If current market conditions have delayed your home buying effort, here are four reasons why you should alter your approach to purchasing a home but definitely not end it. If you’re abandoning a home shopping effort until rates begin to decline and home prices drop, huge mistake. This is a buyer’s window of opportunity that won’t exist next year at this time.
Reason Number One – Housing Prices
Historic Perspective
Home prices have once again stabilized with a few spotty descents in markets that experienced the largest spikes during the recent surge. Below is a historical recap of home prices reinforcing the solid upward momentum of home prices and building a case for owning real estate.
Current Trend
Contrary to inflammatory headlines we don’t see a widespread decline in housing prices, but rather a wrap up of 2022 with average gains nationwide at 13.5% YoY and a 2023 forecast of 3.2% gains YoY. Rents are keeping pace with housing market gains climbing at roughly 10% YoY with no end in sight. Historically it has taken a substantial rise in unemployment to drive home prices down. Current unemployment remains low at 3.5% through September 2022 with additional jobs being added in October offering no foreseeable contribution to any substantial decline in home prices.
Advice: Don’t wait for the market to shift and prices to drop. Housing price declines are market specific and most prevalent in those markets that experienced the largest spikes over the past 24 months. Rents continue trending upward signaling it’s time to consider purchasing a home.
Reason Number Two – Housing Supply
The U.S. as whole has a structural deficit in the supply of homes. An average supply of single family homes optimal to keep the market in balance is a mix of new and existing homes hovering between 2M to 2.5M. According to Trading Economics and the National Association of Realtors current inventory is well below the sweet spot at 1.28M (shown in the chart below).
Home starts decline in economic uncertainty as builder confidence wavers. A pandemic was a qualifying event for economic uncertainty. Add to that the supply chain challenges that ensued constraining materials and spiking prices, and we find our housing market in a conundrum. A shortage of home supply and a lack of builder confidence in the face of an impending recession preventing any easing of supply constraints in the foreseeable future.
The chart below summarizes housing supply data and depicts the clear downward trend of housing supply since its peak in 2008.
Advice: Supply isn’t improving rapidly enough to keep pace with demand and lack of builder confidence in the market is slowing the number of new home starts. If you are looking to own a home or move locations, trying to time the market will backfire under current conditions.
Reason Number Three – Home Ownership Builds Wealth
Programs for first-time home buyers to assist in qualifying are available in all markets. Why? Because the majority of the wealth in the U.S. built by individuals is through real estate in the form of home equity. Investments in the stock market drive taxable events when they do well and offer up extreme pain if you play on the fringes in speculative investments. I’m not suggesting you should not invest in the market; I am suggesting real estate should be the priority as it has an epic success rate supported by decades of history offering generational wealth.
Advice : If you have a 401K, you are aware of market forces and the huge declines that can happen overnight. A large rapid drop has happened only once in recent history to real estate, and we are not poised to see that event repeat. What are you waiting for? Buy a home!
Reason Number Four – Mortgage Rates
This where you likely think I’m missing something by suggesting this is a good time to dive into the real estate market, but stay with me. While rates in the 7’s may seem unreasonable, they are closer to the market average from a historical perspective as seen in the chart below. Interest rates from the pandemic era required a policy known as quantitative easing to artificially push mortgage rates under 5% in the face of market forces that would have them trending upward.
Rate Forecast
Experts forecast the first dip in rates for some time in second half of 2023. According to Trading Economics, the annual inflation rate has trended downward for three consecutive months in a row through September 2022. Mild declines in energy, food and used car prices offer hope inflation could be starting to slow. Not included in that decline is shelter as home prices and rents remain on the rise for the overall economy.
Today’s rates shouldn’t keep you sidelined. Programs to permanently or temporarily lower interest rate and payment can have you comfortably in a new home. For more detail on how these work, here’s what we did for a recent borrower.
Advice: Get pre-approved and capture the appreciation of the next 12 months. If rates drop significantly, there are no downsides to a refinance and you haven’t missed out on tax free equity growth; you’ve locked in your housing costs, and you’ve added a tax deduction.
Pro Tips
- Credit Score – Read up on quick ways to improve your credit score – even while home shopping. My guide can be found here
- Cash Flow – Don’t make any major purchases that impact borrowing power until AFTER you close your home loan. i.e. auto loans, paying off student loans, even paying off some credit card balances may deplete cash reserves necessary to qualify.
- Build Your Team – a lender, a realtor and any co-borrower commitments you anticipate needing. Work with a lender and a real estate agent who can offer alternative solutions to paying list price at a market rate. Creating affordability with a seller sponsored rate buy down is the perfect balance to help you get into a home affordably.
- Get a REAL pre-approval – If you don’t, your offer may not be accepted by the seller. Avoid the rate pitfall by requesting a real Pre-Approval. Think of your rate like a fingerprint. It is unique to you and derived from over 26 different qualifying criteria including employment history, credit score, down payment, property type and the list goes on. These criteria are run through an automated underwriting system which spits out your Until this underwriting process is complete, no one can tell you your rate and what you qualify for.
Here’s what to ask your lender – At what point can you 100% guarantee the rate and fees quoted?
- Give yourself a runway – If you’re attempting to make your end of lease align with keys to a new home, it could backfire. Devise a realistic timeline. Need help? That’s what your team is for.
Grab your team and go make it happen!
by Sheila Landis for The Landis Group
