If you are thinking of buying a home, the 2023 housing market promises to be especially challenging to navigate. Here are 3 reasons why, and how you should respond. 1. Rising Rates: A buyer’s interest rate is a major factor in which home they can afford. For every percent that mortgage interest rates go up, buying power diminishes roughly 10%. Average rates have risen about 2% in the last year which shakes out to a 20% reduction in buying power for home buyers who opted to “wait it out” another year. Looking ahead, while rates have trended down in recent weeks, all bets are off on what they will do next. The waiting game could cost you even more should they bounce back to 7% or higher. How should you respond? Each buyer’s strategy should be customized to their specific personal and financial situation. However, a few general rules apply. First, it’s important to realize that timing the market is for gamblers; not you. Your personal circumstances and financial scenario should be the primary indicators of whether it’s your time to buy or wait. Second, if current rates are significantly impacting your buying power, consider paying off high-interest debt. Your existing car payments, credit card balances, student loans, and other debts eat into your allowable borrow limits – also called Debt to Income (DTI) in lender speak. The general rule is that you cannot be leveraged (i.e. borrow) more than 40-50% of your gross income. Since DTI dictates how much you can borrow, paying off these debts allows more room for your future home purchase. Third, focus on improving your credit score since it is one of the many factors that impacts what your mortgage interest rate will be. Essentially, the more attractive you look to financial institutions, the better they try to make themselves look to you through offering excellent loan products, terms, and interest rates. Keep in mind, the credit score you see on popular, free apps is not what lenders use. That’s why I advise my clients to connect with their real estate team 6-18 months before they buy. 2. Rising Home Values: Despite the swirling rumors last year of a 2008-style housing crash, the real estate market nationally is holding strong. But since real estate is micro-focused, let’s use the Central Virginia area as an example. Median home values in the Central Virginia MLS (CVRMLS) hovered around $340,000 this time last year. While there was a slight dip in values late last year (due in part to higher interest rates), the median sales price in February rebounded to $350,000 - a 3% increase year-over-year (YoY) in line with historical averages. In other words, the real estate market last year continued to do what it does - provide a great rate of return for homeowners. How should you respond? Since the 2023 housing market has thus far dashed all hopes of home prices trending down this year, consider a few things. First, last year’s home appreciation means that a home that would have cost you $350,000 last year may now cost you $360,000 or more. Furthermore, the combined impact of rising home values, coupled with the increase in mortgage interest rates, might diminish your buying power even more. If the cost to own a home has increased 20% a month due to higher mortgage interest rates, the reality is that your new max purchase price may only be $315,000 despite like-kind homes now being listed at $360,000. Adjusting your list of “need-to-haves” may be necessary to put yourself in a more affordable bracket. Second, many buyers will need to consider offering more than the seller’s asking price this spring. While at first it may seem counter intuitive to pay more for an asset than it’s worth today, it can make good financial sense. Locking in a fixed mortgage payment every month stops the bleeding that rising rents inflict on your household budget. By paying a little more now, homebuyers could achieve big savings in the short-term while building up equity and wealth through real estate long-term. Third, if you are a first-time home buyer, investigate the benefits down payment assistance (DPA) programs offer. DPA’s may provide a path for you to go over asking without ponying up your cash to do it. 3. Low Inventory: Inventory was declining even before COVID hurt supply chains and inflation hit new construction. A balanced real estate market is said to be one with a 6-month supply of inventory. Simply put, when a home takes less than 6 months to sell, it’s a seller’s market. When a home takes longer than 6 months to sell, it’s a buyer’s market. In the Central Virginia MLS region, our inventory levels were at a 1.2-month supply at the end of February 2023. Clearly the seller’s market plans on sticking around a little longer. How should you respond? Strategically adjust how you look at real estate. First, while it’s always a good idea to prioritize properties that historically provide good resale potential, it may also be worth considering purchasing a home with great rental potential - especially if you are a first-time home buyer that can use down payment assistance (DPA) programs to limit your debt exposure and keep cash on hand for another primary residence one day. Second, buying a home below your means - but with great resale potential in the short-term (think 2-5 years) - can provide a steppingstone to your “forever home”. Many homes have strong appreciation potential in their current state. Some present the opportunity for a big ROI (return on investment) with a little TLC. Either way, delayed gratification may be the ticket to building equity in a home today that offers better financial footing to purchase the bigger one down the road. Third, if you are an existing homeowner, consider staying in your home a little longer if you can make it meet your needs. Learn more about how to make a space feel larger. While it does feel like the real estate market this spring may be delivering another one-two punch to buyers, fighting back with a winning strategy may be the ticket to a successful home purchase this year and building wealth in real estate over the long haul. Never want to miss a post? For more useful real estate tips & tricks, subscribe to our mailing list or contact us with any real estate questions.
Authored by: Kat Medaries, REALTOR® MT Realty Advisors of Long & Foster Real Estate Village of Midlothian Sales, 1100 Jefferson Green Circle, Midlothian, VA 23113 Licensed to sell in the Commonwealth of VA | Equal Housing Opportunity For informational purposes only. Not intended as legal, financial or credit counseling advice. Seek the assistance of a professional.
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