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Looking for a New Home? Things to Consider in a Seller’s Market

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February 21, 2017
Homes: Seller's market, first-time homebuyers, and interest rate hikes
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Recently, a Portland, Oregon, couple visited an open house at a reasonably priced home in a good school district. Afterward, they went out for a bite to eat, but on the way, received a call from their Realtor saying the owner had just accepted an all-cash offer from someone else who’d attended the open house at the same time.

So the housing market appears to be looking good right now for owners, but some challenges exist for first-time buyers or people without bulging pocketbooks. Here’s a look at current trends and the potential impact they could have on today’s homebuyers.

What’s Driving the Market?

More jobs, growing demand, and a booming economy helped send home sales recently to their highest level since February 2007. And house and home prices rose more than 5% year over year as of late 2016, according to recent data from the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, which covers some of the largest metropolitan areas.

Mortgage rates now average around 4.2% for a 30-year loan, compared with 3.4% last summer. That means it now costs about $1,200 more a year for a $200,000 loan than it did back in July.

For those considering a home purchase, especially a first home, these are confusing times. Home prices keep rising, as do mortgage rates, making it harder to take that first step. On the other hand, job prospects and salaries have improved for many, and it can feel like there’s pressure to buy quickly and not miss the housing boat (so to speak) before rates and prices climb even higher.

Here are a few things to keep in mind as 2017 moves along.

Mortgage Rates May Not Have Peaked

According to Freddie Mac, the average rate for a 30-year, conventional, fixed-rate mortgage surged in January to around 4.2%, from 3.77% in November. The average commitment rate was the highest since April 2014, when it averaged 4.32%.

The growing economy and the chance of several Federal Reserve interest rate hikes this year could make today’s rates look low by comparison in the not-too-distant future. Fed Chair Janet Yellen said in December 2016 that the Fed plans to raise rates “a few times a year” through 2019, although the most recent Fed statement promised the rate hike pace would be gradual. President Trump’s more aggressive economic policies, including tax cuts and infrastructure spending, also have the potential to lift rates, analysts said.

“An improving economy and strong dollar are helping to push [interest rate] yields higher,” said David Settle, curriculum development manager at Investools®, a TD Ameritrade education affiliate. “You have a president whose stated policies are very strong dollar, and that ties in with high yields, so the cost of borrowing could be more expensive in five years.”

What does that mean for mortgages? The past isn’t necessarily predictive, but the last time 10-year yields were regularly above 3% was in early 2011. At that time, 30-year mortgage rates peaked at nearly 5%. So if the interest rate yield continues to trend higher, mortgage payments could get even more expensive as the year advances.

Low-Priced Inventory Is Sparse

Some in the housing hunt say it’s getting more difficult to find homes to buy. The Portland home seekers mentioned earlier certainly found that out the hard way.

Such stories are surfacing in part because even as the job market has boomed, housing inventory hasn’t kept up with demand. The National Association of Realtors (NAR) calls inventory “alarmingly low,” and that means for every available home, there could be increased competition to buy, making this a true seller’s market.

That’s particularly worrisome for first-time buyers, because lower-priced homes seem especially sparse. In December, pending home sales were up around 10% compared to December 2015 for homes sold at or above $250,000, while homes sold between $100,000 and $250,000 only increased 2.3%, the government said. Meanwhile, sales of homes under $100,000 were down 11.6% compared to a year ago.

"The dismal number of listings in the affordable price range is squeezing prospective first-time buyers the most," said Lawrence Yun, the NAR’s chief economist, in a recent statement. "As a result, young households are missing out on the wealth gains most homeowners have accrued from the 41% cumulative rise in existing home prices since 2011."

Yun added that he hopes the homebuilding industry can “make up for lost ground” this year and add housing to lessen the crunch. Decreased construction-related regulatory burdens, he said, might help.

What Should Buyers Do?

It seems tempting, knowing that mortgage rates could rise further and housing supplies could be tight for a while, to purchase a home as soon as possible, especially if a good one becomes available. But keep in mind that it’s never smart to rush, especially with such an important purchase.

Remember, too, that although housing prices and demand are high now, the economy appears to be in the very mature phase of a long-term growth cycle, meaning things may not remain this way for all that long.

“Odds are we could have some sort of pullback,” Settle said. “We are eight years into a bull market cycle in the economy and stock market, so if you buy your first home in a pretty expensive market, there’s a possibility that you could end up with negative equity in your home and have little flexibility.”

Those who plan to buy and stay a while may not need to worry so much about the price now, but those who don’t plan to stick around longer-term might be better off renting or finding some other alternative for the moment, Settle said.

And while most home buyers are tied down to the region where they or their spouses work or where their children are already in school, if there is flexibility about location, it might be a good idea to look at how housing prices have fared in different regions.

Seattle, Denver, and Portland, Oregon, are among the cities with the highest recent price gains, according to Case-Shiller, but more affordable Midwest cities, including Chicago and Cleveland, have seen smaller recent price gains. Prices haven’t climbed as much lately in Washington, D.C., and New York City, either, but those were two of the most expensive areas to live already, so first-time buyers aren’t likely to find bargains.

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