Dan Saelinger
By Sarah Max and Daniel Bortz
April 20, 2015

Too hot, too cold, too hot. For more than a decade the housing market has been nowhere near its Goldilocks moment, a just-right rate of growth that offers opportunities for both buyers and sellers. By certain markers, we’re finally starting to get there: Home prices nationwide are expected to rise 4.9% on average this year, according to the National Association of Realtors (NAR). That’s closer than we’ve been in a while to the long-term average of 3.3%—and a lot more manageable than either the sharp drops of the bust years or the 12% spike we saw in 2013.

What’s more, inventory is expected to loosen up, with 1.9 million units on the market this year—far below the flooded supply of 4 million we saw in 2008. The number of homes that were “flipped” (bought for a quick-sale investment) has dropped for the second year in a row, while the foreclosure rate is less than half what it was two years ago. Those are healthy signs for everyone (except, perhaps, for the small army of TV shows obsessed with renovating and flipping).

Can the center hold? The big question now is whether this manageable growth is sustainable in the long term. Economists such as Moody’s Analytics’ Mark Zandi note that we certainly need more first-time homebuyers in the mix to make that happen, because they drive a good piece of demand, allowing current homeowners to trade up—or cash in. In 2014 the percentage of rookie homebuyers on the market hit its lowest level in decades, just 33% of sales, vs. 40% historically. That said, a new report from BMO Harris Bank finds that 74% of Americans 18 to 34 plan to buy a new home in the next five years, and they are budgeting $240,000 to make the sale, a 24% increase over just last year.

On the other end of the spectrum, experts warn that prices in some markets have already pushed past the bubbling-over peaks, according to RealtyTrac. In San Francisco the median price for a house in December 2014 was $1 million, up 18% from the peak during the bubble. Prices in New York City (median house: $935,000) are 15% above the peak. It’s not just the coasts either. Prices around Austin are 8.6% higher than they were during the mid-2000s. “What we’ve seen so far,” says Zillow’s chief economist, Stan Humphries, “is still a long way from normal.”

What does it all mean for you? If you’re a buyer, you don’t have to worry as much today about being priced out in a bidding war or by all-cash offers. Sellers who didn’t have enough equity in their homes just a few years ago to justify a move could find themselves in a much better position now. And renovators can still get low rates on home-equity loans and lines of credit. In short: If you’ve been sitting on the sidelines, this may be the time to act—or at least to do some serious number crunching.

Here’s some advice to help would-be home buyers plot their next move. In future posts in this series we’ll offer tips for sellers and those who want to stay put and add some value with smart upgrades.

If you’re in the market to buy

The good news: There are a lot more homes to choose from. In addition to the additional properties already on the market, Zillow’s Humphries is forecasting an increase in houses and condos for sale this year as builders pick up the pace and more homeowners cash in on their rising equity. As prices have risen from the depths of the recession—the median sales price hit bottom in 2012, at an average home price of $152,000—the flippers have started to flee, which has helped the overall market stabilize. “Home prices have risen to the point where, in many markets, houses don’t make sense for investors,” says Daren Blomquist, vice president of Realty-Trac, noting that cash buyers dipped to 30%, the lowest in four years. “That helps level the playing field for regular buyers.”

Then there’s that other important factor: interest rates. Despite prognostications that they could tick up by summer, the 30-year fixed rate—recently at 3.7%—”is still within shouting distance of 60-year lows,” says Keith Gumbinger, vice president of HSH, a mortgage information provider.

Dan Saelinger

Your action plan

Start hunting. Sure, you’ve been hearing for years that interest rates would shoot up soon. This time you can believe it—Federal Reserve chairman Janet Yellen signaled as much in her most recent Federal Open Market Committee statement. The NAR is forecasting that the 30-year fixed-rate mortgage will average 4.3% in the third quarter of this year, 4.7% in the fourth, and 5.3% over all of 2016. On a $300,000 loan, the difference between 3.7% and 5.3% would be $285 a month (a payment of $1,381 vs. $1,666) and $102,600 over the life of the loan.

Those rates could go even higher if Europe’s economy starts to recover, warns Sam Khater, deputy chief economist for CoreLogic. One reason that American mortgage rates have stayed so low is that in recent years global investors have poured money into the relative safety of U.S. Treasuries, a main factor influencing the price of mortgages. If money starts flowing back out to the rest of the world, domestic rates will inch up.

Home prices have been heading up as well. Not as fast as in the bubble years, of course, but some areas have already seen double-digit growth. “Until recently the fastest-growing markets were those hit hardest,” says Khater. “Today the fastest growing are those with healthy economies.” With the economy on the upswing, there are a lot more of those now too.

Go fixed-rate, not flex. Adjustable-rate loans may look irresistibly low now—around a 3% average for a five-year and as low as 2.5% for borrowers with credit scores of 760 and higher. But you’re likely to end up paying significantly more at the reset date with rates heading upward. “It’s hard to argue against a fixed-rate loan,” Gumbinger says. The exception: Buyers who plan to stay in the home for less than 10 years may benefit from the low ARM rates in the fixed period.

Right-size your down payment. If you’re looking in a highly competitive market, offer to put down more than the standard 20% if you can afford it. That gives the seller the extra reassurance that if the house appraises for less than the asking price, you’ll still be able to secure a mortgage. Signs that market conditions warrant sweetening the down payment: if houses where you’re looking are going to contract within a matter of days or if they are routinely selling for more than the asking price.

Find a savvy broker. Buyers have so much more information at their fingertips: comparable sales, school district reports, walkability, and more. But don’t underestimate the kind of advice you’d get from a broker. A buyer’s agent will have on-the-ground knowledge of market trends and be able to identify unseen circumstances that affect a property’s price, anything from a cracked foundation or a dead boiler to whether there’s been a recent school redistricting or a zoning change in the area. She might also have access to “pocket” listings that don’t make it online because the privacy-minded sellers don’t want their home flooded with prospective buyers.

Take a little time. Sure, you want to keep an eye on the prospect of rising interest rates. But in a balanced market with steadily rising inventory, don’t feel pressure to jump at the first house you like, says Craig Reger, a broker in Portland, Ore. Visit a good number of open houses (at least five) to get a sense of what’s out there, and go shopping with your agent. You’ll start to learn if a property is over- or under-priced and why.

The rules are a little different if you’re looking at new construction, because builders don’t negotiate on price very often. “They tend to sell at 100% of their list price because that’s their comparable for the next house,” says Jacquie Sebulsky, a broker with Cascade Sotheby’s International in Bend, Ore. That said, if you buy in the early stages of construction (when the developer knows you’ll have to live through months of noise, dust, and other hassles), you may be able to ask for help later with closing costs, upgrades, and additional amenities, such as appliances, in lieu of a price cut.

Remember that money isn’t (always) everything. Even in a market where inventory is tight and sellers aren’t negotiating much, you still have some leverage. That starts with minimizing the seller’s potential headaches. If you have attractive financing—a pre-approved loan from a reliable lender or a large down payment—say so. If you can close on the seller’s schedule—whether that means quickly or letting him stay an extra month—do it.

And don’t be shy about plucking a few heartstrings. It never hurts to write a letter explaining what the house means to you. “A lot of sellers don’t want to sell to investors,” says Tim Lenihan, a broker in Seattle. “Hokey as it sounds, it can help you get your foot in the door.”

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