Barry Ritholtz: Has there ever been a worse time to buy a house in America? Rates are at their highest levels in more than 20 years, inventory is at record lows, competition has been intense. Home purchases are the most expensive they’ve been relative to renting in a couple of generations.
In the face of this mess, what’s a potential home buyer to do?
As it turns out, there are some ways you can make the process of buying a home better or at least less bad. I’m barry Ritholtz and on today’s edition of At the Money, we’re going to discuss how to buy a home in today’s market. To help us unpack all of this let’s bring in Jonathan Miller of real estate appraisal and data firm Miller Samuel for the past 37 years Jonathan Miller’s monthly and quarterly housing sales data and reports are must read in the industry and have made him the most quoted man in real estate Jonathan Miller welcome to add the money Let’s just jump in to the first question how challenging is it to buy a house today in 2023?
Jonathan Miller: It’s incredibly difficult — not only have prices not really come down given the spike in mortgage rates because inventory is absent from the equation buyers don’t have a lot of choices. As a result what we’re seeing just over the last year as rates have been rising bidding wars have been rising [Even as rates have gone up?] Because the number one thing to look at really as a metric is the supply inventory and inventory that the rates began rising with the with the Fed pivot a year and a half ago at one of the steepest climbs in four decades that it’s really challenging the consumer so
Barry Ritholtz: Before we get into even more specific data and details let’s just talk a little bit about psychology if you’re a buyer how should you approach the idea of purchasing a house from a psychological perspective where should your head be at?
Jonathan Miller: I think the most important thing is to look at this as a long term transaction. I always look at housing as a long term asset; there have been various cycles where people were thinking of it as a stock and it’s just not that liquid so you know you buy it you hold it the average person you know the numbers are kind of ranging the average person stays in a home 7 to 10 years on average. You’re really looking at it from a much longer window and within that window markets trend up and down. There’s various cycles reasons I think that’s one of the most important things to look at to treat the asset as it actually is.
Barry Ritholtz: So you and I have discussed what a buyer should pay for a home and you say something that’s kind of counterintuitive — and I’m guessing it’s based on that hey we’re going to be here for 10 years or longer — if you pay a couple of percent over what you think is a reasonable price in the long run it doesn’t matter does it?
Jonathan Miller: It really doesn’t because you have to remember what the asset is it is something that you’re going to use and live in and occupy every day as an owner-occupied house.
In my circumstance a little over a year ago I actually bought a house for 36% of the list price but when I do the details I probably only paid 10 to 15 percent above and who cares so I’m gonna be there for a long time it’s exactly what we wanted. I don’t look at it as that kind of investment that you would track closely and we beat 30 people in a bidding war that’s
Barry Ritholtz: That’s unbelievable. So let’s talk a little bit about bidding war what sort of advice do you have for someone that finds that house they really love? You don’t wanna pay double what it’s worth you’ll never get your money out of it at least not in a reasonable time right — but what are the guidelines for when it’s you against a couple of dozen people and everybody wants this house on this block in this neighborhood?
Jonathan Miller: Well I think human beings need reinforcement so you you probably are gonna have to lose two or three bidding wars before you realize the condition of the market. The condition of the market is that there is a chronic inventory shortage in nearly every housing market in America.
Barry Ritholtz: Let’s talk about that for a second and again we you and I have talked about we’ve underbuilt single family homes in the United states for 15 years following the financial crisis — then you have this massive surge of second and third home buyers during the lockdown of the pandemic; now we have this the number of 60% of homeowners have a mortgage of 4% or less; 80% of homeowners with a mortgage have a mortgage of 5% or less. That creates massive lock in — no one wants to go right how long can this inventory shortfall last well?
Jonathan Miller: I look at there’s two solutions for they’re not very once not realistic and one isn’t good the the the first idea is that rates fall back down and when you talking to many homeowners in our appraisal business there is a broad expectation that rates after going from just below 3 to almost 8% that they’re going to settle back down and I don’t disagree with that except they’re not going to settle back down to 3 or 4% [5 or 6 if we’re lucky]
It’s probably high fives low sixes given that unemployment is still very low the economy is still vibrant so I wouldn’t expect a massive rate cut it would be my just using logic no I insight understanding so when you have rates drop each time the rates serve incrementally drop homeowners become sellers and that adds a little bit of inventory but not enough but every little bit helps.
The other thing to look at would be some adverse negative event that would cause The Fed to cut rates more sharply and that would be a recession of course we’ve been talking about a recession coming in six months the last two years so you know that seems uncertain the problem is then you get job loss right and we have job loss that’s less people that will buy homes.
Barry Ritholtz: We’ve been talking about mortgages and mortgage rates I’ve always been shocked whenever I looked at your reports at the rise of the cash purchaser — this used to be a mostly high end thing; now it seems to be working its way down the economic strata of homes tell us about what’s going on with all cash purchases.
Jonathan Miller: Cash has been the method of purchase that’s gotten a lot more popular in the last a couple of years. I don’t want to give the impression that hey everybody’s just paying cash, who needs a mortgage? The way to think of cash is the higher you go in price the higher the probability the purchase is cash transactions so 10 million and up those are all 80 to 90% cash/
Barry Ritholtz: What about 5 million and up?
Jonathan Miller: It is about the same. People that are at the high end that are more susceptible to higher rates are generally the two to 5 million range because those people aren’t paying cash they’re getting financing and that market has been much more challenged the lower you go in price the more dependent you are on a mortgage. One quick example is in Manhattan we have a situation this year where year over year sales fell about 30% but sales for cash buyers fell 20% and for finance buyers fell 40 or higher percent so it has more of an impact but cash doesn’t bypass the challenge of high rates.
Barry Ritholtz: I used to think of $4 or $5,000,000 as like a big spectacular house on the water cash purchased by a very wealthy individual you’re implying that 2 to 5 is now no longer the very rich that’s the upper class, upper middle class? What is that range of homes?
Jonathan Miller: Upper middle class or lower upper class is really 2:00 to 5:00 and they tend to be dependent on financing we have a market in the New York region known as the Hamptons and we call it “The Hamptons Middle” $2 to 5,000,000 that are higher versus 1,000,000 or 2 million or lower the Hamptons middle is much the most challenged part of the market because those buyers are much more impacted by the spike in rates over the last year and a half than the five and over which are more cash.
Barry Ritholtz: What about working with the real estate agent — if you’re a buyer how useful are real estate agents?
Jonathan Miller: I think one of the things they don’t get credit for — and I know this from personal experience — quite often is they provide a buffer between the parties. Many people when confronted with the opposition there’s no buffer they’re intimidated they end up may end up not doing well in the negotiation that’s not everybody but at least in my experience that’s that’s the service that is provided to have a third party to insulate you from direct negotiation.
Barry Ritholtz: What about those negotiated offers what we need to know about the way to make an offer that’s most likely to to resonate with the seller?
Jonathan Miller: I think a lot of people wouldn’t ask this question they think it’s all about the price “Hey, you know the higher the price you offer, but it really is the terms. It’s how much finance, what is your financial situation, how likely are you to be able to close at this price, is there gonna be a problem? I’m not saying that that you know price is an important but it’s probably parallel to the terms of the deal itself you know if if someone comes in and makes an astronomical offer you know the sellers you know if that doesn’t close the momentum of the house on market and it’s all lost cause the transaction starts over so really your focus is presenting yourself as someone that can afford it and that brings in whether you’re approved for financing
Barry Ritholtz: Do that in advance and come with a plain offer with a lot of not a lot of contingencies.
Jonathan Miller: In this market you know it’s pretty common now to have financing contingencies a year and a half ago that was nonexistent. There were no there was no hair on the deal so to speak but you know less is more always when you’re negotiating I think in this market buyers think that they have more leverage over the seller than they actually have so for example in the market the suburbs that surround Manhattan the share of closings just in the third quarter that were bidding wars was 40 to 50% {Wow!] Half the sales nearly half the sales are selling above the asking price. As a buyer you don’t have a lot of strength over the seller at this current time because nationally we’re in this incredible like inventory situation where inventory is devoid of of being present on the market.
Barry Ritholtz: We’ve been talking about existing homes what about new construction either buying a plot of land and building or working with a spec builder who’s in the midst of constructing a house. How do we navigate those circumstances as buyers?
Jonathan Miller: It’s interesting, because existing inventory is so low that many markets have a disproportionately high share of new construction — even though it’s still a small amount but more — typically you expect 10 to 15% of most markets are new construction. One of the things that large national builders have been doing is buying down interest rates which has been very well received.
Barry Ritholtz: Define that, what do you mean buying down interest rates?
Jonathan Miller: Let’s just say 30 year fixed is 7 1/2 percent they’ll buy down the rate So what that means is that the buyer when they buy the house the mortgage rate is 5 1/2 percent and that has been very successful but not all builders can afford to do that they need scale the financial wherewithal but when you do that you’re reducing the resistance to the purchase.
Barry Ritholtz: To sum up it’s still a seller’s market however as a buyer you have a lot of things you can do to improve your chance of successfully purchasing a house come in with all your ducks lined up make sure your cash and financing is in place try not to hang too many contingencies on your offer work with a good agent who knows the area and don’t be surprised if you’re going to pay a little over the asking price for the House of your dreams.
https://ritholtz.com/2024/09/atm-best-way-to-buy-a-house-right-now/#more-333623
No comments:
Post a Comment