Watching the housing market explode over the last couple of years has been like binging reality TV drama—outrageous list prices, all-cash offers, waiving inspections, intense bidding wars, real estate love letters to win sellers’ hearts, and other things you’d think only exist on the big screen, not real life.
Now, let us welcome you to the Spring 2022 housing market.
Will this season be just as intense and dramatic as the last? How can potential buyers stand out among the crowd? And what can sellers do to make their homes the most attractive on the block?
Here are some ideas for homebuyers and sellers to survive and thrive this spring.
First, What Does The Spring Market Look Like?
Before you dive into open houses or crack open the can of touch-up paint, it’s important to understand what’s happening in the market. Arming yourself with knowledge sets you up to shop and sell smarter.
Last year, U.S home prices grew faster than weeds in your garden, inflating to 18.8%. And experts predict that the market will be just as hot this spring season, if not even hotter. How is this possible?
As with many things in the economy right now, supply and demand are severely out of balance. Last spring, home inventory was down 32% from pre-pandemic levels. And what happens when there are more buyers than houses to put them in?
This string of events spurred one of the most intense buying seasons on record, and the thing is, the trend isn’t slowing down; if anything, the housing market is more constricted this year. Not to freak you out or anything, but Zillow estimates that home prices will surge to 22% in May 2022.
Second, Interest Rates Are On the Rise
Since inventory hasn’t picked up over the last 12 months, mortgage interest rates are on the move. Today, the average interest rate on a 30-year fixed mortgage is 4.6%! This jump in rates is a massive deal as it can directly impact your house-hunting budget.
Say you’re looking at homes around $500,000. Your budget will stretch further with a lower interest rate—let’s see what this means using a mortgage interest rate calculator. In these examples, we’ll assume you put 20% down.
- A $500,000, 30-year fixed mortgage with a 3.5% interest rate will result in a $2,200 monthly payment.
- If your interest rate increases to 4.5%, your monthly payment will jump to $2,400.
That’s an extra $200 a month just on mortgage payments!
The numbers get even scarier looking at the life of the loan. Using the same scenario from above, the loan with 3.5% interest means you’ll pay roughly $647,000 over the life of the loan. With a 4.5% interest rate, that number bounces to $730,000.
With house prices being the highest in decades, what are home hopefuls supposed to do?
Set Realistic Home Buying Expectations
Alright, that information probably felt like a big reality check. But don’t fret; here are some considerations for walking into this market with both eyes wide open.
Start by setting expectations for your home-buying experience. While homebuying always comes with compromise, realize that you may have to make additional or creative compromises in this market.
Before starting the hunt, ensure you know exactly what you’re looking for. To do that, break the experience down into a few categories,
While this may seem basic, it’s so easy to get swept away with brushed brass finishes, quartz countertops, and open floor plans that your budget may easily slip out of reach. Creating this list beforehand helps you know what to look for and remain motivated to stay on track.
Here’s an example. Meg and Brett are seasoned renters, but with their first child on the way, they want more space and to put down roots.
This couple may need three bedrooms and two bathrooms in a good school district. They could want a big backyard for their child and dog to play in. And a basement would be nice to have for additional storage.
Where they may not want to compromise on the “needs” section, they could make concessions in the other two categories. Take this time to create your own list and start writing down what’s most important to you in a home.
Once you know what you’re looking for, it’s time to bring numbers into the equation.
Create A Budget That Won’t Break The Bank
Remember those higher interest rates?
How could you forget, right?
It’s important to consider that higher interest rates may impact the price range you can reasonably afford. As discussed above, higher interest rates increase your monthly financial commitments, so take some time to reevaluate what you can afford in this new interest rate environment.
It’s so easy to overspend on a house, especially in a market as steamy as this one. But your home shouldn’t derail your other financial goals; it should help you reach your goals.
As a general rule of thumb, you want to keep your total housing expenses less than 30% of your income—and that’s on the higher end of the spectrum. So how much house can you afford?
The answer to that question depends on how much money your household brings in every year, your anticipated savings goals, current debt obligations, cash reserve, and more.
Now’s an excellent time to consider working with a financial planner who can help you set a healthy home buying budget that won’t leave you living paycheck to paycheck.
One thing that tends to get new homebuyers in trouble is taking a pre-qualification letter at face value. Before you tour houses, your realtor may suggest getting a pre-qualification letter or pre-approved for a loan, which essentially states how much “house” the bank says you can afford.
- Pre-qualification: It is a more informal process where homebuyers can gauge how much they could borrow. This process doesn’t require a hard credit check.
- Pre-approval: A more formal process that requires a hard credit check. Here, the bank lets you know how much you can actually borrow for a home loan. Getting pre-approved tends to strengthen your offer because sellers know you can afford the house.
But often, the bank pre-qualifies/approves you for far more than would be comfortable for your cash flow. Just because you’re pre-qualified or pre-approved doesn’t mean you should borrow up to that limit. Doing so brings more risk onto your plate and leaves less money for other expenses that will creep up, home or otherwise.
What expenses should you prepare for in this process?
- The downpayment—aim for 20%, so you don’t get stuck with private mortgage insurance (PMI)
- Closing costs, which usually come out to 2-5% of the home’s purchase price.
- Mortgage and interest payment
- Hidden costs of homeownership, such as maintenance and repairs, utilities, insurance, property taxes, homeowners association, or building fees.
Once you know how much you can reasonably afford to pay, now it’s time to secure the best financing.
Shop Around For a Mortgage and Look Into First-Time Homebuyer Loans
A home purchase is a major consideration, and as such, you should do your research and shop around before giving an institution your business. Check out a few different mortgage lenders (banks, credit unions, online lenders, etc.) and compare options. Ask yourself,
- Does one have any first-time homebuyer programs?
- Have you compared interest rates and loan terms from multiple lenders?
- Are you aware of all your mortgage options?
There are several types of mortgage loans out there—conventional, jumbo, government loans (VA and FHA)—with different interest rate options, fixed or variable.
There are also excellent programs available for first-time homebuyers. Here are some of the top options.
- FHA loans. The Federal Housing Administration backs these loans, and they come with some pretty nice perks: a 3.5% down payment and more flexible credit score requirements. Keep in mind that by putting down less than 20%, your lender will likely require private mortgage insurance, which protects the lenders in case you default on the loan.
- VA loans. If you’re a veteran (or a surviving spouse), the Department of Veteran’s Affairs offers incredible benefits, including no down payment or mortgage insurance.
- USDA loans. The Department of Agriculture has a great assistance program that offers 100% financing options. This loan program targets rural areas, but you don’t have to live on a farm to qualify!
- Fannie Mae and Freddie Mac. Here, borrowers can access conventional loans with smaller down payments— a 3% minimum. Your mortgage lender will let you know if any of these options are available based on your credit score, the amount you wish to borrow, and more.
- State and local programs. In addition to national options, you can also check out available first-time homebuyer grants (that you don’t need to pay back) and low-interest mortgage options in your state.
- Renovation-specific loans. Looking to buy a fixer-upper? There may be loan programs that can help support that endeavor. Whether you want to enhance a home’s “green” features, renovate a true fixer, or finance the improvement costs at the onset, there’s an option.
Our advice? Shop around.
It can also be helpful to work directly with a mortgage broker as they can help you find great rates at no cost to you. How? The mortgage companies themselves typically pay mortgage brokers.
Consider An Assumable Mortgage
This point is for buyers and sellers.
With the hot real estate market and interest rates beginning to rise, it could be beneficial to look into an assumable mortgage.
What’s an assumable mortgage?
An assumable mortgage allows sellers to pass their existing mortgage onto the buyers. This way, the buyers wouldn’t have to take out a new mortgage at a potentially higher rate.
Say you refinanced your mortgage during the pandemic when interest rates were at historic lows. If a buyer had the option to assume your mortgage with 2.5% interest or apply for a new mortgage at 4.5%, they would save a lot of time and money by taking yours over and paying the lower interest rate.
As a seller, your house could be more attractive to buyers if the mortgage is assumable. Keep in mind that many mortgage options (conventional, VA, FHA, etc.) aren’t. It’s best to weigh the pros and cons of your mortgage loan option both in the short and long term.
Don’t Be Afraid To Walk Away.
After reading this article, you may be thinking that renting isn’t all that bad—and it’s true. Renting can be an excellent solution for many people. There are so many myths about homeownership that renters can skillfully avoid, like a house is your largest asset, renting is a waste of money, and other silly things too many people say.
There’s nothing wrong with renting! Having the landscaping, roof, appliance, and routine maintenance being someone else’s problem certainly has its perks.
While the home-buying process may make you feel like you’re inside a pressure cooker, you don’t have to make a buying decision that makes you uncomfortable. You don’t have to offer 30K over asking or waive important inspections. Know your boundaries and don’t violate them—no house is worth that.
If you’re looking to purchase a home this season, be sure you do so with a solid budget, clear expectations, and a heavy dose of a fighting spirit. You’ve got this!