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.

“If you were me, would you (fill in the blank)?”

I get asked what I would do if I was in my client’s situation an awful lot. So much so that I thought maybe I’d write a little about the most common times this is asked.

  1. Would you buy a house right now if you were me? My answer is always yes. Not because I want to make a sale, but because I am old enough to know that the sooner you buy a house, the sooner you start building equity. You are leveraging time when you buy real estate. Rates go up and down. Prices generally increase consistently over time. You can always refinance later if rates drop. One thing you can never do is go back in time to get a lower price or a lower interest rate…..NOW is always the best time to buy.
  2. Would you still buy this house knowing what we now know after the home inspection?” My general thought is that no house is perfect. I’ve read probably 600 or more home inspection reports. Most houses seem to have 90% of the same issues as other houses of a similar age. I am rarely shocked at anything a home inspector finds since I’ve seen it all before. I personally think there are only a few times to walk away from a house after the home inspection: When the sum of it’s major immediate needs are just too much for you to handle financially or if there is something found such as structural damage that can make the house harder to sell when you want to part with it. I would not worry about the usual 20-30 minor items that any inspector will surely find on any house.
  3. I’m only going to be in town for 3 years, would you rent of buy if you were me?” For 3 years or more, I would buy. You should be able to net enough from the sale to cover selling it and your own closing costs. I would look for a house that will not need anything major like a roof or HVAC units replaced because that could wipe out any gain. For 2 years or less, I would definitely just rent.
  4. Would you move to a town surrounding Lexington to save money if you were me?” I usually tell people to live in whatever town their lives are in. If you work in Lexington and your social life is in Lexington, then you need to stay in Lexington. My first house was in Winchester. My business and all my friends were in Lexington. I felt like I lived on I-64 since I spent most of my time driving between both places. You won’t really save any money doing this even if you buy a cheaper house. Trust me. What you spend extra on gas, tires, extra oil changes and depreciation on your car costs more than you’d save by living in a cheaper town.
  5. I can’t find a house in my price range, would you buy a townhouse or condo if you were me?” The condo/townhouse market has generally been about 10% of the whole residential real estate market. That means that only 1 out of 10 buyers will consider purchasing your place when it is your turn to sell. I usually tell people to buy a condo or townhouse if that is really what they want. It needs to be mostly about your lifestyle. If you want a low maintenance lifestyle, then it is a good choice. I also suggest getting a condo or townhouse for buyers with a super low budget. If your choice is continue renting, buy a worn out house that needs everything in a sketchy part of town, or buy a decent condo/townhouse in a decent neighborhood…..then buy a condo or townhouse. I have sold several to first time buyers with super low budgets. It was a great way for them to start building equity verses waiting until they could afford more.

Telling people what they need to hear

Back when I was so overweight, I dreaded going to the doctor. They would always tell me all the ways being overweight would affect my health. It’s not like I didn’t know that. I just didn’t want to accept it.

A lot of buyers are in the same situation today. The reality of what it takes to get a home seems overwhelming. It is easier to just hope somehow it will all work out and you’ll get a house somehow if you submit enough offers.

Reality checks are never fun. One day I accepted everything the doctors had always told me. Once I did that, I knew what I needed to do if I didn’t want to have health issues as I aged.

I sold a house over the weekend to a new client who had lost several houses previously with their last realtor. I didn’t really do anything special. I did my usual good job in trying to make our offer the most appealing to the seller. The hero of this story is the buyer. I was just like the doctors telling me the reality I didn’t want to here. He took in all the information and chose to do something about it.

Like all houses these days, it got several offers the first day on the market. It is normal to go over the list price these days so we did an escalation clause up to a certain amount. The buyer was a little anxious about going that high. I explained that odds are we would not need to go that high, but that he would have hated to have lost the house by just a little bit. He agreed.

Once the offer was sent and I told the Seller’s Realtor a few things, I got a question about not having an appraisal gap waiver. I knew this meant that our offer was one being seriously considered. If we were not the best or one of the best offers they had, why would he ask about it?

I told my buyer this good news. He didn’t really want to risk having to put out more cash should the house not appraise for the sale price. I told him that this is getting more and more common with every house I’ve sold. If we didn’t do it this time, odds are we would be in the same situation on the next house when prices and interest rates might be higher. He agreed.

A few hours later I got a text that he got the house!!!!!

The hero here is my client. All I did was tell him the reality of what would most likely happen just like all those doctors did for me. My client accepted the reality of today’s market. He realized he wasn’t going to magically escape some of these uncomfortable things and end up winning a house in multiple offers. Once he saw that, he knew what he had to do just as I saw what I had to do.

My Dad always said “Living in reality is never fun, but what other choice do you have?” to which I will now add “Plus living in reality with a house is better than not doing so and waiting for the next new listing to hit the market and do it all over again and again.”

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!