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There's a good reason to consider purchasing a new home right now -- mortgage rates are currently near record lows, so you may be able to borrow for your house at a more affordable rate than ever before.
However, there are also some major risks of diving into the real estate market under current conditions. Before you make an offer, you need to understand the potential problems with your home purchase.
In particular, there are three big risks you need to be aware of to make an informed choice.
1. A recession could mean your job is riskier
Thanks to COVID-19, the U.S. is officially in a recession. Unfortunately, when the economy isn't very good, that increases the chance that companies will lay people off. It also means that if you do lose your job, it could take longer to find a new one because so many other people are also unemployed.
During a prolonged period of unemployment, it would likely be difficult to continue making your mortgage payments. You don't want to put yourself at risk of foreclosure, so consider how secure your career is before you make the decision to buy a home.
If you're married and buying a house with a partner, you may also want to try to choose a more affordable house so you could cover the payments on just one spouse's income. Or you could aim to bulk up your emergency fund before buying a home to ensure you can cover at least six months -- or more -- of mortgage payments if something goes wrong.
2. More COVID lockdowns could affect your income
Even if your job is relatively stable and you don't fear losing it, it's possible that additional COVID-19 lockdowns could occur. This could lead to a reduction in hours or income if the business you work for closes temporarily or if you lose some key clients if you work for yourself.
3. You may overpay for your home if real estate is in a bubble
Home prices have increased more than 15% year over year. This rapid rise in prices is caused by a few factors, including the aforementioned record-low mortgage rates coupled with the fact that a lot of people don't really want to try to sell their homes in the middle of a pandemic.
The problem is, if you're looking to buy a home right now, you'll be purchasing at prices that may be inflated due to the high demand and low supply. There's a very real chance you could end up overpaying for your home because these unusual economic conditions have led to a bubble.
If you do buy at the top of the market, you could make your home needlessly more expensive when you could have gotten a bargain had you waited for the bubble to burst. You could also end up having difficulty selling your home if its value falls and you find you owe more than it's currently worth.
Of course, no one can know for sure if we're in a bubble and no one can predict when it will burst if we are. The rising prices alone aren't reason enough not to buy a home if you're confident your income is stable and you have a generous emergency fund to cope with any further disruption COVID could cause to your earning potential.
But you do want to evaluate the market in your area carefully and make sure you're satisfied that the price you're paying is fair before you take action and end up making a financial move you could come to regret.