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Have you tried buying a home lately? The pandemic days of 20 offers, waiving inspections and closing prices 15% above asking prices may be gone, but major issues remain. I am married to a realtor, so I can assure you I hear about it all the time; it still isn’t easy to buy a home. The new issues are high mortgage rates, low inventory and a tougher approval process. However, if you can navigate all the headwinds, owning a home can still be a terrific long-term investment.
READ: The Pros and Cons of Investing in Real Estate During a Recession
High mortgage rates
During the pandemic, mortgage rates on 30-year mortgages were below 3%. Today, they are around 6%. Variable rates were even lower. That is a significant difference for a first-time homebuyer. In fact, many younger people may not qualify because home prices haven’t come down commensurate with the rise in mortgage rates. This difference in mortgage rates could mean hundreds of dollars more on a monthly basis. As of March 31, nearly two-thirds of primary mortgages had an interest rate below 4%, and about 73% of primary mortgages had fixed rates for 30 years, according to Black Knight data.
No inventory
If homeowners don’t sell, “the movement up the ladder is sort of grinding to a halt,” said Sam Khator, Chief Economist of Freddie Mac. “It is getting much harder for first-time home buyers to jump into the market because of the lack of supply.” According to the National Association of Realtors (NAR), a healthy housing market has between four and six months of supply at current sales rates. The existing home market, which makes up most of the housing market, hit a record low of 1.6 months’ supply in January of 2022 and stood at only 2.6 months’ supply in March of 2023.
Can’t move
People that were lucky enough to lock in a low mortgage rate of under 3% now don’t want to move because they can’t afford to pay double the interest payment. It doesn’t matter if their house is too small, in a bad location, or if aging baby boomers want to downsize. They are stuck in a home that may no longer work or be appropriate for their needs. They may have considered selling last year, but now it doesn’t make any financial sense to do so. Until interest rates drop, they have no choice but to stay where they are.
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Tougher approval process
One nasty side effect of the recent regional banking crisis is that local banks and mortgage companies are under great scrutiny in terms of loans on their books. Buying a home requires more money down, higher credit scores and a longer job history to qualify today. The number of lenders that even want your business may have shrunk, too. Be prepared for approvals to take longer with even more paperwork than before.
Good investment
Is buying a home even a good investment? Odds are if you can stay in your home for more than five years, buy in a good location and don’t overpay, homes can potentially be one of the best investments you can make. Homes have acted as a great inflation hedge as well. If prices for goods and services keep going up, the price of your home should, too.
Baby Boomers who are selling their homes now after living in them for 20-30 years are making a small fortune. Typically, 70% of Americans’ net worth is tied up in their homes and because they are paying down the principal every month, they are building up equity in their homes over time. However, the cost of selling your home can be as high as 6% if you use a realtor, so you want to make sure you really need to move.
The good news is that your mortgage should be tax deductible. If you move but keep your home, you might be able to create a source of rental income and increase your cash flow. You would also be able to offset this rental income with depreciation and other expenses, so you shouldn’t have to pay taxes on the rental income.
READ: Purchasing a “Second Home” as Your First Property
The solution
Hire the best realtor you can find in your local market who might have pocket listings (they know about homes not currently listed but sellers would sell at the right price), have a mortgage lender letter ready showing you are a qualified buyer and finally take advantage of the 2-1 buydown concession. This buydown is a new financing tool because of higher mortgage rates.
Sellers are now subsidizing, in escrow, at the time of closing the first two years of the buyer’s mortgage at a much lower interest rate, 4% instead of 6%. After the two years are up, the mortgage goes back to the original rate. However, if mortgage rates are lower at that time, the buyer can refinance at a more favorable rate. Buyers must make sure they can afford the higher rate in case interest rates don’t come down.
Although buying a home has been difficult historically, artificially low-interest rates in 2020 and 2021 made it an incredibly attractive time to lock in a long-term mortgage. Today that isn’t the case. Higher rates are probably here to stay for the foreseeable future. My first mortgage in 1985 was at 13%, and when I refinanced at 10%, I thought it was as good as it would ever get. From that perspective, a 6% mortgage still looks like a great rate; we were just really spoiled for those two pandemic years.
The American Dream is still buying a home, and over the long term, has been a great creator of wealth in this country. I don’t see why this time in history is any different just because of higher interest rates. It could be much worse, like 1985.
Important Disclosure:
Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information.