Smart Moves

An Ohio couple in their late 20s -- a nurse and her lawyer husband -- were too intimidated by the overheated real estate market to make any bids during the pandemic. But despite soaring interest rates, they now see reasons for optimism.

“As first-time buyers we have a flexible timeline on when to move. Also, we’re witnessing more motivated sellers willing to accept an offer contingent on a home inspection, which is key for us,” says the lawyer.

Though a large number of would-be purchasers are now sitting on the sidelines because higher mortgage rates have cost them buying power, others with ample down payment money are pressing forward with their plans.

Indeed, novice buyers are now better positioned to make a purchase in many cases than are repeat buyers, says Manny Garcia, a population scientist for Zillow, the national real estate company.

“First-time buyers now appear to be making relative gains as high mortgage interest rates disproportionately encourage homeowners to stay put,” Garcia says.

In spite of affordability challenges, first-time buyers now represent 45% of all buyers, up from 37% last year.

“While rising mortgage rates are hurting affordability for all buyers, first-time buyers may be less deterred by higher rates because they’re comparing a monthly mortgage payment with what they’re paying in rent,” Garcia says.

George Ratiu, a senior economist for Realtor.com, the home listing firm, says wannabe homeowners are heartened by the relative increase in available properties due to a “rebalancing” of the market in buyers’ favor.

“Homebuyers have more for-sale homes to choose from compared to this time last year, as inventory has been improving steadily in recent weeks,” Ratiu says. This means buyers have more time to find good deals and think through purchasing options without missing out.

Here are a few pointers for first timers:

-- Seek out truly willing sellers.

The loss of a job is one common reason why homeowners must sell; divorce is another. Also, an increasing number of older baby boomers must sell to cover living costs in retirement.

Understandably, many potential home sellers with low-rate mortgages are reluctant to move if it means financing their next property with a higher-rate home loan. Yet in all markets there are always some “mandatory sellers” who have no alternative but to move, says Stephanie Vitacco, a real estate broker with Equity Union in Los Angeles.

As a potential first-time buyer, you might feel awkward seeking out owners who are under pressure to sell. But there’s nothing unethical about doing this, says Tom Early, a broker and past president of the National Association of Exclusive Buyer Agents (naeba.org).

How can you identify those who are highly motivated to sell? Early suggests you ask your real estate agent to draw up a list of properties in your favored area that have been on the market for an extended period. Also, he recommends you go to the neighborhood where you’d like to buy and talk informally to residents.

“Tell the local residents how much you appreciate their neighborhood and they’ll be more likely to open up with you as to which houses could soon hit the Multiple Listing Service,” Early says.

-- Invest time in researching the neighborhoods you’re targeting.

Early says many novice homebuyers let emotion dominate their thinking about where to live. But he strongly recommends that you also factor in some statistical measures before finalizing your neighborhood choice. This should increase your odds of choosing an area where prices are likely to rise in the future.

One way to help identify highly motivated sellers is by crunching numbers. Ask your real estate agent to determine the average “days on market” (from list to sale) for properties in the area you’ve chosen. Then look for homes in that price range that have been sitting unsold for a longer-than-average period.

Before crafting an offer on the home of your choice, Early suggests you also examine another set of numbers: the average list-to-sale price differential. If you note that most properties have recently fetched 90% of their list price, you might consider a first bid at a 10% discount off what’s being asked -- assuming your research shows this is warranted, he says.

-- Resist the urge to critique any home you’re considering.

Suppose you’re seriously considering a certain home. However, you’ve seen a few minor flaws in the floor plan, such as an inconveniently located laundry room and the absence of a first-floor bathroom.

In an attempt to strengthen your bargaining position, should you write a letter highlighting these drawbacks and also noting the owners’ poor taste in choosing to paint their kitchen sunshine yellow? Absolutely not, says Sid Davis, the broker-author of “A Survival Guide for Buying a Home.”

“It’s almost universally true that homeowners have pride in their properties and would be defensive about a strong critique,” he says.

Of course, you and your home inspector should be forthright in itemizing repairs that need to be done to bring the property up to standard, such as roof repairs or the replacement of a nonfunctional water heater. But the inspector should do so in a courteous manner that doesn’t insult the owners.

“Remember, it’s better to be gently assertive than obnoxious,” Davis says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)

A few months ago, a 39-year-old nurse practitioner from Rhode Island got a great new job offer in Boston. But there’s one major catch holding up her move: She and her husband -- the parents of two school-age kids -- are struggling to find an affordable house in their new community.

“This family doesn’t need a particularly fancy house or a lot of space, just a neighborhood with strong schools. But where they’re looking, most available homes are ‘fixer-uppers’ with serious issues,” says Rich Rosa, the real estate agent representing the couple.

The other issue is that since the couple’s search began, mortgage rates have steadily risen, which has dramatically reduced their buying power.

“They’ve lost more than $100,000 in borrowing capacity,” Rosa says.

Housing specialists like Rosa, who advocate for homebuyers, say an increasing number of purchasers are so gloomy about market conditions that they’ve abandoned their search altogether.

“Mortgage rates well over 6% are spooking homebuyers,” says Taylor Marr, deputy chief economist at Redfin, the national real estate brokerage.

Indeed, “housing affordability is at a more than 10-year low,” says Jerry Konter, chairman of the National Association of Home Builders (nahb.org).

But rather than pulling back entirely from the market, real estate specialists suggest that motivated buyers regroup.

“Even if you’re frustrated and upset, we always tell people to stay the course. You never know when the right house will pop up, and you want to be ready,” says Rich Harty, who with his brother operates a small boutique real estate company in Highland Park, Illinois.

In a rapidly changing real estate market like the current one, Harty stresses the need for advanced planning and the cautious selection of both property and neighborhood.

“You don’t have to stay in high gear all the time. But you should be ready to move forward when the right opportunity presents itself. One positive for buyers in the current market is that there are many fewer bidding wars. So you have more time to evaluate your options,” Harty says.

Here are a few pointers for buyers:

-- Plan ahead before zeroing in on a neighborhood.

It’s not uncommon for buyers to let emotion dominate their decision on where to live, says Michael Knight, a financial advisor affiliated with the National Association of Personal Financial Advisors (napfa.org).

“You’ve got to do plenty of research," Knight says. "Have an informal talk with a few knowledgeable real estate agents in any area you’re considering. Ask them lots of hard questions before making your choice of the best possible community,” he says.

Which neighborhoods are most likely to hold or gain value in the future? Knight says top-quality public schools are critical, particularly now that private schools are out of reach financially for many families.

Access to quality public transit is also high on the list.

When talking to real estate agents, ask them to show you the neighborhood’s amenities on a map. Also, ask them to assemble data for you on sales trends in the community -- including the median time it takes to sell a home there.

-- Seek sellers who are motivated to move.

These days it’s still very rare for owners to face foreclosure -- yet it’s possible to find some who are highly motivated to move.

As a would-be buyer, you may feel uncomfortable about seeking out owners who must sell quickly due to the loss of a job or mortgage payments that are too high for their income. But Michael Crowley, a broker in Spokane, Washington, says you need not feel guilty about doing so.

“You could actually be doing the sellers a favor in such a case. Even if you buy at a discount off the current market value, the owners will likely do better selling to you than they would if the bank took away the house and ruined their credit in the process,” says Crowley, a past president of the National Association of Exclusive Buyer Agents (naeba.org).

How can you identify highly motivated sellers? Obviously, your agent can often find them through the Multiple Listing Service. An additional approach is to walk around the neighborhood on a weekend, striking up informal conversations with residents there.

“On a Saturday or Sunday, you will likely encounter residents who are out walking their dogs or taking their kids to the park. If you’re friendly and express your admiration for their area, they’ll likely chat openly with you and tell you neighbors they know who intend to move soon and the reasons why,” Crowley says.

-- Evaluate property values in the area where you wish to live.

Once you’ve chosen a neighborhood where property values are solid and you’ve found your dream home there, you’ll want to carefully assess its true current value before formulating a bid.

“With warnings about recession in the near term, it’s vitally important you obtain a true ‘opinion of value’ to ensure your bid is at the right level,” Crowley says.

To help develop a realistic estimate of the worth of the home you wish to buy, ask your agent to provide you with statistics on properties that have sold in recent weeks. Make sure this analysis takes into account any likely “distress sales” that have occurred lately, which often come at a sacrificial price for the sellers.

“Even if we face an economic downturn, it’s unlikely that prices will plummet in the coming years. Still, it’s a very good idea to resist overpaying, even if you love the house you’ve found,” Crowley says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)

The unprecedented demand for detached suburban houses let home sellers reign supreme throughout the pandemic. This situation was painful for buyers, who were compelled to pay well above asking price to compete with rival purchasers.

But with soaring mortgage rates and economic uncertainty now the norm, sellers are no longer calling the shots.

“Sellers can no longer assume they’ll have long lines of eager buyers bidding for their property. They can’t just throw a place on the market in any condition and expect the cash to roll in,” says Tom Early, an independent real estate broker in Ohio.

Granted, there’s still an overall shortage of appealing properties relative to the demand for homes among first-time purchasers. But higher mortgage rates have greatly reduced buying power, putting strict limits on how much purchasers can offer.

“Buyers are scarcer, which gives the active ones a whole lot more sway in negotiations,” says Early, who’s worked in real estate since 1983.

“After the frantic rush for real estate over the past two years, buyers are finally seeing a calmer market. Those still able to afford homeownership are quickly regaining lost leverage,” says Nicole Bachaud, a senior economist for Zillow, the national real estate firm.

Owners have reacted differently to the quickly changing real estate market. Some, with no urgency to move, have withdrawn their listings, if only temporarily. Others have begun reducing their prices. Still others are clinging to above-market prices against the advice of housing experts.

“Sellers should anticipate that buyers are unwilling or unable to pay a price similar to what their neighbor’s home sold for a month ago,” says Taylor Marr, an economist for Redfin, a large real estate brokerage.

Though the rise in mortgage rates is disconcerting for buyers, the decline of seller supremacy could be a positive for people saving now for a purchase in 2023.

Here are a few pointers:

-- Set up an in-person interview with a mortgage lender.

Financial studies show that people save more if they have a concrete objective in mind. But how can you make your home-buying goal more tangible?

Gerri Detweiler, a personal finance expert and author, says one way to reorder your priorities is to visit a mortgage lender to determine how much you can afford to spend for a property and how large a down payment you’ll need.

Once you’ve established your borrowing ceiling, Detweiler recommends you embark on a very limited property search by stopping by a few open houses in the neighborhood you’ve targeted.

“Getting a quick overview of the market can prove highly motivating to help you save,” she says.

-- Review your current spending patterns.

Celia Brugge, a Tennessee-based financial planner, says Americans slip easily into temptation when it comes to discretionary purchases.

“It’s easy to fall into impulse purchases for clothing, shoes or electronics. And eating out is a huge category that can easily consume $500 a month or more,” says Brugge, who’s affiliated with the National Association of Personal Financial Advisors (napfa.org).

Brugge urges anyone trying to embark on a savings program for the purchase of a home, or any other major financial goal, to first go through what she calls “the boot camp period.”

During this initial phase, she suggests you do an inventory of where your money has gone during a recent three- to 12-month period. You can do this by reviewing the entries on your checking or credit card statements and then summarizing your outlays.

Another handy tool for tracking spending that Brugge recommends is Mint, available though the website of a company called Intuit (mint.intuit.com). Through its software, Mint lets you expedite the budgeting process by easily identifying and organizing your transactions.

Once you know where your money is going, it’s time to start making cuts in low-priority categories.

To stay on track and accountable for their spending, Brugge advises couples to set regular times -- as often as weekly -- to report to each other on their recent spending.

-- Assess your transportation outlays.

Detweiler says many people take their need for a late-model vehicle as a given. But to save for a home of your own, you may need to downscale your expectations in this category.

“Owning a new car is not a necessity, though some people treat it as one. And it can be a lot more costly to the budget than people think,” says Detweiler, who drives a car she bought used.

In an ideal world, those with a big savings goal will consider selling a vehicle they own and commuting by rail or bus until their goal is met. Another option is to carpool with a colleague from work. Of course, working from home can save a bundle on commuting costs.

-- Try to reduce your insurance costs.

Insurance brokers and salespeople can be persuasive when encouraging clients to maximize their coverage. But Detweiler says would-be buyers should examine their spending in this domain. For instance, you might find a way to reduce the cost of your car insurance policy without compromising your core coverage.

“Shop around for insurance and also look into how much you could save by increasing your deductibles,” she says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)