If you’ve been keeping up with the latest real estate news you must have heard a lot of talk about home equity and its relation to the 2021 real estate market. Across the country, the housing market remains strong and extremely busy with sellers having an upper hand when it comes to housing transactions. Home equity should not only be something an existing homeowner is concerned about but the issue should be equally important to first-time home buyers entering the Tennessee real estate market.
2021 Real Estate Market Update
In all major US markets home prices have surpassed yet another record with the annual increase in June of 18.6% which is up from 16.8% increase in May. Home prices in the country are now 41% higher than their record high during the housing boom in 2006. Prices continue to increase everywhere in the country amidst high demand and low inventory. According to the National Association of Realtors, even though the housing inventory has been slowly rising the overall supply was down 12% year-over-year in July.
On the other hand, home sales are slowing down. The number of signed contracts on existing homes dropped in July which may indicate the prices may begin to normalize in the next six months. According to the latest Ally Home data, 45% of prospective home buyers decided not to buy a home yet because of the current market conditions. Other reasons for delaying a home purchase are high home prices and high competition among buyers which accelerates the selling process causing some buyers to miss out on a deal.
Home Equity and Troubled Homeowners in Tennessee
In the meantime, skyrocketing home prices caused the home equity values in Tennessee to increase substantially giving relief to many troubled homeowners. According to the latest data, the number of homeowners with underwater mortgages dropped to record lows during the second quarter of this year. While a great number of homeowners who opted for mortgage forbearance were not keeping up with their monthly payments their properties’ values were appreciating considerably.
At the end of the second quarter of 2020 there were 5,232 homes with seriously underwater mortgages in our local market. Same time this year there were only 2,988 homeowners with negative home equity. What we understand by a seriously underwater property is a house mortgage with a loan-to-value position of 125%.
Furthermore, the number of equity-rich owners in the Northeast Tennessee real estate market increased to almost 30%. Equity-rich homeowners owe half or less of their properties’ value. High home equity values give existing owners strong selling and buying power.
Home Equity and First-Time Home Buyers
While existing homeowners have enjoyed watching their home equity advancing this year, some first-time home buyers who purchased a house over the past year may feel different. Due to the low supply, high demand and bidding wars in every housing market in the country, many first-time buyers bought their homes this year at very elevated prices. Especially, buyers who didn’t have an exclusive buyer agent helping them with negotiations.
Because of the high house price tag many buyers couldn’t afford the recommended 20% down payment and decided to put down as little as 5%. Some financial experts are worried that with the real estate market showing signs of going back to normal levels these elevated home prices will start dropping creating a tremendous amount of underwater mortgages. For example, if you bought a home for $400,000 and put down only 5% for a down payment, which is equal to $20,000, your mortgage loan is now for $380,000. If shortly after you bought your home real estate prices correct by 10%, your $400,000 investment will now be worth $360,000 which would mean you have negative home equity right from the start.
Being underwater on your mortgage is a very risky situation. If you happened to lose your income and couldn’t afford your house anymore you would have to sell it and pay the difference on top of that. Refinancing your house also becomes way more complicated if you have negative home equity.
How to Avoid Negative Home Equity in Today’s Market
If you are certain you wish to purchase a home sooner rather than later, and you have sufficient finances to do so, you should definitely consider putting down a 20% down payment. Depending on the price range of your dream home a 20% down payment may be a large sum. However, if home prices start to go down shortly after your purchase the high down payment will save you from being underwater.
Furthermore, if you put down less than a 20% down payment on a house you will need to pay private mortgage insurance (PMI). PMI is usually anywhere between 0.5% and 1.5% of your loan balance depending on your credit score. For example, if you’re buying a house that’s worth $350,000 and you put 5% down payment on it, which would be $17,500, your loan will be for $332,500. If your PMI costs 1%, you’ll have to pay an extra $277 a year (or about $23.08 monthly) on top of your mortgage payment, property taxes and insurance, not to mention maintenance costs. This monthly PMI will have to be paid until you have at least 20 percent equity in the property, which as you can imagine, may take a while.
If you’re financially incapable of putting down 20% as your down payment but you can wait some more to buy a house you should consider postponing your investment. A high down payment not only protects you from a downturn in the real estate market but will lower your monthly mortgage payments.
Find Great Deals in the Tennessee Real Estate Market
According to the July housing trends in the Northeast Tennessee real estate market, sellers added more homes in the $180,000 to $200,000 price range for the fifth straight month. This is great news for home buyers looking for a home in our local market. More affordable housing means buyers can consider higher down payments and avoid financial risks.
If you’re interested in finding a great deal on a Tennessee home contact our exclusive buyer agency specialists today! Our real estate professionals will help you navigate the competitive real estate market making sure you’re making the right investment. Give us a call at 423-283-4677, or send us a message, and we will get back to you as soon as possible!