It’s no secret that home prices in California have seen steady, and in some areas rapid, appreciation in value over the past six years. The question I hear most often today: Is it too late?
No, it’s not.
Although the market is facing new challenges, understanding these challenges from a high-level perspective can make all the difference.
It’s no secret that the extended rise in values is a testament to the basic economic principle of supply and demand. As demand for real estate outstrips the supply of homes for sale, prices increase. However, this pattern of unrelenting demand is beginning to weigh heavily borrowers.
So, will an influx of new supply be buyers saving grace in 2018 and beyond?
In 2016 the state’s housing inventory increased by 88,562 units, while the population rose by 334,578 residents — roughly one new home for every 3.78 new residents, according to data from the Department of Finance.
In addition, according to the California Association of Realtors, median home prices in California are expected to rise another 4.2% in 2018. In other words, it’s not over yet.
On the surface, this data doesn’t necessarily bode well for a buyer pool that’s looking for relief in a market that constantly places them in uber-competitive, multiple offer bidding situations. The multiple offer situations, or “feeding frenzies,” are both a blessing and a curse for homeowners in today’s market. While sellers are experiencing their pick of the litter by sifting through exorbitant offers, borrowers are experiencing sticker shock.
But, when the buyer’s needs outweigh their opinions and judgments about the market, they must accept the options before them and commit to getting into the real estate market.
And that’s the point. Profits are still out there to be had — if, and only if, the timing is right. By timing, I’m referring to how quickly one decides to make the jump, decide to wait or ultimately pass on a deal until the next opportunity is presented. Let’s be very clear: Not everyone is going to be a winner in today’s market.
Commitment, or lack thereof, is a major psychological obstacle facing today’s borrowers. I find this lack of commitment to be justified given the plethora of shifting economic variables, all of which add layers of complexity to the decision making process.
The easiest way to combat this is through preparation.
For one, mortgage interest rates are on the rise. This means that whatever mortgage you take out now is going to cost you more than it would have three, six or 12 months ago. This gradual, upward trend is projected to continue as new Federal Reserve Chairman Jerome Powell (who recently replaced former Chairman Janet Yellen) frequently reiterates the Fed’s plans to hike interest rates at least three times in 2018.
When discussing cost with your mortgage advisor, one should be building in the potential for increasing interest rates. Not doing so would be perverse. After all, rates fluctuate daily. The Fed is telegraphing their next move, and you need to be prepared for inflated borrowing costs that can impact your cash flow — and ultimately diminish your ROI.
Another noteworthy variable — and subsequent challenge — is liquidity. Liquidity concerns are rearing their ugly heads with borrowers who have been preapproved for a specific loan amount. These pre-approval letters often reflect someone’s maximum leverage or maximum borrowing capacity.
So, what happens when you’re preapproved for a $1.25 million house with 20% down, but the $1.25 million house you identified is now fielding offers for $1.3 million or $1.4 million? The answer lies in your liquidity position. In other words, if you can’t increase your loan amount, then you’ll need to increase your down payment.
To combat these concerns, you should keep open lines of communication with your mortgage advisor. Before making an offer, check to confirm how much wiggle room you have in terms loan amount and down payment in the event you find yourself in a bidding war. Ultimately, this will enable you to negotiate effectively and confidently.
Negotiations are the final — and often overlooked — piece of the puzzle.
Conventional wisdom encourages buyers to offer an amount under asking in the hopes of sparking a healthy negotiation. However, some agents today are advising a different approach in which a client presents an aggressive, no-nonsense offer to minimize the level of resistance and expedite the process. Many buyers find this approach intimidating. While there’s a time and place for tactics like this, it should come as a sign of relief that conventional wisdom in the marketplace has not yet been lost.
After all, the listing price is simply a marketing vehicle used to attract a certain amount of attention. Buyers should aim to be pragmatic in their analysis of a home’s value and avoid getting caught up in the hype. In the end, it’s neither the realtor now seller but the buying market that ultimately sets a home’s price.
In other words, your offer should be reflective of what you believe the home to be worth. That philosophy remains steadfast. A good deal is not determined by whether you pay more or less than the original asking price.
Good deals (and profits) come to those who:
• Exhibit patience, and know when to hold firm
• Prepare for the financial unknowns, such as rising interest rates or larger down payments
• Negotiate effectively by making pragmatic decisions rather than emotional ones
Following these footsteps will safeguard the opportunities near you that still have upside. And, make no qualms about it, these opportunities do exist.