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Housing Outlook, 2017: Home Prices Keep Climbing

But as mortgage rates ratchet up, homes will be less affordable, tamping down sales and home-price growth in many cities.

Home prices rose at a nice clip in 2016 as buyers, encouraged by job growth and exceptionally low mortgage rates, competed for slim pickings. Prices increased 5.8% nationally, compared with 4% in 2015, according to Clear Capital, a provider of real estate data and analysis. But with home prices out of reach for many first-time buyers, a limited supply of homes for sale and mortgage credit still tight, Kiplinger forecasts that price increases in 2017 will revert to a 4% pace—the historical U.S. average.

A Challenge for Buyers

Millions of homeowners have felt the wealth effect of rising home prices. Some have parlayed rising equity into refis with lower mortgage rates, and some have taken the opportunity to borrow against their home to remodel or pay off higher-rate debt. Others can now sell their home at a price high enough to pay off their mortgage and trade up to a new home. Still others are using the extra equity to qualify for a reverse mortgage to supplement retirement income.

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If you plan to buy this year, be ready to stretch your budget or compromise on the size and location of a home, says Lawrence Yun, chief economist at the NAR. Find out how much house you can really afford by getting prequalified by a lender. That will limit your search and reassure sellers that you can close the deal. The more information the lender requires beyond just a credit score, the more reliable the preapproval. You can still shop later for the best rate and cheapest closing costs.

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If you make an offer on a home within the first few days it’s on the market and your agent can show you that recent comparable sales support the asking price, bid at or close to that price. If the sellers’ agent reveals that you’re competing with other buyers, you may have to bid more than the asking price. You can require sellers to respond to your offer within, say, 24 hours, so they can’t hold out for better offers, says Dawn Rae, an exclusive buyer’s agent in St. Petersburg, Fla. Also, to make the most attractive offer, include the largest down payment and earnest-money deposit you can muster, usually 1% to 3% of the agreed-upon purchase price.

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Most buyers include contingencies for financing and a home inspection, but your offer will be much more attractive if you’re able to make compromises. That’s what Mary Chris and Wayne Bailey did to snag a house that got away the first time. In 2014, the couple started to plan their move from Newton, Mass., to Florida after they retired. They considered buying a 1,820-square-foot home in St. Pete Beach, with four bedrooms, two bathrooms and a pool, and an easy walk to the Gulf of Mexico. It was listed for $350,000, but they weren’t convinced that it was right for them, and it sold to someone else for $348,000. By the fall of 2016, the same house was back on the market, listed for $385,000. The Baileys decided to go for it. They knew sales had picked up and the bargains were gone, and they fretted that they wouldn’t find anything that was as good a fit. “If we dithered, the prices would just continue to escalate,” says Mary Chris. “We decided to make a strong offer and get it done.”

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The Baileys didn’t make their offer contingent on the sale of their home in Massachusetts. And although they asked for a home inspection, they agreed with the seller not to renegotiate the purchase price afterward. The seller accepted their offer immediately. The Baileys listed their home in Newton for sale in the summer of 2016. They rejected several offers for less than their asking price but accepted one for about 12.5% less in December.

The couple are pleased with their purchase in Florida. They love the location, and they plan to fix up the house. “It will be quite charming,” says Mary Chris.

Other ways to make your offer more appealing to sellers: Include a shorter inspection period, say 10 days instead of 15, so the sellers will know as soon as possible whether there are any issues they must address. Or, depending on your state’s real estate law, you may agree to an “as is” contract; in Florida, that means you have the right to an inspection and can cancel the contract within the inspection period if it turns up unacceptable problems.

If you’re on the sell side and you live in a city with rising home prices, few homes for sale and a rapid turnover, you have the advantage over buyers—in theory. But price a home too high and it’s likely to sell more slowly and ultimately for less. Plus, if the sale price doesn’t match the appraised value required to get a mortgage, buyers will balk about forking over the cash to cover the difference.

TAKE OUR QUIZ: How Smart of a Home Seller Are You?

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