2023 is not like 2008

Another housing crash weighs on a lot of people’s minds. Sharply rising mortgage rates, a steep decline in home sales and a record price appreciation slowdown have raised concerns that the housing market could crash. I get the logic, yet experts argue that these market trends are a symptom of a correction after two years of massive growth.

I wouldn’t expect 2023 to be like 2008. For one, something as extreme as 2008 only occurred twice in the past 100 years…. the first was the Great Depression in the 1930s. The second was the Great Recession beginning in 2008. The housing market and overall economy is completely different now versus 2008.

There are two huge differences:

• Risky mortgages created an environment where people could buy more home than they could afford to pay. If people lost their jobs (and they did), it created a vicious feedback loop a cooling market/declining value market + more foreclosures = more declines in home values (and this cycle kept repeating itself).
• In 2008, there was a glut of housing inventory. For once, too many homes were being built. This is the opposite problem we have today with housing inventory levels in Atlanta hovering around 3 months (ideal amount is 6 months to create a balanced market).

There are also too many people who do not own a home that want to buy a home. The housing glut in the 2000s was followed by close to a decade of under-building that contributed to a shortage of millions homes today. This was exacerbated by millennials coming of age near the end of this period of underproduction along with Boomers not downsizing as previous generations did (moving in with extended family, or to retirement communities, or to assisting living/nursing homes). The lack of homes along with the housing needs of the two largest generations in the history of this country (one looking to buy their first homes and the other not selling their homes) should put a floor on home prices.

While 2023 isn’t like 2008, 2024 could be like 2020- 2021. When the national media begins talking about “now being a great time to buy a home,” we’ll see a similar situation as we did during the peak buying years of the pandemic. This is why I keep harping on now being a great time to buy. Purchasing a home now with fewer competitors – even with a slight decline in home values – will be much better than double digit offers, over asking price offers, no contingencies, etc. as we are likely to see the next time it is ” a good time” to buy.

If you are thinking, “maybe 2023 is a good time to buy,” contact me today (see my banner above for contact info). We can get started in just a few minutes and get you pre-approved for the offer on your new home!

Now is a great time to buy a home!

Happy New Year! Yes, 2023 is a great time to purchase a home. I am well aware if you do a search for “is now a good time to buy a home?,” one is likely to find plenty of articles saying now is a bad time to purchase. While there are many good points in these articles (I’ve read a lot of them), they all seem to be missing one important thing…

Competition.

Or perhaps I should say, the lack of competition.

Follow with me for a moment… in 2020-2021, the market was crazy. Sellers were receiving 5, 10, 20+ offers on a home (one agent I know received over 100 on a listing!). The offers were always over (sometimes way over!) asking price. Every offer waived some contingencies, and most waived all of them. This means the buyer had no protection on their earnest money and had to buy the home “as is,” or forfeit their earnest money if they decided not to buy the home.

This isn’t a great way to buy a home. As we moved into mid and late 2022, the market shifted. Yes, there are still multiple offers on homes. Yet it is only a few offers on most homes. Properties are going under contract at/around list price, and buyers are getting contingencies on their contracts (not to mention sellers giving money to closing costs!).

There are many reasons to consider waiting to buy a home (rates are higher, home prices are high, inventory levels are low, a looming recession). Why should someone consider buying right now? To me, it is simply competition…

Many would-be buyers will sit this spring market out because everything they read says “now is a bad time to buy a home.” Let’s say the stories change this time next year. For example, prices have leveled out, mortgage rates have lowered, so 2024 is a great time to buy. Do you know what that means? Competition will be fierce! Buyers in my “spring market 2024” example would include:

• Everyone who decided to push off buying a home in 2023 because it “isn’t a good time to buy a home.”
• Everyone who planned on buying a home in 2024.
• Some who planned to buy in 2025 or 2026 and decided to move up their timeline because “now is a good time to buy a home.”

When the mood shifts to now being a “great time to buy a home,” inventory levels will still be low. The supply-and-demand dynamics dragging inventory levels (too many buyers and too few homes available) isn’t going away anytime soon. The market will resemble to craziness of 2020-mid 2022.

Yes, mortgage rates are higher, but finding the right home is hard. It is way easier to refinance a home you already own versus fighting the crowd to get a home when rates are lower. I’ve bought two homes in my life, and refinanced them both.

Regardless of what is in the news, taking the long term view, now is a great time to buy a home. If you are buying in the state of Georgia, contact me today. I can get you ready to make an offer on a home in just a few minutes!

Ways to help the housing supply problem

To borrow from an insurance company’s commercial… unless you’ve been living under a rock, you know there is a supply problem with the number of homes available to purchase. While builders are back in full swing, there is still a major deficit in the housing inventory.

What are some things the government (federal and/or local) could do to help ease the housing shortage? Here are three things with something happening (at least in Canada), something that could happen, and something I wish would happen.

• Last week, Canada banned foreign home buyers from purchasing homes in Canada for two years (exceptions made for permanent residents in Canada). Canada added a number of measures (some of the measures are already in place here) to help tone down speculation and demand. While the number of homes purchased by international buyers isn’t huge, with the current housing inventory levels, this falls under the “every little bit helps” category.
• Could re-zoning be a solution? Enterprise Community Partners believes so. They said re-zoning land to allow low-density multifamily housing could help communities address the negative impacts of exclusionary single-family zoning. In other words, instead of allowing only one home built in subdivisions on larger lots, allow for more areas to have condos and townhomes built on them. As an example, on the street where I live, instead of one single family home, there is room on each lot to build four attached town homes. This solutions has been proposed a lot for California, and could certainly increase the number of homes available to buy (of course, we all still must wait on these homes to be built!).
• This falls under the category of reform I would like to see. Given how hot the market is right now, I feel hedge funds/investment firms should not be allowed to purchase homes for the purposes of renting out these homes as an investment for their clients. I am not saying this should be permanent, but could we at least get a two year moratorium on it? If you do a search for “hedge fund housing,” you’ll see countless articles regarding hedge funds buying homes and driving up home prices across the country. This is helping to make housing unaffordable, which dramatically impacts first time home buyers who need lower price points/do not have a ton of assets for a down payment or bidding war. If an individual wants to buy a home to rent it out, that is one thing. An investment firm buying an entire new construction subdivision to rent the homes out is different, and definitely problematic.

There are several reasons we are in the situation we are in right now in terms of housing inventory (few homes being built during the Great Recession is the biggest reason), but doing some of the things listed in this post could only help the situation.

Home sales soar

We’ve discussed new construction sales increasing recently on this site. Existing home sales are increasing too! August marked the third consecutive month of gains on existing home sales:

• the increase was over 2% from July to August
• it is over a 10% increase from last year
• median sales price for all home types (single family, townhome, condo) was up over 11% from 2019.
• Inventory levels are worse now (about 3 months) than last year around this time (about 4 months of inventory)

It’s a seller’s market, and does not seem to be changing anytime soon.

What does someone who owns a home and needs to sell it in order to make a down payment on their new home do in a time like this? Are there any options to avoid making a contingent offer to purchase a new home?

Why yes, there are options! Most people can qualify to carry two mortgages. Their current home + the new home. Given how fast homes are selling, the odds of having two mortgages payments for many months is low. So looking to qualify to buy the new home without selling one’s current home isn’t as daunting as it would seem.

The issue in this scenario would be the down payment. If the plan was to use the equity in the existing home to purchase the new home, how does one come up with the money for a down payment without selling their home?

Here are some options for the down payment on a new home:

1. Borrow money from investment accounts: if money is tied up in investment accounts, look to borrow the money from yourself! It’s nice when you are the bank. Do consult with your tax professional to ensure any money you take out isn’t a tax liability OR if it is, you plan accordingly.
2. Borrow from 401k: Most companies allow their employees to borrow some money from their 401k accounts when purchasing a home for as their primary residence. Borrowing and repaying a 401k loan should not trigger any tax liabilities, and the loan can be paid back pretty quickly once the current home sells. Again, it is nice when you are the bank!
3. Gift from family: Getting money from an acceptable gift source to use for a down payment is allowed. Remember, you do not need 20% down to purchase the home.
4. Temporary loan: apply and receive a temporary loan, such as a bridge loan, to use for the down payment. This is an option, but it can be more expensive in terms of closing costs (a 401k loan should have little/no fees and a gift from a relative has no fees). The buyer would also have to qualify on the new home loan with three mortgages… the current mortgage, the temporary home loan to use as a down payment, and the new mortgage on the new home.
5. Combination of the previous options: perhaps one borrows from their 401k and gets a gift from a family member.

Doing anything above could allow a buyer to make a non-contingent offer on their next home, and give them an advantage over anyone who must sell their home to qualify for the new loan.

One last option is using the seller’s market to one’s advantage. Negotiate renting back one’s current home once it is closed. Then use the rent-back time to find their new home. Going this route has its advantages:

• Since the home is sold, qualify on just the new mortgage
• the equity in the home is now free and ready to be used as a down payment on the new home

The person purchasing your current home has 60 days to occupy it per the terms of a standard home loan used to purchase a primary residence. Is this something that can be done? Yes, I had a client close using a scenario like this month.

Again, if you own a home, use the seller’s market to your advantage. Talk with your agent and negotiate a rent back of your current home. Something like this is negotiated just like the purchase price, closing date, etc.

It’s a seller’s market, and it is hard out there for people looking to purchase a home. Just because it is a tough market doesn’t mean you can’t find ways to make your offer stand out from the crowd! Buying in the state of Georgia? Contact me today! I can help get you prequalified and we can explore several options to see if you are able to make a non-contingent offer on your new home purchase.

Inventory levels still low

If you think you’ve heard this before… it is because you have. Inventory levels are still low across the country. Low inventory levels push home values up due to the simple application of supply-and-demand. This is one of the main reasons home values have jumped so much in the past couple of years. How did we get here? There are a couple of reasons:

• During the Great Recession, very few homes were being built. After many years of very little new construction (coupled with more people wanting to buy homes), a squeeze on inventory occurred.
• While unemployment was high during the Great Recession, many people put off buying a home until their financial situation was more stable. This creates a pent up demand on those wanting to buy homes. This increases competition for the few homes available on the market.
• Homeowners are remaining in their homes longer. We are at the highest rate of owners keeping their homes in 18 years. The length of time is now up to 7 years, which is a 10% increase year over year.

There are many reasons why people may choose to remain in their homes longer (they have a low rate on their current home, fear of finding their new home, tighter loan qualifying guidelines), but one new factor are baby boomers choosing to live/age in place. As baby boomers remain in their current homes (instead of down sizing or moving into assisted living), it again tightens the amount of available inventory. Of course, this will not always be the case. Baby boomers (along with the silent generation) own over 50% of the homes in America. As they age, we may find ourselves in the exact opposite situation – too much inventory.

Until we get there, how can someone make their offer stand out? There are a couple of things to do.

1. Make a non-contingent offer on the purchase. For those who own their current home, qualifying to carry two mortgages means an offer can be made without a contingency. A seller with multiple offers would find that more attractive. Homes are going fast, so it is not very likely one would carry both home loans for an extended period of time. For those who need equity from the current home for the down payment on the new home, there is always the method of recasting the loan after closing. A future post will cover recasting.
2. Get pre-underwritten prior to making an offer. In this method, the buyer applies for the home loan with a “to be determined” property address. Once approved, the offer letter to a seller simply says the buyer is ready to close pending an appraisal and final underwriting approval. This is a quick close and the seller knows the buyer is legitimate. Rodney Shaffer covers this more in-depth with this post.
3. For first time home buyers (and repeat buyers too), look to use Home Ready. This is a conventional loan requiring only a 3% down payment. Some sellers would prefer not accepting an FHA offer, so Home Ready allows for a smaller down payment than FHA (3% vs 3.5%), and is still a conventional loan. Couple this with the “pre-underwrite” option and have even more power behind potential offers. There are conventional loans with only 3% down that are not Home Ready loans, but Home Ready has some advantages over the “standard” 3% down conventional loan that buyers would want to take advantage of if they qualify. Here is a case study on a Home Ready loan.

Yes, it is a tight market when it comes to available homes to purchase. That doesn’t mean buyers should despair. There are ways to help make the offer more attractive to sellers. Looking to buy in the state of Georgia? If so, contact me today. We can start talking about any or all of these potential options.

 

Low housing inventory

It is definitely a seller’s market. The amount of inventory on the market is well below what is considered a balanced market – 6 months of homes is ideal. In the metro Atlanta area, the actual inventory is hovering around 3 months. Atlanta is not alone. Most major cities and almost all of the US faces a shortage of homes.

How did we get here?

I am sure many of you have heard the stat that a couple of hundred thousand jobs need to be created each month to keep up with population growth/new people entering the job market. Well, the same holds true for the housing market. Due to homes becoming dilapidated, burned down, flooded, disaster area, etc. you need new homes built every year to keep up with population growth. That is where one of our inventory problems lie. You see, housing construction has not kept pace with population growth in the U.S. for more than a decade. In order to catch up across the nation, builders will need to construct 7.3 million more homes. Also, home construction per household is near the lowest level in 60 years, John Rappaport, an economist at the Federal Reserve Bank of Kansas City, told the Wall Street Journal.

From 2009-2013/2014, it was a buyer’s market. There were too many homes on the market due to foreclosures and short sales from the housing crash. Now the pendulum swung the other way, and it is a seller’s market. Eventually, it will balance out, but that is of little solace for someone buying a home right now. Is there anything a buyer can do in this market to be more competitive with other buyers?

Yes, there is! Instead of doing a prequalification or pre-approval, buyers can start the loan process prior to being under contract to purchase a home. By going through underwriting early, I can provide my clients with a letter that says they are credit qualified and can close once an acceptable appraisal is back on the home. This can turn into a very quick close for a seller and gives the seller confidence in the buyer’s ability to close on the home loan.

Out there looking for your new home? Are you finding it to be a competitive environment? Give yourself an advantage by going through the underwriting process prior to being under contract. If you are looking to buy in the state of Georgia, contact me today. We can get the loan process started and put you on your way to home ownership.