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How the Housing Market Boom Will Affect Potential Homebuyers

It’s no secret that the housing market is booming. With demand for homes at an all-time high, it seems like a good time to buy.

But will this boom be short-lived?

Will prices stay high?

And perhaps most importantly, what can potential buyers do to get themselves in the best possible position to buy both now and when the market cools down again?

We’ll answer these questions and more in today’s post!

Are we in a housing bubble?

To answer this question, let’s take a look at the economic data. Housing prices have risen much more rapidly than incomes over the past decade and are now significantly higher than in long-term equilibrium.

This is not to say that there aren’t other explanations for these trends as low-interest rates, rapid population growth, and more recently, the COVID-19 pandemic, have all contributed to the housing shortage.

But it’s clear that, in a fundamental sense, there is now too little supply for excessive demand and prices are well above where they should be given inflation rates.

The result?

A housing bubble.

While we’re not in the same league as 2006, there are some parallels and similarities between today’s market and the one experienced more than a decade ago. And what happened then is worth noting – because it didn’t end well for many homeowners or our economy at large.

So how does this affect potential buyers? Well, that is still yet to be seen.

What is known, however, is that there is an opportunity for buyers to take advantage of this housing market bubble and buy now while interest rates are still low.

The same rings true for those who already own property — as they have an opportunity to sell (and significantly boost their nest egg in the process) but it’s best not to wait too long before doing so as the value may depreciate given the cyclical nature of real estate.

What is causing the increased demand for housing?

It is plausible that some of the boom in house prices can be attributed to Covid-19. 

Economists speculate that people who are concerned about Covid-19 and do not want to live/stay for prolonged periods of time in tight, multi-family buildings might be buying single-family homes in suburban neighborhoods as a result.

Another theory related to the boom suggests that the increase in people working from home has contributed to many families wanting more space to accommodate a home office and in some cases a space for homeschooling.

That withstanding, certainly the lower mortgage interest rates are a huge factor as well.

Millennials are taking advantage of low-interest rates to buy their first homes

Millennials are driving the new home purchase market with over a quarter buying homes in the past year. The pandemic, combined with our current low-interest rate environment has created a near-perfect window of opportunity for them to buy and the pace doesn’t appear to be slowing down any time soon.

For many, the goal is a home that is both affordable and spacious, especially as uncertainty looms around how long we will remain in this era of remote work and decreased access to public spaces. 

The challenge, though, is with home prices increasing 8.4% in 2020 — and projected to rise an additional 10.5% in 2021 — millennials are facing the reality of skyrocketing demand and vanishing inventory.

How First Time Buyers Can Compete in this Market

If you’re a first-time buyer, you have a lot of catching up to do. With the median home price in California at $813,980 and steadily increasing yearly, it’s getting harder to break into the housing market without significant financial resources or financial assistance from family members.

The good news is that there are plenty of ways for you to compete in this market.

The first is to get pre-approved. After all, you can’t buy if you don’t have the funds upfront.

The second is to start looking for a home asap. With inventory decreasing and demand rising, it’s imperative that you’re proactive and find a property before you miss your chance entirely.

Next is to be flexible and patient with the areas you’re looking at, rather than fixating on one specific location or type of home.

Another way to compete is by making a more aggressive offer; while it might seem like a gamble that will end up costing you money if they lose out, the chances of finding a  home quickly are much lower if you don’t offer a competitive bid.

The final option is to work with a proven realtor. These agents have a great network of people to help you find the best home in your price range — not to mention experienced agents can help navigate any unforeseen obstacles, like being outbid, discovering an unexpected repair, or issues with the loan process.

Tax Savings for Buyers

Tax savings for buyers may be the most confusing part of home buying, but it’s also one where potential buyers can see some benefits.

If you’re a homeowner — or are planning to become one soon –there are a number of special tax breaks that you are entitled to.

While the rules have undergone some changes due to the Tax Cuts and Jobs Act of 2017, here are some of the key tax benefits of owning a home, and how you can make the most of the new rules.

New rules for deducting mortgage interest. The tax deduction for mortgage interest is one of the most valuable tax breaks for homeowners, but the Tax Cuts and Jobs Act reduced the amount you can deduct.

If you purchased your home before Dec. 16, 2017, you may be able to deduct the interest paid on up to $1 million in mortgage debt (or up to $500,000 if you’re married filing separately).

But if you bought your home after that date, you can only deduct the interest paid on up to $750,000 in mortgage debt (or up to $375,000 if you’re married filing separately).

Deduction cap for property taxes. Another big change from the Tax Cuts and Jobs Act was the property tax deduction. In the past, your property taxes were deductible if you itemized, however, in 2018 the maximum deduction was changed to a maximum of $10,000.

Home-office deduction for self-employed only.  The Tax Cuts and Jobs Act eliminated the deduction for unreimbursed employee business expenses, which includes home office expenses for employees who work from home for an employer.

However, people who are self-employed and work from home are still able to deduct their qualifying home office expenses as long as they meet the requirements that allow them to do so.

Next Steps

With the housing market booming, now may not be a bad time to buy.

However, it is important to do your research and understand that this isn’t just about buying a house but also securing your finances for years to come.

Doing your homework before taking the plunge into homeownership will help you avoid some of the common pitfalls. So take your time, do your research, find an agent with experience in helping people like you get into their dream home, and be sure to weigh the pros and cons before making a decision.

If you want to learn more, visit us at www.crossroads-planning.com where our team will gladly answer any of your housing market questions or concerns! Interested? Contact us today!

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