What’s a first time buyer to do today?

You’ve probably read all the articles saying how much more per month the average house payment is today with the increase in interest rates. I have too.

While I don’t dispute their findings, I don’t really find them helpful. Yes, had somebody bought the same house sooner, they could have had a cheaper mortgage payment. Those rates don’t exist anymore. Why not tell first time buyers what they should do rather than making them focus on the wrong thing.

Let me tell you the biggest way these higher rates are costing you. If you are sitting on the sidelines, holding out for a year or so before re-entering the market, you’re paying a steep price in a lot of ways:

  1. You are not building equity.
  2. You are not getting the tax deductions homeowners get.
  3. You are not making money from the rising value of your home.
  4. You are deferring the date when you will have whatever home you own paid off.

All of that seems to me to be much more costly than paying a few hundred extra bucks a month to own a home. If you don’t have the extra money that today’s mortgage would be, I suggest buying a cheaper house. Buy what you can afford. Owning any home is a better investment than renting.

I have always said the best time to buy a house was yesterday and that the second best time is today. That is because homeownership is the best way to create wealth for the average person. It’s more than just owning where you live. It is about investing in yourself. You do that by leveraging time. The sooner you start, the sooner the benefits begin and the quicker they compound.

Things to remember in a slowing market

Yea, the market is slowing down. Everybody knows that. No big deal. That crazy roller coaster market couldn’t last forever and I’m sort of glad really. It will still be a good market for years to come, but it will seem like a let down compared to the last couple of years.

Here are some things to remember as you process the Doom and Gloom news cycle real estate is in at the moment.

  1. The “Average Days on Market” will be going up. Don’t be alarmed. Usually the way that works is that the worst houses that nobody wants stay on the market longer and bring down that average. Also, keep in mind that average is usually for all residential property types in all price ranges. If you have a $350k house, do you really care about what the market is like for a million dollar home? Or a townhouse at any price?
  2. The “Average Sale Price” is another one that can confuse people. An average is just that-it’s an average of all sales. If house sales over $500k slow down a lot, it will drag down the average sale price. This does NOT mean your house is worth less when you read silly headlines that say stuff like “The average sale price dropped by 2% last month.” When rates got super low, I saw more houses selling for $1,000,000 or more than I have ever seen. Now that rates are much higher, I totally expect to see sales at that price point slow way down, bringing down the average sale price.
  3. Values may stay flat after going crazy for the past two years, but prices will still go up. I know this sounds crazy, but hear me out. Let’s say you bought a house a year ago for $400k and we have had 8% inflation since then. Your house needs to sell for $432k today for you to have effectively broken even. That’s because it takes 432,000 of today’s deflated dollars to equal 400,000 of dollars a year ago. In other words, the price of your house has to be higher even if it got zero percent appreciation just because the value of the dollar has eroded. (This is a whole other post, but one reason prices have risen so much over the past year is because we saw massive appreciation and massive inflation. If prices went up 15% and inflation was 8% of that, then that means the real appreciation was 7%.)

I started my career just as the Great Recession began. I saw most houses in our area drop in value by 15-20%. I know to a lot of people, this market seems scary. Trust me, it isn’t. All that’s going to happen is that we have a more balanced market. It will be a good, but not the greatest time in history, to be a seller. It will also be good to be a buyer because you will be able to get a house that should be a stable investment for your future.

How to make a good choice in a frenzied market

It used to be real estate was all about “Location, location, location.”

Today real estate seems to be more about “Finishes, finishes,finishes.”

This disturbs me. Why? Because one day there will be enough houses for sale that a buyer has a choice on location. Right now, with so few houses for sale, buyers are considering ANY house in their price range. When you only have one or two choices, you can’t afford to be picky.

Something else that disturbs me are all the houses that have been extensively renovated and are selling for twice what a similar non-renovated house is worth in the same neighborhood.

I am not sure why this is but I suspect it has to do with the speed of the market. Nobody has time to do a market analysis and see what the house is worth compared to other recent sales or see if it is overimproved for the neighborhood

This is what I tell my buyers:

  1. Location is still important. Any house can be updated but you can’t easily move a house to a better location.
  2. Only buy at the top of the neighborhood’s price range if there are several other homes equal in finishes and value. You do not want that $400k house that looks like the reveal at the end of an HGTV show and is surrounded by $200k houses. In a balanced market, or even worse in a buyer’s market, potential buyers will love your house but will not buy it. They will be in a $400k price range and expecting a $400k neighborhood. They won’t like the cheaper houses around it. Remember when you buy a house, you are also buying stock in the neighborhood.
  3. Don’t compromise on the lot. Right now nobody cares. Buyers are just excited about any house in their price range. You don’t want the house with the tiniest or oddly shaped lot in the neighborhood. Remember neighborhoods are about conformity……fitting in among the rest of the houses. It’s okay to have the biggest or best lot in the neighborhood of course, but if most of the lots in the neighborhood are flat, you don’t want one that isn’t. If most are large, you don’t want the smallest one. Avoid driveways that are pretty steep. It is better to have a lot where the backyard slopes downhill away the house verses sloping uphill.

Basically, the best thing to remember as you frantically are trying to decide how much over the asking price you want to go is that one day you will be selling the house. The market may not be as tight. You won’t know whether the house you picked was a good decision or a bad one until it is your time to sell it.

So, always go into a purchase being mindful of your exit plan.

What would it take to crash the real estate market?

A lot of people subscribe to the “What goes up must come down” theory on markets. I don’t. I tend to just use that one when describing gravity.

For real estate, we have only really ever had prices go down twice in the history of tracking such stuff. Once was the Depression which caused ALL markets to go down, and the other was the Great Recession which was largely caused by bad mortgages that were toxic to the stock market. Neither time actually had anything to do with just the real estate market.

Today’s market is probably the healthiest it’s been in a long time. Prices are high due to supply and demand. Sure, low interest rates help but not as much as you would think. People acclimate to interest rates. I remember bragging about getting 6.625% on my first home when all my homeowning friends were over 7%.

When people on Youtube or those who write for the news look at the real estate market, they tend to not look at the whole picture. I am sure you have seen headlines about how all the people in mortgage forbearance would crash the market once they got foreclosed. Didn’t happen. All those people who needed to sell had enough equity to sell and avoid foreclosure. What about all the Baby Boomers who would leave a huge void in the real estate market as they sold their homes and went into retirement homes or to reside on the other side of the Pearly Gates? No mention of the youngest generation of buyers entering the market who would keep the wheels of the whole market greased so everybody can move. Years ago I described this like a baseball game where the bases are loaded. The Player on 1st base wants to run to 2nd. The Player on 2nd base wants to run to 3rd. The Player on 3rd wants to run home. What needs to happen in order to keep all those Players moving? For the Batter to hit a home run. The first time buyers are the most crucial element of the market. Without them, no homeowner can part with their old house in order to move up to their next one.

Everybody knows how Supply and Demand works, right? Let’s apply it to real estate. Most people involved in selling or buying will be doing both. Most sellers are also buying. Most buyers are also selling. That means there is no net gain or loss in the supply/demand ratio regardless of the market. This is why the supply/demand ratio got so bad during the Great Recession-You had so many foreclosures where the previous owner did not reenter the market as a buyer. Other than in such catastrophic times, the only people who are doing one side of a sale are first time buyers or those who have passed away or are going into some form of assisted living. Historically there have been more first time buyers than there are those who are exiting the market permanently. (I am excluding those well off enough to purchase second homes since that is a smaller market and we are not in a big area for that like Florida or any other vacation destination.)

So then, what would it take to tank the real estate market if it has nothing to do with real estate? It would take something terrible to happen with the economy…..meaning something bigger and broader than just the real estate market that is like a Tsunami and wipes out everything in it’s path. Let’s hope that doesn’t happen any time soon!

Why now is the best time to buy all year

At the risk of sounding like the stereotypical realtor who is always saying that now is the best time to buy, it really is the best time to be a buyer since before COVID hit.

Why? Lots of reasons but the biggest single reason is that we are seeing more listings hit the market at a time when most everybody who was going to buy a house in 2021 has already done so. If the market were a restaurant, picture that time when you walk into a very popular place that is hard to get into at noon, but you have arrived at 12:45 and there is plenty of seating.

This won’t last long though, which is why I think now is a great time.

I put on a new listing for $185k last week. We had tons of showings, some interested buyers, but only one full price offer. That hasn’t happened all year. One of the agents that showed it gave me some feedback. She said that her buyer opted to buy another house that was closer to her grandparents whom she took care of. I read that and I was a little shocked. It was the first time in the past two years I have seen where a buyer had a choice between two houses. Lately the choice has been the one house on the market or waiting for the next new listing.

The week before that, I put 3 new listings on the market. Granted all sold the first day, but two of them sold for slightly less that the list price and only got one offer.

I think the market will remain strong for years to come. It might not be the frenzy we have seen but there is no doubt we will have more buyers than sellers for quite some time. We will see what next spring brings. That is usually when we see prices got up the most. That is why I think between now and late winter might be the best shot you have for getting a house!