Current Real Estate MarketFinancesFirst Time Buyer October 28, 2022

Our Current Game of Musical Chairs

The recent rise in interest rates coupled with high inflation has caused the real estate market to slow and has sidelined both buyers and sellers:  Would-be buyers are waiting for rates and inflation to come back down (so they can afford more house or even get into one), and many sellers are waiting for prices to begin climbing again so they don’t sell too low. If you are in the waiting game and are spooked by rates and falling prices, here are few thoughts and questions to ponder:

If you are a Seller

* What is your motivation to sell? What is important to you about selling, and what are your goals and options? Finances aside and looking strictly at your life, when is the best time for you to sell? If you factor finances into it, how does your answer change?

* Where do you think interest rates are going?

* What are your carrying costs of the property? What is the opportunity cost of not having the net proceeds now?

* Does the house have any issues that will make it hard to sell? It is hard enough to sell when buyers have choices, but when buyers have fewer choices they are more apt to overlook flaws. If your house has deficiencies that you are either unable or unwilling to correct, it might make sense to sell at a time when there is less inventory (competition).
* If you are worried about not getting the best sales price for your home, consider that if you intend to buy another home, that home has also likely become cheaper due to prices softening recently. Conversely, if you wait to sell your current home to when prices go up, the next home you purchase will also likely cost more.
* One strategy to consider: Many experts predict housing prices will continue to fall into 2023. It might make sense to sell now, taking advantage of current equity gains before prices fall further. Then rent for a while, and purchase your next property next year when prices are predicted to be lower.

If you are a Buyer

* Where do you think interest rates are going?

*  What are your motivations to buy? What is important to you about having a house? Remember, your reasons to buy are not interest dependent. Interest rates are really about the “how.”

* Be aware that it is easier to buy a home now than for the past several years because:

  1. More choices: The last time Seattle had two month’s supply of inventory was November 2018.
  2. Time: For the past several years, buyers have seen a house online, raced to see it, and made a quick decision to write an offer. If you are a person who likes to be more thoughtful, is more data driven, and wants do your homework (including doing your own inspection), now might be a better time to purchase than in a frenzied market where a lot of purchasing decisions are more emotionally driven and rushed.
  3. Contingencies: In our more balanced market, offers now often include contingencies like an inspection, neighborhood review, financing, and title review. In our past sellers’ market, these were almost always all waived in order to win bidding wars. Waiving contingencies increases risks for both buyers and sellers (ask me why!).
  4. Affordability: Although interest rates are now higher, sellers are often giving buyers credits to buy down their interest rates. This has been an effective tool for sellers to find buyers and for buyers to make the monthly payment affordable. In some instances, because houses are not escalating hundreds of thousands of dollars over asking price, the monthly payment might actually be cheaper than it would have been a few months ago. If you or anyone you know is curious about this, I can put you in touch with great lenders who can show you numbers for your scenario so you can see of buying now makes sense.
  5. Better odds: In our current market there are usually not multiple offers. This means your odds of getting the house you want are higher.
  6. Fewer resources needed: It is easier for first-time buyers and those with limited resources to buy now. Conventional thinking says interest rates are higher so it should be harder for first-time buyers and those with fewer resources, but I actually I think the reverse is true. In a strong sellers’ market the risk of getting outbid goes up especially for those with limited resources because it is harder to compete. In months’ past, to compete and win a bidding war buyers needed the horsepower to bid the sales price up, to put towards their down payment, or to release to a seller before closing. Most of the time the buyers who won bidding wars had more capital to begin with; the cards in their hand were better at the start so they had an advantage playing the game. Now, buyers with less resources have a better chance of getting a home because there is less competition. In a nutshell, competitive markets are especially brutal on first-time home buyers and those with limited resources.

* Decreased risk: In our current market, buyers are no longer releasing cash to sellers before closing. if you ask any attorney about this practice, they will almost always advise against it because of the risks involved. This practice was the norm in months past, and if we return to a strong sellers’ market, it could start happening again. Ask yourself how you would feel releasing thousands of dollars to the seller just a few days after getting under contract and before the house is sold. If something goes sideways in the transaction, it could take awhile and be difficult or even impossible to recover the funds.

Other Important Questions and Considerations for Buyers

Would you rather put less money down and buy down your interest rate or put that same money towards an escalation going hundreds of thousands over asking price (assuming you win and get under contract)? You might be surprised how effective a rate buy down is! It can dramatically reduce your monthly payment and actually make a home purchase affordable even with rates in the 6-7% range. If you or anyone you know is curious, let’s talk! It is worth a conversation to explore what might be possible.

* If/when you purchase, be sure you can say yes to these four things:

  1. You have stable income (either retirement or employment)
  2. You are able to afford the payment
  3. You like the house and location
  4. You plan on living in the home for at least six years

These guidelines are true in all markets, but are especially important in today’s.

For an additional professional perspective on the housing market, I encourage you to watch the latest Mondays With Matthew video where he discusses the current state of the housing market and whether or not we are in a housing recession. You can watch his video here.

Final thoughts

Our current market reminds me of playing musical chairs: Buyers and sellers both seem to be listening to the music, circling the chairs, and waiting for the music to stop before they rush to grab a chair. When interest rates start to climb and prices have bottomed out, both buyers and sellers will be tempted to jump back into the market. One interesting twist to this game: Sellers who have rock-bottom 3-4% mortgages may be reluctant to get off of their chairs. Further, given that more Millennial and Gen Z buyers are entering the home purchase years, demand is also expected to increase. The combination of increased demand and decreased supply could push us towards a a more frenzied market similar to what we just experienced.

Nobody has a crystal ball, though. At the end of the day, we can all all make predictions about where we think interest rates, inflation, and the housing market are headed, but nobody really knows for sure. Sometimes the best course of action is to consult multiple sources, obtain informed perspectives, and make the best decision based on your particular situation, needs, and objectives. If you have any questions or want to talk through possible scenarios about what makes the most sense for you, please reach out! I am here to help you analyze your options and empower you to make sound real estate decisions.