The 2017 homebuying season is underway, but that doesn’t mean it’s gotten easier to find the perfect home. On the contrary, this is shaping up to be a challenging season for buyers. It’s a seller’s market, demand is high, inventory is down, and there’s a fear that interest rates and sales prices are only going to keep ticking up.
So is the clock running out for homebuyers? In a word, no. The fact remains, many homebuyers will indeed find their dream home this summer, as will others in the seasons to come. To calm the fears that are part and parcel of being a homebuyer in today’s market, knowledge is key.
Here’s our analysis of the top challenges homebuyers are likely to face this buying season, as well as what they can do to overcome them and land that dream home.
One issue facing this season’s buyers is the pace of the housing market. Houses today are selling like hotcakes. Last month, CNBC called it the “strongest seller’s market ever.”
“I’ve been selling real estate for 25 years, and this is the strongest seller’s market I have ever seen in my entire real estate career,” David Fogg, a Burbank, Calif., agent told the news outlet. Fogg related the story of his latest open house, an entry-level home in Burbank listed for $789,000. Before the first open house, which drew more than 100 potential buyers, the home had three offers in hand.
The latest industry data from March says homes are selling in 34 days on average, down from 47 days a year ago. Home sales volume was up nine percent year over year, pushing up prices and contributing to depleted inventory.
Inventory Is Low
A six-month supply of homes is considered healthy for the market, but that benchmark remains elusive. In January, Reuters reported that inventory had fallen to a 3.6 month supply, a level last seen in 2005, after 19 consecutive months of decline. Now, things are a bit better than that. At the end of last month, inventory had ticked up to a 3.8-month supply. However, this level still falls short of a healthier six-month supply of homes.
Another inventory issue buyers this spring are likely to run into is just what that inventory is. For first- or second-time homebuyers, a starter or trade-up home would be ideal. But these are precisely the part of the market that’s getting squeezed the most.
Data from Trulia in March showed the inventory of starter homes had fallen 8.7 percent year over year, while trade-up home inventory is down 7.9 percent. These market segments are already smaller than that of luxury homes, which reportedly make up 51 percent of active listings. Buyers looking for a starter home will be focusing on only 25.9 percent of the housing market, while those able to afford a trade-up home will have access to a further 23 percent of the market.
Rising Prices, Rising Rates
If demand and inventory weren’t enough of a concern, buyers this summer also have to contend with the ticking up of both prices and, potentially, interest rates. Trulia’s data from March notes that prices for all three tiers of homes are going up. Starter homes were selling for a median price of $165,000, up 8.3 percent year over year, while trade-up homes had a median of $289,500, an increase of 6.8 percent since 2016. Nationally, for all homes, CNBC says the median sales price has risen 7.5 percent since last year, up to $273,000.
Interest rates are another point of concern. After spiking at the end of last year in the wake of the election, rates have floated back down in recent weeks. According to the latest Primary Mortgage Market Survey, the average 30-year fixed-rate loan is now down from its recent highs above 4.25 percent, resting around 4.02 percent. Rates for 15-year fixed-rate loans and 5-1 ARM loans have likewise cooled a bit to 3.27 percent and 3.13 percent, respectively.
However, these rates are still elevated, compared to what was often available in 2016. Moreover, it’s looking more likely the Federal Reserve will be continuing its gradual lifting of the federal fund’s target range. After the labor force added 211,000 nonfarm jobs in April, experts are expecting another fractional rate hike in June, which could further push up rates for homebuyers.
What to Do
For buyers planning to buy in this fast-paced market, staying cool, calm, and collected is a must. Svenja Gudell, chief economist for Zillow, told CBS News that the hot housing market wasn’t something to agonize over. “My advice to buyers would be not to freak out and feel a sense of urgency,” she said.
However, planning is a must. With as few as 34 days on the market for an average home, buyers should have a list of must-have necessities for their next home. A list of nice-to-haves can be a compliment. When buyers find a home that ticks all the boxes, be ready to act, as others may be drawing up their offers. Lastly, consider drafting a cover letter along with your offer. The personal touch could make a difference with a seller considering multiple similar offers.
Another part of planning for prospective buyers should be to have all your financial ducks in a row before you go shopping. A pre-approval letter from a mortgage lender could put your offer ahead of other less-prepared buyers. Work with a professional real estate agent who knows the local market and has their ear to the ground for new listings.
As far as planning for interest rate changes that could come in the next few months, flexibility is key. Serious buyers could talk to a lender about interest rate locks before the Fed makes any changes to interest rates, or alternately, consider whether they could purchase discount points to lower their eventual interest rate.
Above all, prospective buyers should make an effort to stay informed throughout their home shopping journey. Shop around for mortgage rates, get recommendations from family and friends for local agents, and keep abreast of market developments in the local news. Buying a home can be stressful, particularly in a hot housing market, but staying in the know can make the process more manageable.