Have you considered purchasing a home, but are fearful of paying more than the house is worth? In this blog, I will cover 4 points so that you can be confident in your investment into a home.
I’m Bailey Beckman, a local Twin Cities realtor that reduces stress for my clients and helps them make educated investment decisions.
What is your definition of "overpaying"
The first point that you need to take into consideration is your definition of “overpaying.” There is so much misconception surrounding real estate and the overall housing market that it can be hard to determine what reports are just trying to scare you. A key question to ask yourself is what guidelines have you followed in order to define what is considered too much?
It is irrelevant to compare home prices today versus 20 to 30 years or even when the market crashed in 2008, because homes appreciate over time (this is why investing in real estate is one of the safest investments you can choose!) On average home prices appreciate at 3-7% annually. And even though homes have appreciated faster over the last two years, that adjustment counters the steady growth and appreciation that would have occurred if the housing market crash of 2008 hadn’t happened.
Where are home prices projected to go in the future?
In addition to considering the historical appreciation of homes, you have to also consider where home prices are projected to go in the future. There are very few indicators that we are headed to a market crash, because lending practices are stronger now.
In this chart from Keeping Current Matters, you will see the number of mortgages that were granted to buyers with credit scores less than 620, which is typically a sign of a financially unstable buyer.
Home prices will continue to rise until supply and demand even out, and even then, home prices are projected to plateau, not decline.
What is your ownership timeline?
You also have to consider the timeline that you plan to own the house. You may not get direct equity growth back if you plan to own a home for 1-3 years in this market. However, say you pay 10 percent more than what a home is valued at, appreciation may catch up in 7-10 years.
What is the local market dictating & how are sellers pricing their homes?
Finally the most important point to consider when determining if you are overpaying for a home is local market knowledge. You want to work with an agent that compares what other homes in a specific neighborhood were both listed at and what they actually sold for. A key to this is to understand seller pricing strategy. Often sellers will list for under what they believe the home is worth in order to drive the home into multiple offers, and the home will actually sell for what it is valued at.
a home is worth what someone is willing to pay.
At the end of the day, a home is worth what someone is willing to pay for it. Buyers are in a competitive market right now, but you never know what someone’s final motivation on purchasing is. Maybe grandma and grandpa live across the street? Maybe the layout is perfect? So each individual buyer’s motivations make an impact on what a home will sell for.
Now that you have a better understanding of how homes are priced and the definition of “too much” you can make a sound investment into a home with less stress and less fear!
In my next post I will walk you through the steps of what you do AFTER your offer is accepted, so that you will stay on track and get the keys to your home on time!