Smart Moves by Ellen James Martin

How to Minimize Risk When Buying a Home

The economy is officially in recession, 30 million Americans are collecting unemployment benefits, and COVID-19 deaths continue to rise. Meanwhile, the number of young adults applying for mortgages to buy a home is skyrocketing. Economists who track real estate are amazed.

“The housing market has displayed incredible resilience,” says Danielle Hale, chief economist at Realtor.com, the national real estate listings website.

Hale is one of a number of housing economists expressing surprise at the strong rebound in buyer demand. At the Mortgage Bankers Association (mba.org), forecasting specialist Joel Kan notes that in recent days home loan applications have risen to the highest level in more than 11 years.

Kan says the current homebuying surge is largely attributable to demographics and the fact that many in the millennial generation -- a cohort already entering their late 30s -- still have yet to buy a first home.

“The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” Kan says.

But the reality is that many millennials have suffered financial setbacks due to the pandemic, making it tougher for them to fulfill their housing aspirations. To make up for lost income, Hale says numerous young adults have had to dip into accounts earmarked for a down payment.

Take the true story of a couple in their 30s -- a landscape designer married to a medical assistant. The medical assistant was furloughed by her hospital in March, and it took her weeks to obtain unemployment compensation. During that difficult period, the couple had to rely in part on savings to meet regular expenses. That postponed their dream of acquiring an exurban cottage surrounded by enough land to plant a huge flower and vegetable garden.

Yet, despite the delay, the couple is as driven as ever to fulfill their housing desires. And they have reason for optimism, because the medical assistant’s hospital expects to soon recall her to work. Meanwhile, the pair have resumed house-hunting and are back in contact with their mortgage lender.

Not all young would-be homeowners are as sanguine about their prospects. And others are weighing the pros and cons of moving forward with a purchase in the near future, given lingering uncertainties about the economy.

“Some young buyers are gung-ho and can’t wait to get the keys to their new house. Because we’re short on available homes in hot neighborhoods, we’re witnessing multiple bids for entry-level property. But some qualified buyers are still waiting in the wings,” says Michael Crowley, an independent real estate broker who works exclusively with buyers and takes no listings.

Crowley, a past president of the National Association of Exclusive Buyer Agents (naeba.org), counsels wannabe buyers who are solidly employed to persevere with their plans while at the same time making sure they don’t overpay for a property or get themselves into too much mortgage debt.

Here are a couple of other pointers for novice buyers:

-- Review your personal economy before deciding what to buy.

Would buying a well-priced home in a strong neighborhood be a good financial bet for your household if your monthly mortgage payments are a major stretch for you to afford? Probably not, says Eric Tyson, a personal finance expert and author of “Let’s Get Real About Money.”

Despite stringent credit standards, Tyson says it’s still possible for many buyers to qualify for a larger mortgage than their situation warrants, thereby placing them at risk of a future default. That’s because the lender knows less about their financial obligations and spending habits than they do.

Before committing to any purchase, it’s always wise to first take an in-depth look at your budget and assess your level of job security. Is your current position at risk? Do you have easily marketable skills that would allow you to quickly get another job if you had to?

-- Consider neighborhood property values before you bid.

Researching local property values before you bid on a home is critically important these days.

To reduce your odds of overpaying for a particular place, Crowley recommends you ask your agent to provide you with information about similar homes that have sold recently -- ideally within the last six months or still more recently.

But data on comparable sales won’t give you the whole story. These days, you also need numbers to track the direction of the market. Ask your agent to give you data on the median price of a home sold this past month versus the month prior. Also ask for median-price comparisons on an annual and yearly basis. These statistics should give you a good feel for the trend.

Use these data when crafting a bid for a property you like. If selling prices have been rising in the neighborhood where you’re searching and inventory is scarce there, you could lose out to rival bidders if your offer comes in lower than market level.

“Lately, many sellers have been holding out for the stronger market they anticipate in 2021. Because many owners are in this wait-and-see mode, there are fewer listings on the market than at many other times. Strange as it seems, we’re in something of a seller’s market despite the recession,” Crowley says.

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