The National Association of Realtors reports that in the first quarter of 2023, home prices actually rose in 7 out of 10 metro markets around the country. That happened even as the Federal Reserve continued to raise interest rates, pushing the average mortgage rate to nearly 7%.
This isn’t how things typically work. When mortgage rates increase, prospective buyers typically bow out, resulting in fewer sales, which then causes prices to fall. That’s Economics 101. When demand falls, so do prices. But that’s not happening, partly because demand is not falling.
Prospective home buyers have apparently gotten used to the higher rates and are staying in the hunt. Meanwhile, prospective sellers are shying away from listing their properties because they don’t want to pay those higher rates when financing their next home. The net result is that inventory or supply remains low, and with demand steady, prices will stay up.
SO WHAT CAN YOU DO ABOUT IT?
How do you buy a home in this market without breaking your budget?
Start by not “going it alone.” Interview at least three real estate agents and pick the sharpest one. You want someone with a track record of helping folks buy homes in the neighborhood of your choice and who’ll stay on top of new listings.
You or your agent may want to make a list of the other real estate agencies in your area and make frequent calls to them, checking to see if they’re working on potential houses that haven’t been entered into the Multiple Listing Service yet. You might be able to make an offer before a house hits the market. But be ready to make a quick decision.
You also want to get pre-approved for a mortgage before you set foot in the first house on your list. That’ll give you a leg up over the competition that hasn’t bothered to look into financing.
But understand that the lender will likely approve you for a bigger mortgage than you’ll be comfortable with. Work up an estimated budget that allows 25% or less of your take-home pay for housing expenses.
Also, you have to realize that in this market, buyers can’t be choosers. The goal is to find an affordable home that meets your needs, not your dream house. Be flexible with your “must haves” and be willing to make changes. Location is probably the most important thing to hold out for. Other things, like a finished basement, you can do later.
Here’s one that should go without saying: Don’t bother trying to lowball a seller. With most homes selling near the asking price these days, making an offer well below that won’t get you anywhere.
To be competitive, you’ll have to come in very close to the asking price, if not a little above. Here again, your agent can help you come up with a realistic opening offer.
It’s happening less and less these days, but you could find yourself in a bidding war where emotions can run high. You’ll need to keep your wits about you or you’ll find yourself with a fat mortgage payment and eating a lot of Spam. Know the absolute upper limit of what you can spend and have the discipline to stop there.
And don’t try to put a lot of conditions on your offer. Sellers aren’t in the mood to throw in a major appliance or give you a new roof allowance if you feel the house might need one. You have to keep the seller’s interests in mind. For example, agree to a closing date of the seller’s choice, not yours.
And one final thought: You might consider doing nothing. That means waiting until the market moderates even further. Don’t expect home prices to fall significantly in the future, but eventually, inventory should catch up with demand and you’ll have less competition.
You definitely should wait if you haven’t saved up 20% for a downpayment yet. There’s no sense in adding the cost of private mortgage insurance to your mortgage payment, which is likely to be high to begin with.
PMI is required if you can’t put 20% down, and it could run as high as $70 a month for every $100,000 you borrow. It only protects the lender in case you default. It has no value for you at all.
So those are some tips for surviving a seller’s market. We hope you find them useful.
On today’s program, Rob also answers listener questions:
- Is a balance transfer to a credit card offering 0% interest for a period of time a good way to pay off debt?
- When do you have to start taking a minimum required distribution and what’s the best way to go about that?
- Are annuities a wise investment?
- What is the best way to tap into home equity?
RESOURCES MENTIONED:
Remember, you can call in to ask your questions most days at (800) 525-7000. Faith & Finance is also available on the Moody Radio Network as well as American Family Radio. Visit our website at FaithFi.comwhere you can join the FaithFi Community, and give as we expand our outreach.
