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Mortgage rates keep plunging as the economy remains sluggish in the coronavirus pandemic. That's led to an uptick in buyer demand.
But many buyers have struggled to purchase homes, and high prices have a lot to do with that. In fact, home values rose 7% year over year in September, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. That's the largest annual gain since September of 2014. The result? Home prices are now almost 23% higher than when they last peaked, back in 2006.
Limited inventory is also driving prices up
It's not just low mortgages rates creating a surge in buyer demand. Housing inventory has also been extremely limited during the pandemic, making it difficult for buyers to get in on the action. Inventory declined to a 2.5-month supply at the end of October, reports the National Association of Realtors. For context, a four- or five-month supply of homes is generally available in a more balanced housing market. Also, due to the level of competition for existing homes, many homebuyers are finding themselves in bidding wars for properties, driving sale prices up.
Of course, some cities are seeing higher home prices than others. Seattle, San Diego, and Phoenix, for example, saw substantial gains in September, while New York, Dallas, and Chicago saw smaller ones. But overall, homes prices have gone nowhere but up.
Does it pay to buy a home in light of higher prices?
Though capitalizing on today's low mortgage rates may seem smart, weigh the amount you'd save with a low rate against the higher price you'll pay for a home. And remember -- it's not just the amount you pay for a home that'll eat away at your savings. Due to limited inventory, you might find yourself with a property in less-than-stellar shape, so the money you'll sink into repairs could further negate your mortgage savings.
Another thing to keep in mind: The low mortgage rates you read about are reserved for top borrowers -- those with strong credit scores, low levels of debt, and solid savings and income. If your credit score is only in the low 700s -- still respectable, but not considered "excellent" -- then you may not get the best rates.
Will housing inventory open up in 2021?
There's a good chance it will. If things improve on the coronavirus front (which could happen if vaccines are rapidly deployed) and the economy improves, more sellers may be willing to list their homes. That could ease demand and bring home prices down to a more affordable level.
Of course, if the economy picks up, mortgage rates could climb a little, but there's a good chance they'll remain quite competitive throughout 2021. If you find that you're priced out of the housing market right now, it could pay to wait things out and work on making yourself a better mortgage candidate in the meantime. That way, a lender will be more likely to offer you a top rate once you are ready to buy.