After an odyssey that lasted more than a year, my wife and I finally got over the finish line this week. We finally closed on the purchase of our new house.
We’ll be unpacking boxes and figuring out which light switches control what for a while. But we couldn’t be happier with the place and are looking forward to spending a lot of years there together with our children.
So why am I bringing this up here? Because I believe our real estate experience has a few lessons about market conditions that are worth sharing. That’s especially true if you are in the market to buy, sell, or refinance a home!
How the Housing Market
Got to Where It Is Today
I’ve been closely following the mortgage, interest rate, and real estate markets since the late 1990s for my job. I’ve also bought and sold a few houses … and rented a variety of units in between. So if you don’t mind the pun, you could say I’ve been around the real estate block a few times.
|If you’ve been thinking about buying a home and will stay put for many years, now could be a good time to take the plunge.|
Back in the early-to-mid-2000s, no one was more vocal than me about the threat of a real estate and housing market collapse. I could see how rampant bidding wars, out-of-control speculation, incredibly reckless mortgage lending, over-pricing by developers and sellers alike, and more were setting the stage for an epic disaster.
Sure enough, that’s what we got!
In the aftermath of that implosion and the Great Recession that followed, I saw that many of the excesses had been rung out of the real estate market. The hottest housing markets collapsed in value, restoring rationality to home-price-to-income ratios. And the cost of owning a home became much more competitive with the cost of renting one, after a few years where owning made no financial sense whatsoever.
So I gradually shifted to a more neutral stance on housing. I mentioned as early as 2010 that conditions appeared to be stabilizing in some locales and that SLOWLY but surely, we would see the market bottom out. That too is what occurred.
By early last year, I was confident enough in the outlook — and in a position personally with my wife and family — to make the leap and get back into the market. We settled on new construction and signed our contract last spring, closing a few days ago.
What You Need to Know about Sales,
Construction, Pricing, Financing, and More!
So what happened in the intervening year? What boots-on-the-ground insight can I share with you to make YOU a smarter buyer, seller, or mortgage shopper?
First, recognize that builders are playing catch up these days. Many of them failed — or were pushed to the brink of failure — during the bust. They stopped buying lots, mothballed developments, fired workers, and/or lost many subcontractors to bankruptcy.
Now, they’re seeing increased demand again. But they’re lacking a substantial inventory of finished homes to sell, and a pipeline of lots under contract and development. They’re trying to get production ramped back up again, but many former tradespeople have moved on to other jobs. That means you should expect a longer construction timetable if you’re buying a new home.
Second, pricing IS firming up at the ground level. Our builder raised prices twice for incoming buyers over the past year, and so have others in this area. We’re not talking about 2003-2004 style insanity, where my last builder was hiking prices so much, so fast that I thought he was going to run out of toner printing out new pricing sheets. But it is happening. Sales activity is also picking up.
Third, home loan rates are incredibly low versus what I’ve experienced in the past. But the tougher mortgage financing process you’ve been hearing about isn’t just hype. It’s reality! The difference between the qualification, verification, and closing process now and several years ago is striking.
Even if you have great credit, a solid job, decent down payment, and substantial reserves, you should be prepared for a lot of back-and-forth with your lender and its underwriting department. And you should be ready to sign more papers at closing than you would have ever thought possible!
As a result, you may be at a disadvantage as a financed buyer versus a cash buyer. You may also end up locking in a mortgage rate, then find you can’t get to the closing table before that lock expires. So as a buyer, you may need to bid a little higher to avoid losing your target property to someone else. And as a mortgage borrower, you may need to go with, say, a 60-day lock versus a 30-day or 45-day lock, to avoid getting stuck with a higher-than-expected loan rate and payment.
If there is a risk to the housing market going forward, it’s the increased participation of investors rather than core buyers. I’ve discussed that issue before, and do believe that many of those investors are making overly optimistic projections about future rental demand and rent growth. It’s all part of the easy money-induced search for yield.
But even there, I don’t believe that the burning of these investors will lead to a new, full-scale housing crash on par with what we saw in the mid-2000s. That’s another reason I was confident enough to own real estate for the first time in a long, long time.
After all, I’m not looking to flip the house or rent it out. I’m planning on staying put for years. And I locked in 30-year, very-low-rate conventional financing, steering well clear of the kind of high-risk toxic mortgages that blew people up a few years ago. Indeed, if mortgage rates go up (as I expect them to), it won’t change my payment at all!
So keep all of this in mind if you’re trying to figure out how to price your home as a seller, if you’re evaluating whether to buy, or if you’re shopping for a loan. Best of luck if you decide to take the plunge!
Until next time,