

“When it comes to spending, people are creatures of habit. Because of that, looking back at your personal spending history should help you project your future spending,” he says.

Once you’ve categorized your past spending, it’s time to comb through the columns, determining which among your non-mandatory costs you’d be willing to trim in order to afford the sort of house you wish to purchase.

Once you’ve calculated your living costs, along with quality-of-life choices you consider essential, it’s time to compare this monthly total to the net income you’re bringing in. The difference should be the funds available to cover your mortgage expenses and future home upkeep and utility costs.

-- Realize that it’s still possible to qualify for too large a mortgage.

Given rising levels of unemployment, the federal government is now engaged in an unprecedented level of deficit spending, and all financial institutions are more wary. Meanwhile, lenders are looking ever more closely at the quality of borrowers’ credit. So Siegel recommends that buyers who are postponing their home search use the waiting time to repair any blemishes that appear on their credit reports.

Yet ironically, despite more stringent lending standards, she says many who can jump over lender approval hurdles are still able to borrow more than they reasonably should. Why? Because the full extent of their living costs isn’t apparent to the lender who reviews their file.

For example, in assessing your affordability range, a lender won’t take into account private debts, like the regular payments you owe your mother who advanced you the money to buy a new car.

“If an expense doesn’t show up on your credit report or tax returns, the lender often doesn’t know about it,” Siegel says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)