The peak season for real estate sales typically hits its stride from April to June, and this year there’s more pent-up demand than usual. Even with mortgage rates dancing around the 7% mark, compared to two years ago when lenders offered 3% home loans, buyers tired of sitting on the sidelines and waiting for interest rates to settle are ready to make a move. At the same time, sellers used to 3.5% mortgages can afford to sit tight and wait to get their ideal price.
If you want to make a move this spring or summer, now is the time to sharpen your pencil. The combination of elevated mortgage rates, sky-high home prices and record-low housing supply are the thorns among the roses for home buyers this spring — and possibly for the foreseeable future. Hotter-than-expected inflation and robust payroll figures could prop up mortgage rates.
In the face of these obstacles, Fannie Mae forecasts offer a glimmer of hope, predicting an uptick in home sales transactions compared to last year as impatient buyers and sellers adjust to the reality of mortgage rates between 6% and 7%. It’s important to remember that becoming emotionally attached to a transaction can lead to financial loss. It’s easy to feel discouraged or frustrated by factors beyond your control, which underscores the importance of managing what you can.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here are the essential insights that will help you navigate the potentially tumultuous housing market this spring and early summer.
Buying: First-timers, investors and flippers
Given the uncertainty surrounding interest rates and home prices, the most pressing question for most buyers is: Is now the right time to buy?
Maybe. Maybe not. But it doesn’t hurt to explore your options. Dave Rowan, president of Rowan Financial, a fee-only financial adviser and housing expert who’s part of the Wealthramp network, tells clients, “It may not always be the best time to buy, but it’s always time to look, whether you’re a first-time buyer or an investor.”
For first-time buyers and investors, he stresses the importance of getting educated on how to purchase your first home or investment property. In addition to considering home prices and mortgage rates, Rowan advises paying close attention to four additional expenses: taxes, insurance, maintenance and utilities.
Taxes and insurance can vary significantly by location, and it’s crucial to be aware of potential insurability crises in areas like Florida and California. A useful guideline for annual maintenance costs is 0.5% to 0.6% of the home’s purchase price. However, for older properties, such as buildings over 150 years old, annual maintenance expenses can rise to 1% to 1.5%. Utilities, on the other hand, can be estimated more straightforwardly based on the property’s square footage.
You should also identify your buyer profile and any associated advantages. For example, if you’re a veteran, you can benefit from the VA home loan program, which typically offers no down payment requirement, competitively low interest rates and no need for private mortgage insurance (PMI).
However, with housing prices tripling in absolute terms since 2000 and more than doubling when adjusted for inflation, finding a “forever home” on the first try has become increasingly challenging.
Rowan says a potential solution for first-time buyers or those eager to delve into real estate investing is “home hacking.” This approach involves purchasing a property, residing in part of it and renting out the other parts. One of the significant benefits is the ability as an occupant to qualify for an FHA loan with as little as 3% down. In areas with high rental costs, the financials could be more favorable than renting.
Basically, it allows you to occupy the property for a few years, make improvements, then rent it out entirely and move on to your next home hack, effectively becoming a serial investor. “It’s a win-win from the standpoint of getting into a home earlier than you might otherwise, reducing your monthly cash outlay compared to renting and starting your path as a real estate investor,” Rowan explains.
Look for deals elsewhere
Investors should also look beyond the MLS for deals by collaborating with national or local wholesalers or forming connections with banks eager to offload properties, perhaps through a short sale rather than the foreclosure process.
While house flipping remains a favored investment strategy, especially at the market’s bottom, current conditions — high prices and slowing price acceleration — make it an inopportune time to start flipping. Despite the FOMO induced by social media and TV shows, Rowan highlights a crucial consideration: Success in these ventures often depicted on HGTV is typically due to one partner having construction expertise and the other design skills, allowing them to eliminate these costs from their budget.
From an investment perspective, it’s also important to recognize real estate returns have historically lagged behind the stock market. Although real estate can present lucrative opportunities, it shouldn’t be regarded as a guaranteed long-term, safe investment.
When considering a purchase, affordability is key to avoid becoming house-poor. Keep in mind, in real estate you make your profit when you buy. The true profit in real estate comes from purchasing at the right price, not from selling.
Selling: Market drivers
What about selling in this market?
Many homeowners, having secured ultra-low interest rates or hesitant to sell amidst soaring home prices, find themselves in a tight market where demand consistently outstrips supply.
That means if you’re a seller, you're mostly in the driver’s seat.
But even for those prepared to sell, such as retirees looking to relocate or downsize, the era of effortlessly attracting buyers with mere listings, reminiscent of times with rock-bottom rates, has passed. Despite the low supply, high rates and home prices have led to a more cautious and discerning buyer base.
Strategic thinking is essential for sellers in this environment. Rowan suggests “partnering with a Realtor who has in-depth knowledge of your local market (and neighborhood) and understands the specifics of your home and the type of buyer it will appeal to.” He emphasizes “the importance of pricing the home correctly — not too high to scare buyers away, yet not so low that it undervalues the property.”
A significant trend that sellers, particularly on the East Coast, should note is the burgeoning demand for historical homes. Buyers are seeking properties with character and are willing to pay for that unique charm.
Different expectations for historical homes
Rowan highlights a crucial distinction in preparing homes for sale: While newer constructions must be updated, immaculate and well-maintained, historical homes are treated differently. They should be presentable and show well, but it’s not necessary to fix everything, as they do not require the same level of perfection for listing.
This spring and early summer real estate market, whether as a buyer or a seller, requires a nuanced understanding of current trends, strategic planning and a bit of savvy.
The main thing to keep in mind is that the right time to buy or sell is not dictated by the market alone, but by your personal circumstances and the thoroughness of your preparation. Real estate is one very important financial asset. Just keep in mind how it fits into your larger financial picture. It may be smart to collaborate with a fee-only financial adviser to get unbiased advice and guidance on how your next real estate transaction impacts your whole financial life.
Related Content
- Five Tips for Nabbing Your Dream Home in a Tough Market
- Find the Best 30-Year Mortgage Rates
- 20 Things Home Buyers Will Hate About Your House
- Retirement Tips for 2024 From Five Retirement Experts
- Five Things I Wish I’d Known Before I Retired
-
Don't Have an Estate Plan? Six Things That Could Go Very WrongBad things can happen when you're unprepared, such as big-time taxes and family turmoil. Generational planning can help protect the people you love. Here's some expert advice to help you out.
-
A Financial Planner's Tips for Teaching Kids About Wealth Without Creating EntitlementIf your kids are likely to inherit and you're worried about how they'll manage, start talking about money and teaching common-sense habits as soon as you can.
-
The $1 Million Retirement Question: Are You Being Tax-Smart About Your Pension?A financial planner raises some key considerations for navigating retirement with a pension and recommends four strategies.
-
The Costly Mistake You Might Be Making With Your First 401(k)Most people start contributing to their retirement savings later in life. That could be a big-time mistake, literally costing you thousands of dollars.
-
An Estate Planning Attorney's Guide to the Importance of POAsRegularly updating your financial and health care power of attorney documents ensures they reflect your current intentions and circumstances. It's also important to clearly communicate your wishes to your chosen agents.
-
Divorce and Your Home: An Expert's Guide to Avoiding a Tax BombYour home is probably your biggest asset, so if you're getting a divorce, the stakes are high. Keep it? Sell it? You need to have a good plan in place for how to handle it.
-
Fewer Agents, Fewer Audits: How IRS Staff Cuts Are Changing EnforcementSignificant reductions in the IRS workforce appear to be increasing the number of 'no change' audit closures. The shift could potentially increase the overall tax gap — the difference between taxes that should have been paid and those that were.
-
What if You Could Increase Your Retirement Income by 50% to 75%? Here's HowCombining IRA investments, lifetime income annuities and a HECM into one plan could significantly increase your retirement income and liquid savings compared to traditional planning.
