What’s more, inventory is expected to loosen up, with 1.9 million units on the market this year—far below the flooded supply of 4 million we saw in 2008. The number of homes that were “flipped” (bought for a quick-sale investment) has dropped for the second year in a row, while the foreclosure rate is less than half what it was two years ago. Those are healthy signs for everyone (except, perhaps, for the small army of TV shows obsessed with renovating and flipping).
Can the center hold? The big question now is whether this manageable growth is sustainable in the long term. Economists such as Moody’s Analytics’ Mark Zandi note that we certainly need more first-time homebuyers in the mix to make that happen, because they drive a good piece of demand, allowing current homeowners to trade up—or cash in. In 2014 the percentage of rookie homebuyers on the market hit its lowest level in decades, just 33% of sales, vs. 40% historically. That said, a new report from BMO Harris Bank finds that 74% of Americans 18 to 34 plan to buy a new home in the next five years, and they are budgeting $240,000 to make the sale, a 24% increase over just last year.
Here’s some advice to help would-be home buyers plot their next move. In future posts in this series we’ll offer tips for sellers and those who want to stay put and add some value with smart upgrades.
Then there’s that other important factor: interest rates. Despite prognostications that they could tick up by summer, the 30-year fixed rate—recently at 3.7%—”is still within shouting distance of 60-year lows,” says Keith Gumbinger, vice president of HSH, a mortgage information provider.
Start hunting. Sure, you’ve been hearing for years that interest rates would shoot up soon. This time you can believe it—Federal Reserve chairman Janet Yellen signaled as much in her most recent Federal Open Market Committee statement. The NAR is forecasting that the 30-year fixed-rate mortgage will average 4.3% in the third quarter of this year, 4.7% in the fourth, and 5.3% over all of 2016. On a $300,000 loan, the difference between 3.7% and 5.3% would be $285 a month (a payment of $1,381 vs. $1,666) and $102,600 over the life of the loan.
Those rates could go even higher if Europe’s economy starts to recover, warns Sam Khater, deputy chief economist for CoreLogic. One reason that American mortgage rates have stayed so low is that in recent years global investors have poured money into the relative safety of U.S. Treasuries, a main factor influencing the price of mortgages. If money starts flowing back out to the rest of the world, domestic rates will inch up.
Home prices have been heading up as well. Not as fast as in the bubble years, of course, but some areas have already seen double-digit growth. “Until recently the fastest-growing markets were those hit hardest,” says Khater. “Today the fastest growing are those with healthy economies.” With the economy on the upswing, there are a lot more of those now too.
Go fixed-rate, not flex. Adjustable-rate loans may look irresistibly low now—around a 3% average for a five-year and as low as 2.5% for borrowers with credit scores of 760 and higher. But you’re likely to end up paying significantly more at the reset date with rates heading upward. “It’s hard to argue against a fixed-rate loan,” Gumbinger says. The exception: Buyers who plan to stay in the home for less than 10 years may benefit from the low ARM rates in the fixed period.
Right-size your down payment. If you’re looking in a highly competitive market, offer to put down more than the standard 20% if you can afford it. That gives the seller the extra reassurance that if the house appraises for less than the asking price, you’ll still be able to secure a mortgage. Signs that market conditions warrant sweetening the down payment: if houses where you’re looking are going to contract within a matter of days or if they are routinely selling for more than the asking price.
Find a savvy broker. Buyers have so much more information at their fingertips: comparable sales, school district reports, walkability, and more. But don’t underestimate the kind of advice you’d get from a broker. A buyer’s agent will have on-the-ground knowledge of market trends and be able to identify unseen circumstances that affect a property’s price, anything from a cracked foundation or a dead boiler to whether there’s been a recent school redistricting or a zoning change in the area. She might also have access to “pocket” listings that don’t make it online because the privacy-minded sellers don’t want their home flooded with prospective buyers.
Take a little time. Sure, you want to keep an eye on the prospect of rising interest rates. But in a balanced market with steadily rising inventory, don’t feel pressure to jump at the first house you like, says Craig Reger, a broker in Portland, Ore. Visit a good number of open houses (at least five) to get a sense of what’s out there, and go shopping with your agent. You’ll start to learn if a property is over- or under-priced and why.
The rules are a little different if you’re looking at new construction, because builders don’t negotiate on price very often. “They tend to sell at 100% of their list price because that’s their comparable for the next house,” says Jacquie Sebulsky, a broker with Cascade Sotheby’s International in Bend, Ore. That said, if you buy in the early stages of construction (when the developer knows you’ll have to live through months of noise, dust, and other hassles), you may be able to ask for help later with closing costs, upgrades, and additional amenities, such as appliances, in lieu of a price cut.
Remember that money isn’t (always) everything. Even in a market where inventory is tight and sellers aren’t negotiating much, you still have some leverage. That starts with minimizing the seller’s potential headaches. If you have attractive financing—a pre-approved loan from a reliable lender or a large down payment—say so. If you can close on the seller’s schedule—whether that means quickly or letting him stay an extra month—do it.