We help buyers understand the long-term implications of their property purchase, rather than getting caught up in short-term market challenges, writes Luke Babich.
Stubborn inflation, high interest rates, and other negative economic indicators have dampened many real estate markets. This is a confusing situation for prospective home buyers, many of whom have no idea whether home prices and interest rates are trending upward or downward.
Complicating matters, many potential sellers who have locked in low mortgage rates are leaning toward staying put, especially when selling a home can cost tens of thousands of dollars in commissions, repairs and moving costs.
In an uncertain market, real estate agents serve as knowledgeable and responsible advocates for buyers making expensive home purchase decisions. Here are some of the most common ways inflation affects buyer behavior and how agents can help guide you toward the right decision for your buyers.
Interest rates continue to deter buyers
Mortgage rates have fallen over the past year, but are still nearly double the historically low rates that buyers enjoyed during the pandemic. As a result, many prospective homebuyers are putting off their home search until interest rates come down.
There are several reasons why this is not the best approach. The first is that it could be several years before mortgage rates fall significantly. Meanwhile, house prices are expected to rise by more than 3.9% by summer 2026, eroding potential savings from lower interest rates. Waiting may only result in a small profit for the buyer.
There are steps buyers can take right now to get a better mortgage rate. One is to actively compare mortgage finance companies. Advise your customers to get quotes from multiple lenders to see who offers the best interest rate.
We can also tell you about options such as interest rate float downs, which allow you to take advantage of a lower interest rate if interest rates go down after you lock in your loan. Finally, emphasize that you can easily refinance when interest rates drop. It may be wiser to buy a home now and refinance later, rather than blindly hoping that future interest rate cuts aren’t offset by rising prices. In general, housing prices have never been as affordable as they are today.
Check if the client has realistic expectations
While buyers are almost certainly aware of the interest rate increase, they may not understand exactly how it will affect their purchasing power.
Experts say that every 1% increase in mortgage rates can reduce a buyer’s purchasing power by up to 10%. For buyers in some markets, this means budgets from five years ago could be cut by up to half.
To illustrate this impact, a recent Redfin report revealed that sales of starter homes are increasing rapidly, as many buyers are forced to cut back on their budgets and consider less expensive homes. As an agent, it’s important to clearly communicate the realities of the market to your clients so they don’t waste their time or yours looking at properties they aren’t qualified to buy.
Debunking the myth of undersupply
Although there aren’t enough homes on the market to meet demand, housing supply has gradually increased over the past year as a wave of new construction has begun to hit the market.
Redfin reports that the number of listings for starter homes has increased by 13%, pushing the inventory of these homes to levels not seen since 2016. For cost-conscious buyers, this could be a great time to find your next home.
Many builders are highly motivated to sell new homes and may offer financial incentives such as closing cost coverage or interest rate buybacks. With the market still somewhat stagnant, buyers may be able to negotiate more deals at the bargaining table.
Some buyers are waiting for a crash.
With inflation pushing up home prices, some mainstream housing analysts are starting to think a housing bubble may be brewing. A few experts are predicting a housing market crash comparable to the 2008 crash.
Although such pessimistic predictions are in the minority, they are here to stay as consumers’ overall economic outlook is poor. Some potential buyers are actively waiting for a market crash to buy a home at a lower price.
If you’re an agent with a client who’s worried about the Great Recession, where the price of their dream home has dropped significantly, gently let reality sink in. A big crash is unlikely, and staying out of the market is costly. Prices in many markets will likely continue to rise while waiting for a crash that may never come, leaving you missing out on potential home equity. A year from now, they will regret their inaction.
Buying a home during a recession, even a crash, can be complicated. Buying a home is a long process, and the aftermath of the recession will disrupt the market and cause some sellers to sell their properties. In these situations, finding the perfect home becomes much more difficult.
Then there is the issue of securing funds. Lenders are fearful of a crash. In the aftermath of the 2008 financial crisis, it was notoriously difficult to get a mortgage. Finally, the housing crash will have dramatic ripple effects throughout the economy. If you’ve just been laid off, what good is lower house prices?
final thoughts
At the root of all this advice is a simple fact. The best time to buy a house was yesterday, and the next best time to buy a house is today. This may sound like a cliché, but it reflects solid economic reality.
Markets are unpredictable in the short term, but more predictable in the long term. It’s almost impossible to predict what the market will do over the next month or the next six months, but it has consistently risen over time.
If a buyer is fixated on the short term, speculating about how interest rates and prices will change in the coming months, the most responsible thing an agent can do may be to redirect the client’s attention to the big picture.
Luke Babich is CEO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.
