Demand is still significant, given years of diminishing inventory, so we haven’t seen any crash in prices.
In most markets, you must pick, as usually one condition sours the other. Take the 2020-2022 housing market, for example. A massive government stimulus package led to 70-year low interest rates and we saw prices rapidly rise and a market where buyers had to compete in bidding wars and assume they were going to pay more than the asking price. Other conditions accompanied that type of extremely hot market, like accepting the condition of the home “as-is,” waiving appraisal contingencies and also competing with a higher than usual percentage of cash buyers. While a sub-3% rate was certainly a massive value to those buyers, we have to remember: It wasn’t all a walk in the park.
Not surprisingly, the last 18 or so months of high inflation and high interest rates have brought a calming effect to home prices. Demand is still significant, given years of diminishing inventory, so we haven’t seen any crash in prices. But we are seeing more price negotiation in the last few months than we have in years. This plays hand-in-hand with interest rates and their ups and downs as we work through this high inflation wind down. The higher the rate, the less demand and the more room for negotiation. This can play out in a variety of benefits to the buyer ranging from price reductions, repairs getting completed, seller concessions toward closing costs and buyer rate buy-downs, willingness to accept contingencies for move-up sales, etc.
Anecdotally I’ve seen some of the best negotiations in the last 30 days than I’ve seen in the last five years with real estate returning to the good old days when one party’s motivations lead to another party’s opportunity. In many of these cases, a seller simply needed to sell and time was of the essence. So, five-figure price reductions or concessions or both were readily agreed to. Now, don’t take this as a universal expectation as each transaction is unique, but it does give some hope to those buyers wanting to make lemonade out of the perceived sour conditions of this market.
There are undoubtedly many would-be buyers and even potential move-up sellers who are convinced that waiting for rates to come down is the best strategy. That will be a correct assumption if we can also make the assumption that this isn’t a broad populace belief. If this is, in fact, a widely shared idea, the chances of prices remaining at current levels in then a rate-reduced market are very slim.
Time will ultimately decide how that bet plays out but my objective below is to illustrate that the softer negotiation market doesn’t mathematically play out all too badly against a potentially lower rate scenario. In fact, there are creative ways to use seller concessions that put a buyer significantly ahead of what would be a lower rate but stiffer negotiation situation.
In the below analysis I’ve made several assumptions including using the current approximate median price point, a 20% down conventional loan and showing comparisons with then a non-reduced price in a slightly lower rate bracket against a reduced price or offered concessions without price reduction.
With the concessions I’ve structured, about $12,200 would go toward what is called a 2-1 Temporary Buydown. This means that on the buyer’s 30-year fixed rate loan that they’ve fully qualified for, they will have an incentive of a 2% lower rate locked for the first 12 months and then a 1% reduced rate for the next 12 months with the mortgage going up to the 30-year fixed rate for the remainder of the full loan term (assuming the buyer has not refinanced within that timeframe). The remaining concessions then contribute toward the buyer’s closing costs, resulting in their reduced out-of-pocket expense.
The savings across 36 months paints a clear picture of opportunity if the negotiation terms come together. While we don’t know exactly how things will play out in this market, I do believe it’s important to many households to consider the passage of time in reference to their housing expense. Unless there’s a strong factual case for a return to 2012 market conditions with low rates and lowered prices, then time will pass with landlords getting richer and zero equity building for those households without the promise of a better deal in the housing market.
I’ve searched for the case of a “better deal” market down the road and simply haven’t found a logical one, but if you have a good case, call me on that as I’m all ears! FBN
By Chris Hallows
For additional information or to schedule an appointment visit ChrisHallows.Benchmark.us or call 928-707-8572. The Flagstaff location is 824 W. Route 66, Suite A-3.
Chris Hallows is the Branch Manager & Sr. Mortgage Advisor of Benchmark Mortgage Flagstaff.
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