In a typical housing market, houses may sit on the market for up to 90 days, while the seller hopes someone will make an offer — but that has not been the case these past 18 months.
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There have been houses sold within hours of being put on the market, with multiple offers over list price, says Brian Thomas, the senior vice president and a loan officer at Fairway Independent Mortgage Corp. in Stow. In the 37 years he’s been working with mortgages, he can’t recall ever seeing a more dominant seller’s market.
“Sellers have been able to sell their houses for more,” he says, “and really control the entire transaction.”
This is great news for anyone currently selling their home, but for people looking to buy, it presents unusual challenges. Thomas offers a few tips to consider before tackling the homebuying process and taking on a mortgage in a hot market.
Don't Rush In
Keep in mind that if your search for houses has been difficult, it’s not your fault. One of the reasons the housing market is so competitive right now is because of a lack of available new and existing homes.
“There’s not a lot of inventory, but there’s a lot of demand for homes,” Thomas says. “Then you’ve got house prices, even construction prices, going up.”
The price of lumber has risen dramatically over the past year and a half, which along with other pricey building materials, has slowed the homebuilding process since it is expensive for construction companies. Even as lumber prices are beginning to fall, people must make careful decisions when considering a new build, since that extra cost trickles down to consumers, often resulting in a higher cost than anticipated.
“Some people say, You know what, I’m going to hold off,” Thomas says. “Maybe I’ll just stay where I’m at and improve the home that I live in.”
Although he predicts the cost of building materials will continue to decrease, he says they may not get back down to their original prices, because the high demand for housing and increased number of buyers are set to remain for at least five years, according to Fairway’s research.
“I think that things will get better,” Thomas says, “but I do believe that there will be demand.”
Be Competitive
Consider both yourself and the seller when planning to make an offer.
Thomas has had clients who have made offers that were rejected by sellers on four or five different houses.
“Hopefully, ultimately they get an accepted offer,” he says, “but it is frustrating for buyers.”
While this competitive market remains, using a conventional loan can make the process go smoother, rather than options like Federal Housing Administration loans and Veterans Affairs loans.
“The seller has the upper hand,” Thomas says. “If they look at an offer and … it’s not a conventional loan, they may bypass that offer.”
In less competitive markets throughout his career, those loans were readily accepted, but right now, with plentiful offers, homeowners can cherry-pick.
Ask for Less
Pause before asking the seller for concessions.
Generally, people need to have enough money for four components when buying a home: a down payment, closing costs, a prepaid house insurance policy and a home inspection. Buyers can ask the seller to help cover closing costs. But in today’s market, asking for that assistance might put you at a disadvantage.
“If a buyer writes an offer on a house and they say … I would like you to pay $4,000 or $3,500 toward my closing costs, the seller might say … I’m not going to do that,” Thomas says. “There might be three other offers.”
But help is still available. Thomas recommends state financial programs from an organization like the Ohio Housing Finance Agency. These can help with up to 5 percent of the purchase price toward closing costs or a down payment. And if possible, get some extra assistance from a relative or a retirement account like a 401(k) — just not from the seller.
Have a Strategy
The options for mortgage plans are plentiful, but right now, the answers might be simpler than ever.
The first thing to strongly consider is a 30-year fixed-rate mortgage because interest rates are at a 40-year low now, Thomas says, resting at around 3 percent as of press time, as compared to a high of 16 percent in the ’80s.
“It’s … rare that we would help someone in today’s market with any product other than a 30-year fixed because the rates are so low,” he says. “It doesn’t make sense to put someone on a variable-rate loan when … in the future, rates will be higher than they are today.”
And those interest rates can be even more competitive if you are a veteran or work in the military, law enforcement, health care or other careers that serve the public. Qualifying borrowers using the Ohio Housing Finance Agency’s Ohio Heroes program can get assistance with interest rates well below 3 percent on a 30-year fixed-rate mortgage as of press time.
Keep Your Options Open
If you’re considering a lease-purchase agreement so you can rent a house now and buy it at a later time, it might be best to hold off. That way, you can wait to see what the housing market does.
House values have hiked up in the past 18 months, and homes are selling for higher prices than in previous years. If you settle on a rent-to-own contract with a property owner now, and if house values drop within the next few years, you may already be locked into a price that is more than the house will be worth in the future.
But at the same time, Thomas adds that some buyers are opting into lease-purchase agreements if they can’t afford to buy a house during today’s competitive market.
Shop Smart
No matter what strategy you take, Thomas recommends getting comparisons on loans and interest rates from several local lenders, researching the companies before deciding on a mortgage provider and looking into preapproval.
“Check your lender’s reviews, how long they’ve been in business,” he says. “Experience does mean something.”
Despite the pressure of today’s market, take time to make sure you can afford your purchase. Before you commit to a down payment, which can be anywhere from 3 percent to 50 percent down, you should have several months of savings for paying bills leftover in an emergency fund.
Everyone’s circumstances are different, but having a safety net, working with a financial planner and communicating with lenders should help you know your options and navigate the homebuying process during this chaotic time.
“We try and help consumers, whether it’s their first home purchase,” Thomas says. “We try and guide them into the best type of financing for their situation.”
