Real Estate Debate Part 1: Buy Now or Wait
I've been asked more in the last week what's going on in the real estate market. Well, it's too early to tell. We probably won't see any trailing data to indicate the state of the market for another 30-75 days. I'll be keeping a close eye on it, that's for sure.
What is more curious is the questions and discussions around whether you should buy now or wait. Also, whether you should sell now or wait. For that reason, I am going to do a 2-part series on the benefits on buying now vs the benefits of waiting. I will follow that up with part 2 on the benefits of selling now vs the benefits of waiting.
So, lets jump in.
The Argument for Buying Now
So, you're stuck in your home. So is everyone else who isn't "essential workers". Brokerages are putting restrictions on showing homes. You've better bring your hazmat suit if you're planning on going into another person's home, if they allow you to. Ah, forget it, lets just wait this out.
Agreed, it is strange times. There are still sellers that NEED to sell and buyers that NEED to find a place to live. They could find a rental (maybe) or they definitely could find a short term rental as those are seemingly all mostly vacant. Or, they could buy. If you're in that boat, needing to find a place to live and want to buy, at least there shouldn't be too much competition these days.
FaceTime or Skype. Agents are taking advantage of professional videos and 3D tours to help buyers understand the home better than just pictures. If you're comfortable enough to buy a car online, thanks Caravan, well, maybe you'd feel comfortable enough to buy a home online. Maybe not.
Historically Low Interest Rates
A major reason why prices keep going up and up is because interest rates have just been so low, that money is very "cheap". That has not changed with the new COVID environment and in fact, one of the FIRST responses the FED did when they saw the coming economic catastrophe was to lower the rates. Even thought the FED's rates do not directly impact mortgage rates, mortgage rates and the FED they do have a relationship.
"The Fed and the mortgage market move like dance partners: Sometimes the Fed leads, sometimes the mortgage market leads, and sometimes they dance on their own." -Holden Lewis, Nerd Wallet
When the FED lowered its rates, it sent the mortgage rates down to low 3's on Primary residences which flooded the gates of borrowers looking to refinance. That, artificially increased rates to reduce the numbers of refinances coming in. It has started to calm down and rates are again dropping down in to the mid 3's for owner occupied, primary residences. Who knows where rates go in the future, but locking an interest rate in today does provide you some security of very affordable money.
How long has it been a seller's market? Since the dawn of the ages? Feels like it. 2019 started to balance the playing field a bit. 2020, everyone wants a redo, a gift exchange, to forgot it happened and push the reset button. BUT, as a buyer looking at homes, this could be a great opportunity for you. Fear and uncertainty lead to interesting decisions. As a buyer you can take advantage of less competition, low interest rates and the fear and uncertainty of the market in your negotiations with a seller. "Hey Mr/Mrs Seller, the market is unknown, but I love your home, am very qualified and am looking at buying. I am a certainty in this world of uncertainty."
I don't believe this is taking advantage of the situation any more than seller's were seemingly taking advantage of their market over the last 5-7 years. "All offers are due by X/X/XXXX at X:XXPM." Or the ol' escalation clause that many buyers were having to employ due to the uncertainty that their full price offer was not going to be accepted.
You, as the buyer, are providing value to the seller at a time where there are not many buyers. Find out what will work for you, financially and what you believe is fair and shoot your shot.
"The temporary softening of the real estate market will likely be followed by a strong rebound once the economic ‘quarantine’ is lifted, and it’s critical that supply is sufficient to meet pent-up demand.” -Lawrence Yun, Chief Economist NAR
Just because you are looking at buying today does NOT mean that you are actually buying today. You are going to negotiate the contractual rates for you to buy at a later date, typically 30-45 days later. AFTER you do all of your due diligence, including getting fully approved on your loan.
What that means exactly, is you have time, which we can all probably agree on seems like is acting funny. A week can feel like a year and more can change in an hour than what has changed over a year. The more time we have, the more clarity we will be afforded, hopefully, on our current situation and market.
This argument for buying now, needs to only be engaged if you are acting in full and complete good faith. If you are just playing around and not serious about buying and are willing to cancel the contract at any sign of trouble, well then, you probably should wait. If, you do want to buy but are concerned that the market could REALLY go bad, but feel it could also get better, rely on your loan contingency. This loan contingency states that in your subjective opinion, the loan that you will obtain fits or does not fit. This could simply mean that the market has not gotten better and in fact it has gotten worst and you do NOT believe you will be able to afford the home, you could terminate the contract due to the loan contingency.
In 30-45 days time, we may know a lot more than we do know and you could feel comfortable or even great about buying. The contract to buy and sell real estate in Colorado provides the buyer a lot of protections.
As for the the argument of waiting to buy, here are some thoughts.
The Argument for Buying Later
More Inventory Could Come
As there is quite a bit less competition in the market right now, there is also the potential for less inventory right now. My BiWeekly Analysis showed that inventory is tracking right along with 2019. BUT, we are in the beginning stages of how real estate gets impacted by COVID-19. Decisions take a lot longer in real estate. There are multiple parties involved, and as discussed above, contracts take 30-45 days to close. The real estate market lags in its reactions.
Here is some data that suggests that the inventory could be and is being impacted.
Between 2/12/20 and 3/12/20, in Fort Collins, there was a TOTAL of 38 properties withdrawn from the market. Considering a similar amount of days 3/12/20 to 4/9/20, there were 76 properties withdrawn.
Even though there are still quite a few properties coming on to the market, many are in a holding pattern. On the flip side, there can be and absolutely will be sellers who are fearful of the future and decide to sell now rather than waiting as was their original plan.
Interest Rates Could Come Down Lower
The general consensus is that interest rates are going to stay low and stay low for a long time. Potentially, once the back log of all the refinances gets cleared, rates could come even lower. Every 1/4 of a point on a $350,000 loan equates to about $50/month or $600/year. What if rates go from 3.5% to 3%?? Shoot, waiting an extra month or two to buy could save you $1,200 a year! If you live in that home just as the average person does, for 7 or so years, that's $8,400 saved!
Waiting on interest rates is a gamble. Vegas is closed, so why not throw the dice on the Crinterest Table?! Ha! Get it?! Okay, sorry.
On to the next argument for waiting.
In a world that none of us knew existed and no one knows for sure how this all pans out, waiting and patience could be the most valuable investment you make all year. This, I know, can be really tough. You've been pre-approved and you've started searching for homes and maybe you've even made an offer or two. The excitement of buying a new home is especially strong and being told to pause can be frustrating.
News is coming fast and furious. Every day brings new information to the world. Today, we were supposed to be out of our "social distancing" request from the President. Then more information (negative) came and he extended that until April 30th. In Fort Collins, the same is true for our stay at home order. It has changed once already and hopefully it doesn't change again, but it could.
With time, will come clarity of the situation, the economy and what the future of the housing market will bring. Buying later, which could be 30 days or 6 months or more, could provide you this gift.
It is strange times right now and a very dynamic world. Things are changing rapidly. Just as much as they are changing, the real estate market is for all intensive purposes on pause. When the market gets back up and running, we may see what type of reaction the real estate market has. It could be positive (pent up demand), neutral (just like in a video game the action starts back up after player 1 unpauses the game), or negative (fear, uncertainty, unemployment negatively impact the market).
Above are some reasons as to why you could buy now or buy later. I leave it up to you to decide how you wish to proceed. Hopefully you know better now some of the risks and rewards.