If you are interested in buying or selling a home in todays market you have seen many changes in the latter half of 2002. Interest rates have doubled from under 3% to 6% and now over 7% in the past few months. So, unlike the past few years, when anyone who wanted to sell their home was pretty much guaranteed a buyer, this is no longer the case.
During the height of the COVID-19 pandemic, a seller’s market reigned, where buyers would do just about anything to get a house, from offering way over the asking price to waiving contingencies. Home prices were going up around 20% per year for the last 3-4 years. Well now the pendulum has begun to swing from a sellers’ market to a buyers’ market.
In this article, we will share with you some recent developments and changes for both buyers and sellers in the real estate marketplace and some suggestions to overcome these developments.
This is part of an on-going best in class series of helpful real estate articles by Nick Santoro and Joe Santoro of Personal Property Managers who service Pennsylvania and New Jersey and specialize in real estate, home content downsizing, property management, estate sales and home watch services. These tips and insights are especially important in the economic environment we are in today, with the global economy turned upside down. Additionally, during this challenging time, we help families that are unable travel or tend to their property needs by providing a true one-stop resource. We are focused on making life just a little easier for families during often difficult times. With Personal Property Managers, one call does it all.
One recent study found that because of changes in the marketplace, along with increased mortgage interest rates and the economy in general, it was found that 1 in 5 real estate deals fell through in the past 6 months. The signs of stress have become blatant. Recent data showed that in September, existing home sales dropped 24%; the eighth straight monthly decline, marking the longest slide since 2007. Behind the deteriorating housing market is the Federal Reserve, which is aggressively raising interest rates to fight 40-year high inflation. This has sent mortgage rates soaring to 20-year highs. In fact, mortgage interest rates have more than doubled in the past year. For example, a buyer who wanted to finance a $500,000 mortgage has seen their payments rise over $1,000 per month or over $12,000 per year. In many cases, this is a deal breaker. So both sellers and buyers need to be mindful of interest rate trends and adjust their expectations accordingly.
Some of the reasons these deals are failing run the gamut, but one common theme is economic uncertainty. 16% of deals fell through due to buyer’s job loss and in 23% buyers pulled out because they were afraid of a recession.
“Consumers are feeling uneasy about the current state of housing and the economy,” says Joe Santoro. “Today’s market is different than it was just six months ago.”
Since selling a home today is no longer a given, sellers whose homes are on the market right now might be worried. While not all contracts can be saved, many can if sellers know how to properly vet a buyer and make sure they’re prepared for any curveballs that might hit before closing day. In this short article, we will share with you the most frequent deal-killing pitfalls, as well as how to avoid them so that your own contract successfully crosses the finish line.
1. Higher interest rates interfere with buyer financing
Back when the market was booming and mortgage interest rates were low, many buyers could finance a home purchase without a problem. But now that interest rates have essentially doubled in the past year (from the 3% to 6% and now approaching the 7% range), buyers can’t afford what they used to. In fact, a recent survey found that of the real estate contracts that didn’t close, 42% was due to the mortgage application being denied and 31% was due to higher interest rates.
How to save the deal: “The best bet for sellers is to require a recent pre-approval letter from the lender, written within the last 30 days,” says Nick Santoro. “This helps the seller by preventing a contract termination based on the loan’s monthly payments.”
Whenever interest rates are rising fast, sellers should ask if their buyers have a lock on their interest rate, which makes them immune to fluctuations within a certain time period. “Buyers that have a mortgage rate lock are more likely to close the purchase versus those that still need a rate lock,” says Nick.
“Home sellers should also be aware of some signs that a homebuyer is at higher risk for not closing on the deal,” says Joe. “These signs are a smaller down payment, a need for concessions or seller credits, and/or a pre-approval from an unknown lender.”
2. Homes aren’t appraising for what buyers offered
Another problem with loans today is that even if the buyer is solid, the property itself can throw a wrench in things if the appraisal falls short of what the buyers offered to pay. This is known as an appraisal gap, and it’s a huge problem for sellers and buyers right now.
Joe and Nick point out that recently some 35% of deals that fell through during the past year were because a home appraised came in significantly lower than the purchase price. Nick and Joe said that “Home sales are falling through because sellers are still pricing their homes as if it was six months ago, thinking they are going to be getting lots of offers over asking price.”
Even if sellers luck out and get a sky-high offer, a lower appraisal means the homebuyer has to figure out how to make up the difference. If the buyer can’t, or doesn’t want to, the deal is off.Â A recent CMA or comparative market analysis is very important and can shed more light on market values and mortgage loan appraisals.
How to save the deal: When you’re looking to price your home, make sure you’re on target with what similar homes in your area have appraised for within the past three months. In general, you want to price your home within 10% of those numbers.Â In addition, you will need to consider that the market is cooling.
“A seller reluctant to price their property at the lower market price may find themselves chasing a declining market,” says Nick. “And that can become extremely costly.”
3. Buyers are driving a harder bargain
When the market was red-hot, buyers were willing to give up a lot to win the bid. In many cases, that meant giving up contingencies for appraisals, financing, and home inspections. But now that buyers have a bit more leverage with negotiations, contingencies are back, particularly home inspections. And if your own home’s inspection uncovers termites or a leaky roof, know that buyers will dig in their heels today.
Joe points out that some 38% of home purchase deals that didn’t close in the past year was due to something found during a home inspection.
How to save the deal: As a seller today, you just have to accept that buyers will no longer throw caution to the wind and waive all contingencies. They have the leverage today to do their due diligence, and if a home inspection turns up problems, you may have to make repairs or other compromises to keep the buyer happy.
“One of the most common ways to save a deal from dying is to renegotiate fairly for both buyer and seller,” says Nick. “Whatever the buyer is looking to renegotiate should also be fair to the seller. Avoid any overabundant requests or higher price adjustments that are way out of whack.
As a seller right now, you’ve got to be willing to give a little. “Sellers that want the contract to move forward should be willing to work with the buyer,” says Joe. One way a seller can help the deal move forward is to consider helping with the closing costs or addressing many of the items on the home inspection list.
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