Top 3 Reasons Why Now is a Great Time to Buy Your First Property

Photo by Tonik on Unsplash

Written by Max Vishnev, licensed NJ Realtor with Compass and real estate investor

We are living through a period of tremendous uncertainty, fear, and social upheaval, bombarded with scary headlines, images, and daily death toll reports, stuck at home “indefinitely”, hoping to remain healthy and employed. Face masks, gloves, and social-distancing is our “new normal”. Those of us that do leave the house encounter mostly shuttered storefronts, bars, and cafes. Entire sectors of the economy are at a virtual standstill.

In this environment, what’s a homebuyer or real estate investor to do?

Well, to paraphrase the Oracle of Omaha, Warren Buffet: 

“Be greedy when others are fearful and fearful when others are greedy.”

I think history supports this sage statement. The best buying opportunities have typically been in times of great uncertainty and high volatility. In other words, it often works out well in the long run to buy when everyone else is running scared. The opposite is also true – you may have missed the best buying opportunities if everyone from your neighbors to your kids’ babysitter is talking about how this is a great time to buy – whether it’s “dot.com” stocks in 1999/2000 or homes in 2007/2008.

So, in this post, I want to break down what I believe are the Top 3 reasons why now is a great time to consider making your first (or next) real estate purchase.

Here is a summary:

1. - Mortgage rates are near historic lows
2. - Less competition from buyers
3. - Sellers may be extra motivated

Reason #1: Mortgage rates are at or near historic lows right now.

If you have excellent credit and can lock in a 30-year mortgage at a rate that starts with a “3”, it’s a no-brainer. You’ll lower your monthly overhead and save a lot of money on the total interest paid to the bank over the life of the loan. It might also mean that you could afford to stretch your budget a bit, given the lower monthly mortgage payment (compared to even just a year ago).

That said, I should caveat that by saying that a lot of the large banks have tightened lending standards. Chase, for example, recently announced that they will now require 20% down payments and minimum FICO scores of 700. That’s why it’s a good idea to speak to one or more local lenders where you’re looking to buy and see what you can qualify for.

By the way, even a half point difference in mortgage rates can have a significant impact on your monthly cashflow. For example, let’s take a look at two scenarios – a 4% 30-year mortgage with a $500,000 loan balance and a 3.5% 30-year mortgage with the same loan balance:

Here is what the monthly principal & interest payments would look like:

- At 3.5%: $2,245

- At 4%: $2,387

That half a point difference in mortgage interest rate would account for a monthly savings of $142, which could fund a decent supermarket run or pay for a few tanks of gas. That’s a savings of $1,704 over 12 months, or $8,520 over 5 years.

But that’s not all. The other difference worth mentioning is the difference in the total interest paid over the life of the loan. Most people only focus on the monthly payment differential. But it’s important to remember that if you take out a 30-year loan, you are paying interest on it for 30 years (unless you refinance into another loan, of course, or sell the house). Let’s use our previous example:

The total interest paid over the 30-year life of the $500,000 loan at 4% would be $359,347. With a 3.5% mortgage rate, that total interest amount would be $308,280. That’s a difference of $51,067!

Of course, the lower the rate, the more pronounced the savings. For example, the most qualified borrowers have very recently been able to lock in 3.25% (in fact, a few of my clients have done just that this month), which would save $211 a month (compared to a 4% loan) or $2,532 per year. Over the life of the loan, the savings on total interest paid would be just over $73,000.

Some historical context:

Another point I want to make, as it relates to today’s mortgage rates is that it’s important to put them in a historical context. I looked up average historical mortgage rates on 30-year fixed-rate loans and found a chart going back to 1971 provided by Freddie Mac.

Quick aside: “Freddie Mac” is a nickname for the Federal Home Loan Mortgage Corporation, a government-backed agency whose main role is to purchase the vast majority of conventional mortgages from individual banks and lenders and then package these loans into Mortgage-Backed Securities (“MBS”), which are then sold to investors. This serves a vital function of providing liquidity in the mortgage market and ensures that most Americans have access to home loans.

According to the rate table published at http://www.freddiemac.com/pmms/pmms30.html, the average 30-year rate in the month of March of 2020 was 3.45%, with an average of 0.7 points upfront (simply put, “points” is the dollar amount the lender charges the borrower at closing, as represented by a percentage of the loan amount).

In March of 2019, the average rate was 4.27% with 0.5 points upfront. So just a year ago, the average borrower would have locked in a rate higher by 80 basis points (a basis point is 1/100th of a percent), which as we’ve seen earlier, would make a big difference in terms of both the monthly cashflow and the total interest paid over the life of the loan.

But let us go back even further in time. In March of 2009, for example, (the year following the financial crisis precipitated by the collapse of the subprime housing market), the average 30-year rate was exactly 5%, with 0.7 points upfront.

In March of 2001, meanwhile, after the bursting of the “Dot Com” bubble, 30-year rates were 6.95% with 0.9 points upfront.

Going back even further, the 30-year rate in March of 1994 (the year the NY Knicks, led by Patrick Ewing, got as far as Game 7 of the NBA finals only to lose to the Houston Rockets, led by Hakeem Olajuwon) was 7.68% with 1.7 points upfront.

I saved the “best” for last. In March (I went with March across the years to keep things consistent) of 1981 – chosen by me, because that’s the year I was born -- the 30-yr rate was a whopping 15.40% with 2 points upfront! That’s right, the average homebuyer would have locked in a mortgage rate slightly above 15 percent, just in case you thought that was a typo.

Hopefully, these historical references have helped place today’s very low rates into context for you.

Now, let’s move on to next reason why I think now is a great time to buy.

2. Less buyer competition.

The second reason why now may be a great time to buy real estate is that there is simply less competition from other buyers. We are in late April, which would normally be the beginning of the spring buying season, but because of the stay-at-home and social-distancing guidelines in most states and the economic turmoil wreaked by the COVID-19 pandemic, a lot of buyers who would be competing for properties are either on the sidelines or out of the market entirely. 

More than 22 million Americans have filed for unemployment just in the last month, which is unprecedented, and entire industries are at a standstill. Some people can’t make their rent, let alone buy a house. Others have been furloughed, which would prevent them for qualifying for a mortgage.

Even prospective buyers who are still employed may be “sitting it out” due to concerns over their job security or economic prospects in the near term.

So, if you’re an employed, qualified, and pre-approved buyer, with the funds for a down payment and a relatively secure job, you should enjoy a competitive advantage.

No in-person open houses and very limited showings:

Record unemployment claims aside, the other limiting factor as far as buyer competition is that open houses are non-existent right now and in-person showings are extremely limited, for obvious reasons. This new reality we are in right now means that the usual flow of buyers spending their weekends hopping from one open house to another has been abruptly shut off. That combined with extremely limited individual showing availability (in person, at least) implies that most buyers, even those that are employed and pre-approved, are probably sitting at home waiting for open houses and in-person showings to resume.

If you, however, are willing to make offers based on photos, virtual tours/video walk-through's, and comps in the area (and the analysis and advice provided by your top-notch real estate agent), you would put yourself at an even greater competitive advantage.

That’s why working with a great Realtor is crucial, especially in this market environment.

Reason #3: More motivated sellers:

And the 3rd and final reason why this may be a great real estate buying opportunity is that sellers may be extra motivated. Think about it, if you owned a home and didn’t have to sell it now, would you put it on the market in the middle of a pandemic? Probably not. And if you mistimed your listing and put it on the market right before COVID-19 rocked our world, you would probably take it off the market, at least temporarily, if you had the option.

So, the properties that are on the market are probably those that the sellers have to sell, or at the very least, really want to sell. Maybe they are flippers trying to complete the flip after renovating a property. Or maybe they are homeowners that have to sell because of a job relocation, death in the family, or financial hardship.

You won’t know their level of motivation or reason for selling by just looking at the property on Zillow. But if you work with a great agent in your target area, he or she can help you come up with a strategy and write up an initial offer on your behalf. Your agent can also have a conversation with the seller’s agent (aka “listing agent”) to try to gauge the seller’s level of motivation and reason for selling now.

By the way, in a normal, competitive “seller’s markets”, where there is a lot of demand from buyers and home inventory is limited, the level of seller motivation is not particularly relevant, because properties priced competitively would sell anyway. In fact, in some cases, they would even get multiple offers and sell above asking price, even if the seller is highly motivated. Because real estate is all about supply and demand.

These days, however, bidding wars are far less common. Certain properties might still get multiple offers, but it certainly won’t be the norm. Given the relative dearth of willing and able buyers right now, sellers, who this time last year would have been gearing up for multiple offers and bidding wars, might now be happy to get an offer at all, especially if it’s from an employed, pre-approved buyer.

Conclusion:

The rare combination of historically low mortgage rates, far fewer able and willing buyers, and sellers of listed properties who may be “extra” motivated means that now may be a great time to buy your first (or next) property.

On that note, I am going to leave you with a two-step Action Plan:

First, reach out to one or more local lenders today! Don’t wait until tomorrow.

Second, reach out to a great buyer’s agent in the area you're targeting. Working with a professional Realtor in this market is crucial. Don’t try to go it alone.

Don’t have a lender or agent yet? Don’t stress. Ask your social network for lender recommendations in your area or browse the network of real estate professionals right here on BiggerPockets!

And if you have any questions about this post or need advice, feel free to leave a comment here.