A New Perspective on the Housing Market

3/19/2023

The housing market in 2021 and part of 2022 was anything but normal. Mortgage rates were at all time lows and may never reach those levels again. Double-digit appreciation drove prices to new heights. Low inventories fueled by high buyer demand made multiple offers a normal expectation.

As we look at the market snapshots provided by MLS in the various markets across the U.S., it appears that things may be returning to normal, but not necessarily in all areas. While there are more homes on the market now than a year ago, there are less sales due primarily to the doubling of mortgage rates in 2022.

Time on the market is lengthening but that can be explained by the removal of approximately 15 million homebuyers who now have affordability issues. When the market shifted, sellers expectations for what they thought their home is worth are not keeping pace with current conditions.

Some sellers who didn't put their home on the market in 2021 and 2022 for whatever reason, remember the peak of the prices they could have sold their home for and now that they are ready, instead of looking at today's prices, still expect to get the higher value.

Every experienced agent knows that all real estate is local and while you can look at trends on a national basis, it takes a knowledgeable professional to assess the local market, even on a neighborhood basis, to determine what a property will reasonably sell for currently.

A seller who has owned their home for several years is going to realize a good profit and return on their investment. If they are ready to sell in today's market, that should be their focus and not on what might have been, had they sold at the recent high.

There is no way to predict when prices will achieve their high whether it is in stocks, bonds, commodities, or housing prices. It is only after it has hit the pinnacle and started retreating, that It can be identified.

Don't be concerned about the market you missed regardless of whether you are a buyer or a seller. When real estate is viewed as a long-term investment, time takes care of things that can be incredibly stressful in the short term.

The average 30-year fixed-rate mortgage for the last 50 years is 7.76% according to the Freddie Mac PMMS survey. The current 6.60% is considerably below that benchmark and it appears to be trending lower. The current rate is what today's buyer must pay to borrow.

Home prices have experienced 7.16% appreciation for the last fifty-five years according to the Federal Reserve Economic Data of the St. Louis Fed. Compared to the average inflation rate of 4.3% for the same period, homes provide a hedge against inflation and a significant contribution to personal net worth.

If you're in the market to buy or sell, contact your real estate professional to find out what your market is doing and what options you have available.

Rethinking Backup/Secondary Offers

3/12/2023

Rethinking Backup Offers

Like with any professional, there are tools and techniques available to help with particular situations. They might be more popular at certain times and might even be put aside or forgotten at others. For real estate professionals, one of those is the backup offer.

In a situation where there are multiple offers, the seller can accept any offer for whatever reasons are important to them, leaving the makers of the other offers disappointed. There is always some uncertainty that the buyers on a contract will close accordingly. To hedge on that possibility, the seller may choose to make a counteroffer to one or more of the other offers to be a backup should the primary contract not close.

From a buyer's perspective, the purpose of a backup offer is to be next in line to have the chance to purchase the property should the first contract fall through. The benefit is that you'll be next in line to purchase the home without having to submit another offer and possibly, get into a bidding war. It simply moves from the first backup to the primary contract position.

The buyer in the backup position also experiences uncertainty if it will work and possibly, feeling like they could be wasting their time while waiting to hear the outcome of the first contract. Some of these buyers will continue to look at homes in the likelihood that another acceptable or better property becomes available.

Should this situation occur, the buyer in the backup position may or may not have the ability to withdraw from their contract. It will depend on how the agreement is written. It is important to understand the rights and limitations, as well as when they can be exercised.

A backup offer can lock you into a binding contract until the primary contract's buyer is approved and closed or until it fails to close and the backup buyer becomes the primary. The backup may or may not have a unilateral way to withdraw the offer prior to one of these outcomes.

Considerations that need to be understood by sellers and buyers alike are:

Can a buyer in a backup contract unilaterally withdraw at any time?
Will the earnest money be deposited on a backup offer?
Will the timelines for contingencies like mortgage or inspections need to be made before becoming the primary contract?
Will there be any fees incurred by the backup buyer?

Sellers sometimes use a backup offer to apply leverage to the primary contract's buyer. For instance, if the seller feels the buyers' demands on repairs are too high, the seller might say something like "if you're not willing to accept it 'as is', I have another buyer waiting to do so."

Many buyers, as well as their agents, don't want to obligate themselves to a back-up offer. However, in certain situations, it is a good tool to have the opportunity to purchase a home that meets their needs.

In the highly competitive market experienced in 2021 and part of 2022, some buyers may have been reluctant to use a backup because of the slim possibility that it would become the primary. With the shift in the market due to the interest rate increases, a backup offer could be a viable tool to get the home of your dreams.

Your real estate professional can help you understand the advantages and disadvantages of backup offers. Recognizing that contracts are legal and binding agreements, you can also consult an attorney who can confer with your agent to understand the situation.

Download our Buyers Guide

Playing Monopoly Is Good Homework

3/6/2023

If you've ever been in a Monopoly game after most of the properties have been purchased and developed, it can be a relief to land on Free Parking, knowing the dice must rotate to the next player giving you a respite from paying rent. Like the game, in real life, it would be nice to avoid paying rent and even better to have people paying you rent for property you own.

Winning in the game of Monopoly is all about investing. If you travel around the board, trying to buy the ultimate property and pass Go to get another $200, you're missing the opportunity to purchase good properties along the way that could lead to upgrading into your dream home.

Starting early to buy your first home gives a buyer a chance to acquire a property with a minimum down payment, and inevitably, have a lower payment than paying rent for a similar home. As the home appreciates and the loan amortizes, the equity grows. Within a few years of average appreciation, the down payment can double or triple based on the leverage of using other people's money.

They could use the equity to stair-step their way into a larger home and finally, their dream home. Or, if that homeowner's goal is to acquire rental properties, they could convert that home to a rental and buy another home on a low-down payment, owner-occupied mortgage to allow that property's equity to grow in the same way.

Multi-unit properties could be another option. Finance it with the same type of owner-occupied, low down payment mortgage to achieve leverage that isn't available to non-owner-occupied investors; live in one unit and rent the others. FHA, VA, and conventional mortgages allow for owner occupants to purchase up to a four-unit building with minimum down payments.

It is very impressive to see the portfolios of properties that some young people have built by focusing on their goals, living within their means, and not getting distracted along the way. You can learn a lot from them but be careful about getting into a game of Monopoly with them; they know how to play the game.

Let's connect and talk about some of the specifics.

When should you lock your mortgage rate?

2/19/2023

Locking your interest rate protects you from increases due to market conditions. Locking early safeguards your budgeted payment. By locking the rate, if the market goes up, you get the lower rate; if it goes down after the lock, you may be able to pay a fee and lower the rate.

Knowing when to take the lock is determined by which direction you think the market is going. If you think rates are going up, lock in early. If you think rates are going down, ride the rate to within a few days of closing.

Some lenders may allow a borrower to lock a rate after pre-approval but is more common to not offer a lock until there is a signed contract on a home. Even with a pre-approval, it could easily take 30 days or more to close a transaction and the rates can move a lot in that period.

There may be a fee charged to lock a rate which is determined by the lender. Generally, the longer the time for the rate lock, the higher the fee.

There is a lock period established by the lender that guarantees the rate, if the loan is closed by the expiration date. Normal lock periods can be between 30 to 60 days. Longer periods may be available but will probably require higher fees.

Things that could affect your rate lock are:

The appraised value comes in lower than what was expected in the sales contract.
The borrowers' credit changes considerably before the closing.
The loan amount changes after the rate lock.
The loan type changes.
The down payment decreases before the closing.
Some income, like bonuses or overtime, could not be verified.

If a higher rate at closing means that you will no longer be able to qualify for the mortgage, it may be more important to lock in early. Looking at what the rates have done for the preceding weeks may indicate a trend but at the same time, markets have turned overnight and started moving in the opposite direction.

A trusted mortgage professional can give you good advice and why they feel you should either lock the rate or let it ride. Your real estate agent can help also but ultimately, the decision is yours.

Learn how "Buyer Incentives" can help you purchase sooner!

2/13/2023

Sellers, who last year, were not willing to make any concessions, are much more likely to do so this year due to the softening of the market because of inflation and higher mortgage rates affecting affordability for buyers.

Concessions can take place in different forms. A seller could offer to pay the buyer's closing costs or pay points for the buyer to get an FHA or VA loan. Another option would be to pay for a 2/1 buydown that would lower the buyer's payments in the first two years of the mortgage.

Buydowns can be temporary or permanent and are achieved by pre-paying the interest at the time of closing. Typically, the seller will do this as an inducement to the buyer. While individual lenders set the price for permanent buydowns, a common rule-of-thumb would be two points, or two percent of the mortgage amount, to buydown the rate 0.5% for the life of the mortgage.

A more common type of buydown is a 2/1 where the payment is calculated at 2% lower than the note rate for the first year and 1% lower for the second year. The third and following years, the payment would be calculated at the note rate.

$400,000 Purchase Price, 80% loan-to-value @6.27% for 30 years Cost of buydown - $8,099

	1^st year	2^nd year	Remainder
Payment Rate	4.27%	5.27%	6.27%
P&I Payments	$1,775	$1,992	$2,221
Monthly Savings	$446	$229

In the example above, the seller would pre-pay the interest on the buyer's mortgage for the first two years to subsidize the difference in the note rate and the payment rate.

A 2/1 buydown is a fixed interest rate mortgage where the buyer must qualify at the note rate. It is a standard, conforming loan and applies to FHA, VA, or conventional. The benefit is that the buyer will have lower payments for the first two years which can help them settle into the home and not exhaust their resources initially.

Closing costs and pre-paid items are commonly included in seller-paid incentives for the buyer. Many times, they are described in the listing and/or sales agreement as "Seller to pay up to $X,000 in closing costs or pre-paid items on behalf of the buyer."

The benefit to the buyer is that less money is needed to close the loan. Lenders are agreeable to this type of provision if it is stated in the sales contract.

Car dealers have been providing incentives in the form of upgrades, below market interest rates, pre-paid regular service for a period, and other things to incentivize a buyer to purchase now. It is also common practice for new home builders to do the same.

In the resale home market, while these things have been done in the past, there wasn't a need for sellers to incur the additional expenses with such a short supply of homes. The market certainly changed in 2022 with fewer qualified buyers in the market due to the higher interest rates. Now, sellers are starting to offer incentives but regardless, buyers can include the incentives in a sales contract for the seller to consider.

Your agent will be able to help you understand what things are common in your market to help with some of the concerns facing buyers today.