To say that the real estate market is an ever-evolving landscape, presenting a unique set of challenges and opportunities for potential buyers, is stating the obvious.
In recent times, particularly in the wake of economic fluctuations and a global pandemic, many are left wondering: is now a good time to invest in a home?
In today’s blog post, we delve into the factors influencing today’s market and what they mean for potential homeowners.
Interest Rates: The Double-Edged Sword
A critical factor in any real estate decision is the interest rate.
Currently, we’re witnessing a transition from the historically low rates prompted by the recession to a more normalized range. Interest rates, traditionally hovering around 4 to 6%, are adjusting from the 3% lows. For those who are hesitant to buy, the key is to monitor these changes closely.
Although higher rates can increase the cost of borrowing, they also signal a stabilizing economy. With predictions of further rate reductions, it could be advantageous for your clients to time their purchases when rates dip.
Understanding Seller Hesitancy
A significant reason for the current low inventory in the market is the reluctance of homeowners to sell.
Many current homeowners are locked into mortgages with exceptionally low interest rates of around 3%. Selling and purchasing anew often means securing a mortgage at a higher rate, effectively doubling their interest rate and increasing their financial burden significantly.
This dilemma is causing both potential downsizers and up-sizers to pause. Families looking to upsize face the challenge of higher interest rates limiting the size of the property they can afford, while those downsizing are moving from a very affordable rate to one less so.
This has led to an increase in cash deals, with individuals tapping into savings, 401(k)s, or borrowing from family, to bridge the gap until more favorable rates are available.
The Impact of High Property Values
In addition to higher interest rates, the market is also grappling with elevated property values.
Sellers can expect to gain considerable value from their current homes, but this is a double-edged sword if looking to stay within the same market. The high value of homes means entering a competitive market at elevated prices, which, coupled with higher interest rates, can make a move less appealing.
Evaluating Affordability and Timing
Buying a property that fits comfortably within your clients’ financial means is crucial, irrespective of market trends. It’s wise for your clients to purchase something they can afford in the long term, considering both current and potential future interest rates.
Additionally, it’s prudent to have a substantial down payment. This not only reduces the loan amount but also provides a safety net, allowing your client to have equity in their property right from the start.
The Changed Landscape of Lending and Appraisals
A significant change since the 2007 financial crisis is the transformation in the banking industry, especially in the appraisal process.
Previously, banks had appraisers on their payroll, leading to potentially biased property valuations. However, post-recession reforms, particularly the establishment of the Consumer Financial Protection Bureau (CFPB), have changed things. Now, lenders must provide financial information to borrowers at least three days before closing, and appraisers are independent from lending institutions. This independence ensures appraisals are based on actual comparables, reflecting the property’s true value.
Such transparency in lending practices and appraisals means borrowers are more informed and protected than in the pre-2008 market.
Deciding to buy property in today’s market is a decision that should be made after careful consideration of all these factors. While the fear of a repeat of the 2008 crisis is understandable, today’s market dynamics, regulatory environment, and economic indicators suggest a different scenario. With a thoughtful approach, the current real estate market offers promising opportunities for potential homeowners.
The Minchella & Associates Difference
With over 40 years of experience in Illinois real estate law, Erica Minchella has represented thousands of home sellers and buyers, landlords, and commercial and investment property owners. For more information, schedule a consultation today.
