Buyer Pushback and Sitting on the Sidelines

In the last month the housing market went from being red-hot to a normalized market. Although we are still seeing a shortage of housing, we are not seeing escalated offers, and there is more opportunity to negotiate.

Last week we even saw a contract where a seller paid the buyers closing costs. (Crazy, I know)

The housing market is starting to reflect that buyers are beginning to pushback. It is kind of like how do you cure rising home prices? You keep raising prices until buyers say, ‘No thank you.’

Now does this mean home prices are going to fall? We don’t think so. Although things are slowing down, it doesn’t mean the housing market is going to go down. There’s a big difference between decelerating appreciation and depreciation of homes. We’re not looking at home prices declining, we believe we are looking at the rate of appreciation decelerating.

The rapid rise of home prices has been a struggle. It has forced many people out of the home buying market, and we have seen many more people sitting on the sideline wanting to buy a house but shocked at how much home prices continue to up.

Parallel to the purchase market there is a shortage of rental properties. People looking to rent are not only battling to a find a house but if they do rents have escalated so high, they are battling to afford it.

One family we are working with is being forced to move out by their landlord who wants to sell their rental property. They are at a crossroads between choosing to buy or rent. Of course they want to own, but they want to own at the home prices of 2 years ago. Although they qualify to purchase a home they are having a hard time pulling the trigger at these prices. At the same time they are having hard time finding a rental due to so few rental houses available and rent prices being so much higher than what they are currently paying.

Another family I know owns their house but is in desperate need of more space. With a growing family they have exceeded their current living space and their home no longer fits their needs. They are debating if they should buy a home at today’s higher prices or wait to purchase and see if market goes down. (All while continuing to be inconvenienced in their home which is too small for them.)

It is true that we don’t know what will happen to home prices in the future. But it is also true that we don’t know what rates will do in the future and whether a rise in interest rates will affect home prices.

While I don’t believe that we are in a housing bubble and that home prices will decline but if they did, I believe the most likely cause would be from rising interest rates.

Will either of these families really win by waiting to purchase? Well one of two things could happen. If home prices go down and interest rates go up their monthly payment will be higher. If home prices move up and interest rates move higher then their monthly payment will definitely go up.

Let’s look at this from a number’s standpoint. If someone were to buy and finance a house for $500,000 with a 2.875% rate their principal and interest payment would be $2,075.

Now let’s say interest rates go up to 3.5%, (because we all know they won’t stay low forever), and we assume home prices fall by $30,000. If they finance a home for $470,000 at a 3.5% rate, now their new monthly payment would be $2,110.

If they wait and this occurs good for them, they bought a house for $30,000 lower by waiting. However, their monthly payment went up $35 a month because interest rates went up.

If they wait and get lucky, they don’t really win because affordability is the pretty much the same since their payment is higher.

Worst-case scenario prices AND interest rates go up it’ll be a lose/lose because they’ll have to pay more for their house with a higher interest rate.

Now is not the time to be sitting on the fence. Take advantage of the current market while it is still available to you.

If you rent and can afford to own, you need to purchase now. Interest rates are still great, so if you plan to live in a house for more than 5 years it makes sense to purchase now instead of continuing to rent.

If you own a house and haven’t refinanced yet you need to.

If you own and you want to upgrade your home, there is no reason not to do it now. If you wait and prices go up you are going to spend more and if you wait and home prices go down and interest rates go up, you are going to spend more.