By Amy Hoak, MarketWatch
Home buyers, prepare for sticker shock.
Prices of homes are expected to tick up again this year, and mortgage rates are due to creep up, too. And that’s on top of the increases already experienced over the past year.
A median-priced, three-bedroom home bought in the fourth quarter of 2013 costs a homeowner 21% more a month, compared with one bought a year before, according to an analysis by RealtyTrac, a housing data provider. That monthly cost includes mortgage, insurance, taxes and maintenance, and subtracts the estimated income-tax benefit.
“There’s no doubt about how affordability has been affected here in the past year or so,” said Loren Haley, a Redfin agent in Silicon Valley. “Prices have been driven up so quickly and intensely; there are a lot more buyers in the market than there is inventory.”
Every real-estate market is different.
Despite a more competitive market, it’s important that buyers keep a sense of perspective. And if your goal is to move into a new home this year, there are things you can do to position yourself to get the best deal possible — even if bargains are becoming rarer.
“It’s not fair to say it’s a huge shock … we’re still well above normal levels of affordability,” said Mark Fleming, chief economist for CoreLogic, a provider of consumer, financial and property information.
The National Association of Realtors’s national Housing Affordability Index dropped to 175.8 in 2013, from 196.5 in 2012. But, for comparison’s sake, the index reading was 107.6 in 2006, around the peak of the housing bubble. The higher the number, the more affordable the market. The index is based on the relationship between median home prices, median family incomes and the average mortgage interest rate.
While prices are expected to rise, early indications suggest that the increases won’t be quite as steep as last year. And although mortgage rates are expected to increase, their rise so far has been somewhat gradual. The 30-year fixed-rate mortgage averaged 4.3% in February; it averaged 3.53% for February 2013, according to Freddie Mac data.
Fleming also points out that if you own a home already, and plan to sell it to finance a new one, you’ll see even less of an impact on affordability. While the price of the home you’re buying will be more expensive than last year, you’ll be able to sell your home for more, too.
Most importantly, remember that every market is different. Yes, inventory shortages are widespread, but shopping in the red-hot Silicon Valley market is different than shopping in Chicago. And while finding a home may be a challenge where inventory is tight, the more attractive of a buyer you are, the more negotiation chips you have with a seller.
Heed the following six pieces of advice while home shopping this year.
1. Sooner is better
Of course, you should make sure that you focus on a home that fits your needs, with access to the school districts or other amenities you desire, Fleming said. But once you’ve done that, decided how much you can afford and found the place you want to buy, make a move — and quickly.
“Sooner is better than later because interest rates will probably rise this year and house prices will rise some more,” he said. So start soon. “If you’re thinking about doing it this year, do it early.”
2. Hire an expert
Many people hire the first real-estate agent they meet with. That’s a huge mistake, said Charlie Young, chief executive of ERA Real Estate. Interview a few agents who work in the neighborhoods you’re interested in, and make sure they have relevant expertise. For example, if you’re looking for a starter house, don’t choose someone who focuses mainly in luxury homes.
Ask buyer’s agents what the list-to-sales price ratio (the difference between what the home is listed for and what it eventually sells for) is in the neighborhood — and what their personal list-to-sales price ratio is, Young said. That will give you a sense of the agent’s negotiating skills.
Strong knowledge of the market is key. “In this kind of market, where inventory is low, the ability for a Realtor to help you find homes that may come on the market is going to be important,” said Steve Berkowitz, chief executive of Move, Inc., which operates the website Realtor.com. The earlier you know about a property, the more time you have to consider it and prepare a competitive bid.
3. Know the market
A good real estate agent will also be able to tell you if a list price is misleading, Haley said. For example, if it’s listed for $500,000 but is in a neighborhood where homes are getting five to 10 offers and it’s more likely that the home will sell for $600,000, your agent should be able to tell you that up front.
And they can tell you how tight the inventory is where you want to live, including how long homes typically last on the market. That’s the best indicator of how fast you’ll need to make a decision — and how hard it will be to find a home to meet your needs.
4. Know your finances
Understand what you can afford. That’s different than what a mortgage broker says that you can qualify for, Young said.
It’s important to think about how large of a mortgage bill you’d feel comfortable paying each month, he said. When bidding wars get intense, it can be tempting to blow your budget, but you may regret the decision later.
Some buyers also might consider adjustable-rate mortgages to finance their home more affordably, especially those who plan on living in the home for a shorter period, say, five to 10 years, Young said. If you go this route, just make sure you can deal with the interest-rate resets scheduled after the introductory period. Otherwise, if your plans change, you could be in for an entirely different kind of sticker shock.
5. Be an attractive buyer
Get preapproved for a mortgage before shopping, Young said. Sellers will take you more seriously, an important point when they’re getting multiple offers.
For sellers, the best offer isn’t always synonymous with the highest bid. In general, the fewer contingencies you have on the contract, the better, Haley said. “When we’re looking at five or 10 different offers, having the highest price is great, but we’re also looking for the highest certainty of closing,” she said.
A contingency that you need to have a contract on your current home before completing the transaction, for example, could put you at a disadvantage when you’re competing with a buyer who doesn’t make that stipulation. But tread lightly when giving up conditions: A home inspection contingency, for example, could save you from buying a home fraught with problems found during an inspector’s exam.
6. Consider other neighborhoods
For many prospective buyers, increasing home prices and mortgage rates won’t restrict them from buying this year. But they might need to make some compromises.
Aside from buying a smaller or less desirable home, you might also consider buying in a different location. The next town over may be more affordable than the area you originally were considering, Young said. Compare real estate taxes from city to city as well; there could be a big difference between the taxes you will pay for one house versus another across the street.