If you're considering purchasing a home, but worried that rising home prices mean you'll pay too much for a house, think again. Just because home prices have risen doesn't mean it's a seller's market out there. Here's why.
1. Home Prices Aren't Necessarily Inflated
Home prices have gone up, but have they done so unreasonably? Rewind to 2012, the unemployment rate exceeded 8%, short sales and foreclosures were still rampant, consumer confidence was low, the prospect of job growth was bleak and the general consensus was that the economy was still licking its wounds from the recession. People don't buy homes when they're feeling skittish about their job. Fast forward to 2015, job growth is getting traction, the banks are clearing foreclosures from their balance sheets and short sales are dropping. The result? Because the pendulum swung so far in the opposite direction with drastically low real estate prices several years ago, today's prices in general are a reasonable correction of a settling housing market.
The likelihood for prices to continue to rise by leaps and bounds while credit is still tight is a shot in the dark, as wage strength has still not peaked. Remember, banks still have tight constraints on lending and are especially picky when approving large mortgages. Home prices in many markets are in direct proportion to the local economy. Take San Francisco, for example, where home prices are, without question, exorbitant. The tech industry is having a massive boom, driving prices up. The stronger the local economy, the more people working, the more support housing prices will have to remain strong.
2. Many Sellers Have Unrealistic Expectations
This average home price appreciation has brought sellers out of the woodwork in hopes of attaining a maximum price. Many have expectations far larger then what the market will bear. The best example of this is a home listed on the market for longer than 30 days within a strong local economy. Look at Sonoma County, Calif., where if a house is on the market longer than 30 days without a contract, it's a good sign the property is listed too high. The only alternative is to drop the list price to induce an offer. It's not uncommon at all these days to have a home close escrow at a price beneath the original listing price. (If you're a seller who's not sure what to offer on a house, talk with your real estate agent and take their advice — this is what you hire them to do.)
3. Multiple Offers Are Less Common
A good indication of a seller's market is when there are large numbers of multiple offers – say eight to 10 – for each listed property. That is a strong indicator of the true seller's market, much like it was in early 2014 and even summer of 2014. But these days I'm seeing that a handful of offers at best is more realistic. Less competition means a greater opportunity to get your foot in the door.
Consider this: Mortgage rates are down, increasing affordability. More people can afford to pay a little bit more for a home and not feel financially squeezed because their housing payment is lower. Prices do rise in relationship to what a ready and able buyer is willing to pay for a property. But the basics also come into play, including the location of the property, school district, bedrooms, bathrooms and lot size are all critical factors in the listing price of a home. Agents know this, but not so much sellers, who still believe they can get top dollar for their property regardless of whether they really can.
If you're looking to buy a home, and are putting it off because you think prices are too high, prices will always be too high. Economic cyclical changes drive home prices. We would have to bear a repeat of the Great Recession in order to drive prices to levels they were several years ago. That's not likely to happen in the foreseeable future. Furthermore, though mortgage rates are low and allow people more borrowing power, strict lending standards still keep in check consumers' general ability to buy (this calculator can show you how much house you can afford if you're not sure). Keep in mind your credit score will affect your ability to qualify as well. (You can check your credit scores for free on Credit.com.)
Quick Tips to Getting Your Offer Accepted
- Get a real pre-approval upfront. That means letting the lender review your credit report, along with all your supporting financial documentation. Doing so will bullet-proof your loan, solidifying your ability to perform on the contract.
- When you submit your purchase contract, have your loan officer call the listing agent and let them know that they have personally reviewed your credit, debt, income and assets – and that you are well qualified. A personal touch can go a long way with the listing agent for them to influence your offer with the seller.
- Thirty-day contracts are still the norm – meaning you have 30 days from the seller accepting your offer to complete the purchase of the home, during which time you will secure financing. A standard 17-day loan contingency removal allows you 17 days to cancel the contract if you do not receive financing. So, as a sign of good faith, you can spruce it up with a 12-day loan contingency removal, and increase your deposit on your earnest money.
- If selling with a contingent offer, that is selling one house to buy another, list your home on the market, then make an offer to purchase the new home and include a copy of the listing to demonstrate that you are a serious buyer.
- Include proof of funds in your offer. Putting down 15%? Great! Prove you are ready to play ball by providing a bank statement that shows you really do have the assets.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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