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As the Fed continues to raise interest rates to stem inflation, buyers are increasingly pulling out of the housing market.
The current stock market volatility is adding to the maelstrom, creating a double whammy for some buyers who not only face higher mortgage rates, but also see potential down payments devastated, as lower stock prices lower the portfolio value and undermines stock options.
Some buyers are taking a wait-and-see attitude, hoping that rising rates will reduce home prices enough to regain a foothold in the market. Others, smelling blood in the water, are circling like sharks in the hope of catching a bargain from desperate sellers who have been stuck in the market longer than expected.
Whatever the reason, the number of buyers looking has dropped significantly, as evidenced by a drop in the number of multiple offers, a decrease in the number of open visits, and a noticeable drop in buyer leads from all sources.
There is no doubt that the market is changing. There is a lot of money to be made in a change for those who understand the factors driving the market and react accordingly. Here are six answers buyers will give in the emerging market and our recommendations on how to counter them.
“I’ll wait for interest rates to drop.”
For budding buyers who have looked at mortgage rates over the past two years, the 200 basis point jump from the same time last year comes as a severe shock. While it’s understandable that buyers want to wait for lower rates to appear, this logic reveals a lack of understanding about how we ended up with low rates to begin with.
Those who have been in this industry for a long time have seen much higher rates. Freddie Mac started tracking mortgage rate news in 1971 and, if you calculate the average rate since then, it’s a hair’s breadth below 8%. Many current millennial buyers have never seen high rates and not only lack historical perspective, they also don’t understand the factors that facilitated the record high rates of recent years.
Due to the economic meltdown in the mid-2000s, the Fed, attempting to revitalize the economy, began cutting interest rates, with the average rate in 2009 falling to 5.4%. Due to the low rates granted to credit institutions, mortgage loans fell to an average of 3.65% in 2016.
As the economy came to a screeching halt again, this time due to the global pandemic, the Fed eased rates further and mortgages fell as low as 2.68% at the end of 2019. 2020 saw a gradual increase to reach an average of 3.11%.
While it’s understandable that buyers want interest rates to stay low, we’re all hoping that the key conditions that produced those rates – a total global economic collapse and subsequent global pandemic – won’t return anytime soon. With a more normalized economy, rates will rise and most likely return to historical averages over the next few years.
Conclusion: Those who wait for a return in rates as we have seen in recent years could end up waiting decades.
In fact, the short-term prognosis is that rates will rise even further as the Fed continues to rein in the economy. Buyers who are on the fence waiting for rates to drop should be advised to lock in rates as soon as possible.
“I’ll wait for the prices to come down.”
For starters, even if house prices fall, it is expected that due to low inventory levels, declines not be significant enough to compensate for expected increases in interest rates. In the end, the most important number is not the purchase price of a house, but the amount of the monthly mortgage payment.
Second, while this excuse seems logical on the face of it, it shows a lack of understanding of the overall issues surrounding homeownership, which is, for most, the biggest investment they own and the biggest contributor to their wealth.
For example, between January 1 and April 30, 2021, the value of homes in our region increased by an average of 28%. In just four months, owners of a home worth $500,000 saw their wealth passively increase by $140,000.
During this same period, as the value of homes rose, so did rents. Those who owned homes saw their wealth increase dramatically, while those who rented, due to rising rents, saw their net worth decline. While this is an extreme example, it highlights why homeowners have, on average, 40 times the net worth of the average renter, according to a survey by the Federal Reserve.
Third, those who own homes in the United States have considerable tax advantages. Although many attempts have been made to eliminate the homeowner’s mortgage interest deduction, the deduction remains and further allows homeowners to build wealth while tenants do not have this option.
Fourth, as the stock market continues its see-saw behavior, real estate has long been considered the safest and most rewarding long-term investment. While some have made short-term money in the housing market through flips and other similar investments, most investors make their money by buying and holding.
One of the lessons learned during the financial meltdown of the mid-2000s is that homeowners cannot treat their home like an ATM. Those who came through the crisis intact are those who did not speculate in the market but rather held on for the long term. Although home values fell during the crash, the market has rallied and current values are significantly higher.
The lesson here is simple: the buy price doesn’t matter if the strategy is to buy and hold. The only thing that matters is the owner’s ability to meet the monthly mortgage payment.
The goal is simply to own the roof over your head, not to speculate on the potential value of the home. Given enough time, history has more than amply demonstrated that those who buy and hold are much more advanced than those who try to time the market.
“I’m going to start writing lowball offers.”
Our advice to these buyers is simply, “Knock yourself out.” While it’s true that some sellers need to sell and do so quickly, most sellers understand that we’re at a turning point and if they wait a little longer they can expect to receive a reasonable offer on their home.
At this point, all lowball offers tend to alienate sellers and frustrate the buyer’s agent who has to write ridiculous offers.
“I’ll sit with my rental.”
All is well, but there are some very important facts tenants need to know about the long-term future they face as tenants.
First, as demonstrated above, the choice to continue renting deprives individuals of the opportunity to begin building wealth through home ownership.
Second, as landlord costs rise with rising mortgage rates coupled with rising labor and maintenance costs, you can expect rental prices to rise over the next few years. just to keep up with rising operating costs. Additionally, rising values have also driven up property taxes and landlords will look to tenants to offset these additional costs.
Third, many rents have not kept up with the runaway increases in property values over the past few years, and landlords are now looking to raise rates to parity. In the places that have seen the biggest increases, you can expect rents to skyrocket over the next few years.
Fourth, some owners, due to the incredible increases in value, seek to cash out and redistribute their earnings. This means they will be looking to sell and trade the properties or just cash in and get out of the rental business altogether.
As mentioned in the previous paragraph, since many rents have not kept up with rising values, the first priority for any new landlord is to keep the property operating at fair levels. Translated, this means an increase in rents.
To those who insist they’ll stay seated in their rentals, our response is, “Good luck with that.”
“I can’t afford the house I want.”
As a child, I shared rooms with my siblings until my parents could afford a bigger house. We also didn’t have a separate family room, living room or dining room, and we didn’t have a large yard either. We didn’t live in the best neighborhoods or attend the top-rated schools. Personally, I think I did well.
Buyers today have, in many cases, totally unrealistic expectations that prevent them from making prudent financial decisions. They forget that the goal is to get into the market, not necessarily to get the ultimate home they want upfront.
They also think they have to drive a new car, take an expensive vacation, own an 85-inch TV, designer clothes, etc. I suggest candid conversations centered around making sound financial decisions and recommend that they start listening to sound financial advice from sources such as David Ramsey.
“I can’t afford to buy in my local market.”
Our advice to these buyers is to find an area of the country where they can afford to buy and purchase a rental. There are many tax advantages for those who invest in real estate and rather than sitting around and doing nothing, we recommend that they at least enter the market somewhere.
There is no doubt that rising interest rates have prompted us to switch markets. Savvy investors understand that there is a lot of money to be made during a change by those who understand the potential gains and jump into the market instead of sitting on the sidelines.
With effective advice, your buyers will look back years later and be grateful they listened to your advice to get into the market now.