Summary (for those who hate to read!)
The Fed raised interest rates in order to cool an overheated economy – and it worked. Higher interest rates mean the end of outrageous bidding wars, waived inspection and appraisal contingencies, huge cash requirements, and overall a very risky real estate purchase. It also means that your mortgage money won’t go as far; you may need to make adjustments to your strategy. So, what should you do?
Stop making decisions based on national news sources and don’t take advice from individuals who don’t know your local market well. Real estate is local. Work with a highly skilled buyer’s agent, not an agent who specializes in listings or a buyer’s agent who knows little more than how to open a door. And, above all else, relax. Interest rates go up and down. Day after day, year after year, the beat goes on. You WILL be able to buy a home (with as little as 3-5% down if you choose) and you WON’T be a renter forever. Make good choices and don’t do anything stupid and you’ll be fine. If you need advice, send us a message and we’ll try to help…no charge and no catch. We’re here to help
The Federal Reserve’s job is to keep the economy humming – not too hot and not too cold. When an economy is weak, declining, or uncertain – like during a pandemic – the Fed lowers interest rates (the cost to borrow money) to stimulate growth. When the economy is booming, inflation and asset bubbles can get out of control and threaten economic stability. When this happens, the Fed raises interest rates to cool the economy and keep growth on track.
How does this affect home buyers?
Lower interest rates mean you can qualify for a larger mortgage. Your monthly payments will be lower and you can buy a bigger or better home than you could when interest rates are higher. But – there’s a downside.
Greater affordability means greater competition. Tremendous demand and very limited supply in my area led to crazy bidding wars and unreasonable amounts of risk for the buyer…unlike anything I’ve seen in my 27 years in real estate.
Representing Buyers in a Seller’s Market
My job as an Exclusive Buyer’s Agent is to help the buyer pay the lowest possible price and to assume the LEAST amount of risk. My state (Texas) is a “buyer beware” state which means that although the seller has an obligation to disclose everything they know about the property, it’s up to the buyer to prove or disprove the information provided by the seller and listing agent. It’s my job to help them do that.
Protecting my clients has proven to be quite challenging in the past few years. With dozens of offers on any given property, buyers have been forced to waive most – if not all – of their contingencies and “out” clauses. They are given just 30-60 minutes to tour a home and sometimes only hours to submit an offer. Their offer is based on inadequate pricing data and the hope that the seller is honestly and accurately sharing what they know about the property. If they win the bid and later find a problem with the home, there’s no way out without losing thousands of dollars or risking an expensive lawsuit.
It’s Risky Business
Would you spend $40,000 on a car without a test drive, without looking under the hood, with no opportunity to have it inspected by a mechanic, and no right to cancel the contract? Probably not. But this is exactly what buyers have been forced to do but on a far more expensive and consequential scale. Let’s dive deeper.
When you read the words “Highest and best offers due by X”, you’re getting into a blind bidding situation. Blind means that we don’t know how many offers they have (if any), or how high the sales price has been bid up (if at all). We’re basically shooting arrows into the sky and hoping we hit the right number. Exhausted buyers who have already lost out on multiple homes throw ridiculous numbers out there – sometimes beyond what they can afford – with little time to think about the potential consequences of their decision.
To be fair, there’s nothing wrong with a seller and their agent wanting to get the highest price and best terms for their seller/clients. I want the opposite for my buyers. But blind bidding leads to drummed-up bidding wars and often other unethical tactics. A legitimate, open auction environment is a challenge when you’re a homebuyer, but it’s a fair practice. Taking advantage of buyers’ fear of missing out is not.
Does “highest and best” really mean that every seller is going to go through a stack of offers to select the one with the highest price and the fewest obstacles to closing? No, it doesn’t. For some sellers, the highest price is the starting bid and an opportunity to emotionally blackmail the buyer. I have received many calls from listing agents who are pleased with the price my buyers offered, but then demanded unreasonable terms like an unusually long and free seller leaseback with no security deposit…take it or leave it. Bully counter-offer. Can’t close on the 30th because your baby is due? Too bad. Induce labor on the 25th or lose the house. Nothing feels better than pushing back on a disingenuous, bully counteroffer, but it’s risky and stressful for my clients.
Inadequate Pricing Data
I rely on CLOSED sales to accurately determine the value of a home. Most transactions take 30 days to close, so in a swift-moving market where prices rise so rapidly, the closed/sold data I have available is obsolete by the time we are writing an offer. I have no other choice but to project (guess) what the value might be by the time of the appraisal and beyond. Will prices rise so fast that my clients recoup their money within a reasonable timeframe? How high can my clients go up in price before I need to reign them in? I want my clients to make financial decisions based on logic and facts, not emotional exhaustion.
Buyers without a huge amount of cash in the bank have been completely locked out of the market. Why? Your loan is based on the appraised value of the home. If a house appraises for $500,000 but the negotiated sales price is $600,000, it’s up to you to make up for the deficit of $100,000…in cash. That might mean cashing in your 401(K) or restructuring your loan in order to use part of your down payment money to cover the spread; in many cases that means paying Private Mortgage Insurance (PMI) when your total down payment is less than 20%. While paying for mortgage insurance isn’t the end of the world, it does add to your monthly mortgage payment, which is already higher if you used your down payment money to cover the appraisal spread. It also means paying more for a house than it’s actually worth, and that’s never an easy pill to swallow.
In the past, buyers had the option to cancel the contract or renegotiate the price when a house didn’t appraise for the sales price. These days, buyers are expected to waive their right to terminate the contract due to a low appraisal. If you don’t agree to pay X for the house – regardless of its appraised value – your offer won’t be accepted.
No Option Period and/or Very High Option Fees
The option period is the time you have to do your due diligence before you proceed with the sale. It’s when inspections and repairs are negotiated, schools are verified, insurability is confirmed, questions are asked, etc. If a problem is found with the house that the seller is not willing to address, you have the right to terminate the contract; the only loss you incur is your option fee and the money spent on inspections. For most of my career, option fees ranged from $100-$500, with a 7-day option period being the norm.
In a seller’s market like the one we have seen recently, buyers are expected to waive their option period completely, pay options fees as high as $10,000, or are given an unreasonably short period of time to hire an inspector, contact an insurance company, and evaluate the property. Is 48 hours enough time? No? No house for you.
No option period means no inspection. My job as an Exclusive Buyer’s Agent is to make sure my buyers don’t waste money to inspect a house with obvious issues that will cause them to cancel the contract later. I’m great at spotting foundation problems, mold, bad roofs, and old HVAC units. But I’m not a licensed inspector, electrician, or HVAC specialist. I won’t go into the attic, climb on the roof, or access the crawl space under a home; that’s the job of a home inspector, not a Realtor.
Many buyers have been forced to forfeit their right to a proper inspection. Homes are purchased as-is, and the buyer risks purchasing a home that isn’t in the condition that the seller presents it to be with no recourse when problems arise.
Home Owner Association (HOA) Waivers
HOAs can restrict the type of pets you can own, the color of your house or roof, the types of flags you can fly, etc. They can also make sure your neighbor keeps their grass mowed and restrict them from installing a UFO on the roof. That’s a good thing.
The purpose of an HOA isn’t to make your life miserable. It’s there to protect you and your property value. As such, every HOA has a rulebook (CC&R) that details what owners are allowed and not allowed to do with their property and within the community. If you’re planning to buy a home that has an HOA, knowing the rules and regulations is vital BEFORE you purchase a home.
In a balanced market and in most cases, the seller will be required to send you the HOA documents within a negotiated period of time. You have a few days to review them and cancel the contract if there is something you don’t like. Not surprisingly, this isn’t true in a seller’s market. You can request the CC&Rs from the HOA on your own or sometimes find them online, but if you want to buy a house in this market you must forgo your right to cancel the contract if you don’t like what you read.
So, Is it Really a Bad Time to Buy?
No, it’s not! The Feds increased interest rates to cool the market – and it worked. It’s a GREAT thing for most buyers. Why? With fewer buyers competing for a listing, homes will ultimately sell for a more reasonable price; the already high list price won’t be the starting bid. Sellers won’t be so eager to walk away from a qualified buyer and will allow them the time they need to do their due diligence. I can now protect my buyers with appraisal contingencies, HOA docs, home and roof inspections, etc. Sellers will have to do a lot more than just vacuum their homes to get them sold (and some don’t even do that).
What do higher interest rates and higher prices mean in practical terms? It means you can’t afford to buy the same house that you could have purchased last year. Or even 6 months ago. It means you may need to make adjustments to the type of home you purchase or its location. Maybe you forgo your dream home for now and buy a home more suited to be an investment property later. But does it mean you are stuck paying ridiculous rent rates? Are you stuck making someone else rich? Absolutely not.
Real estate is local, so if you’re making decisions based on what you hear on the national news you’re doing it wrong. Find a highly skilled buyer’s agent in your area; let us know if you need help finding one. Let them help you decide if it’s the right time for you to buy, how much you can comfortably afford to spend, and see what might be available in your price range and go from there.
As always, I’m here to help. If you need advice send me a message here.
Happy House Hunting,