The real estate market may be approaching a shift as the COVID-19 pandemic places a hold on the hospitality and tourism industry. Many local and state governments have issued mandates that restrict the business of vacation properties, forcing the homeowners to pay their mortgage out of pocket rather than with the side rental income. Even when restrictions are lifted, it’s predicted that few people will risk exposure to the coronavirus through travel, meaning that spring and summer tourism economy will be significantly slower this year.
As a result, many people who own vacation rentals are listing their properties on the market, hoping to use the proceeds of the sale to cover the mortgage payments on their own primary residence. The more people who panic will increase the amount of properties available on the market, and the simple law of supply and demand suggests that this surplus could cause prices to plummet.
First-time homebuyers may have the unique opportunity to enter the market for significantly cheaper with less money down upfront. If you think you could be in the position to buy, be sure to consider these five tips first.
- Mortgage Structures Are Not One and the Same
Even if listing prices dip below market value, few people will have enough saved to purchase a property with cash and will require financing to complete the transaction. It’s important to know that not all mortgage structures are created equally, and some offer much better terms than others. Your real estate agent should walk you through available options, but some choices may include:
- Traditional mortgage – Obtained through private lenders
- FHA mortgage – Nonrecourse loans insured by the federal government
- VA home loans – Also backed by the government but offered to veterans or active servicemen and women
- Low Interest Rates May Not Last
Before you start hunting for dream homes, get pre-approved by a lender to know exactly how much you may qualify to borrow. You may be able to shop around to find the best interest rates, but keep in mind that each loan application will pull your credit file and may place a hit on your score, resulting in less favorable terms.
If you come across an option that seems too good to be true, be wary. In all likelihood, it means the rate is variable and subject to increase over time. Although the coronavirus may present an opportunity for buyers to obtain a mortgage with a historically low rate, interest is quickly rising due to the amount of people refinancing their home loans during these trying times.
- Property Taxes Can Change Every Year
As sellers get nervous and the buyer’s market grows, it may be possible to purchase a home well below value. But keep in mind that the selling price is only one portion of the ongoing costs of homeownership.
Property taxes are due every year and the criteria that determines how much you owe depends on the state in which you live. In most places, the appraised property value plays at least a partial role. So, even if you get a steal of a deal in 2020, the taxes you pay in two, five, or ten years from now can be thousands of dollars more.
- Calculate Hidden Costs into Your Bottom Line
Taxes are just one example of the hidden costs that homeowners can forget to account for. Routine maintenance and repairs also eat up a significant amount of annual expenses, so be sure to factor those into your long-term picture. A smart budget usually suggests setting aside 1-4% of the purchase price to cover these costs. So, if you were to buy a home at $400,000, by conservative estimates, you’d need to cover at least $4,000 more by the end of the year.
- The Depth of Impact Depends on the Duration of the Pandemic
Ultimately, it’s important to understand that the effect of the pandemic on the real estate market will depend on how wide the virus spreads. Anyone considering buying a home should seriously weigh economic concerns and evaluate the downward spiral.
If trends continue and more people are laid off from their jobs, it seems highly unlikely that the housing market will sustain itself and we may face another recession similar to the 2008 crisis. Crunch numbers more carefully than ever and be judicious by purchasing far under budget to account for unexpected curveballs.