Now that we're halfway through Q1 of 2022, things have shifted back to a more competitive state.
The lull of November and December is gone and it seems like January and February came with a whole new slew of buyers who came here with guns blazing. Our inventory is also the lowest it's ever been, not only in Austin, but across the nation.
Of course, my predictions are simply that: predictions. This is all speculative.
With that being said, here are my quick thoughts on where we're heading and what that can mean for you as a buyer.
What's the Impact of Increasing Interest Rates on Your Wallet?
It's no secret that the Fed is saying they will raise interest rates over the course of 2022. Some say it could go as high as 6%, maybe even higher. For context, here are the past few years of interest rates for a 30-year fixed mortgage, pulled straight from Freddie Mac:
- January 2019: 4.46%
- January 2020: 3.62%
- January 2021: 2.74%
- January 2022: 3.45%
While these changes in interest rates may seem small, they're not. As I write this in mid-February 2022, interest rates are floating at around 3.75%.
Let's use an example to show what these seemingly small changes mean over time.
Let's say you're purchasing a home for $500,000. You're a first-time homebuyer and you're below the maximum conforming loan limit of $647,200, which means you can put as low as 3% down. You have great credit and your interest rate was locked in at 3.45%. With these terms, you'll have paid $294,167 in interest over the 30-year life of the loan. That same loan on that same house last January when rates were 2.74% would cost you $226,865 in interest. This is a $67,302 difference, enough for a 20% downpayment on a $330,000 investment property.
This accrues for even seemingly small percentage jumps. If you bought that same $500,000 home today when rates are 3.75%, you would pay $323,600 in interest over the course of your 30-year loan term. At 3.45%, you would pay $294,167, which is a $29,433 difference over a .3% increase.
How Do Interest Rates Affect the Market?
If the Fed actually increases rates over the year like they say they will, this will ultimately affect the real estate market. But I'm not convinced that these increases will have a large impact on the Austin market. Higher rates may deter some folks from buying, but I don't think higher rates will drive down home prices by a significant amount that justifies waiting to buy.
With this there are two very important factors to keep in mind.
- Austin is attracting some of the best talent and therefore some of most qualified buyers in the country. These are folks who are less likely to put off their purchase due to higher rates. In fact, some of them will come in with all cash, making interest rates irrelevant.
- Inventory is extremely low. Low supply and high demand means higher prices.
I think that these higher interest rates will decrease the speed at which prices climb. I don't think we will necessarily see a 40% increase in median home value like we did from June 2020 to June 2021, but I think the Austin market's median home value will continue to rise.
Edit on March 7: The pace of the market over the past week has been very similar to that of summer 2021. Homes in areas like the East Side are closing for 10% - 20% over asking price and it's only March.
I can't make a blanket statement and say whether it's always better for buyers to hop in now in anticipation of those hiked interest rates, or to wait until the summer to see what happens.
However, my best advice for buyers who are seriously looking is to pull the trigger before these predicted increases come into play. As of now (February), rates are around 3.75%, which is still incredible compared to the vast majority of history.
In my opinion, interest rates AND home prices will continue to rise over 2022, so it's best to get in earlier rather than to wait.
How Do Buyers Purchase A House Then?
As described above, the market is still very competitive. How do buyers navigate this landscape of uncertainty?
Overall, I encourage my buyers to be as prepared as possible, especially if they are first-time homebuyers with a hard deadline (i.e their lease is expiring). You never want to feel trapped or rushed, as this is a recipe for buyer's remorse later.
Being prepared means getting pre-approved by a local lender that you trust and beginning the search in MLS as soon as possible. I always want to ensure that my buyers feel comfortable, empowered, and confident when submitting offers on homes, and the best way to do that is to be well-versed in the market. Oftentimes, this involves browsing houses on MLS for a few weeks, dialing the search in, going on a round or two of house tours, and then moving quickly and aggressively on one of those homes.
Here are a few other strategies that I suggest to clients as well.
STRATEGY 1: ROOT FOR THE UNDERDOG
I talked about this last time, but there are usually at least a couple homes in your MLS portal that have been sitting on the market for quite a bit. In a market like this one, the hot homes will be gone within 48 hours. If that's a landscape that you want to compete in, see strategies 3 and 4. But if you're less interested in going after the ultra-desirable homes, it may be worth your while to look at homes that have been sitting on the market for longer than 7 days.
Be sure to do your due diligence to make sure the home doesn't have any deal breakers, but sometimes these homes haven't gotten any action for reasons that aren't so severe. Maybe the home was overpriced, maybe it needs some TLC, or maybe it just has a funky layout that you can overlook. The longer a home's been on the market, the better your chances are of putting it under contract. And you may even have some negotiating power on its price and other terms, which is almost unheard of these days.
STRATEGY 2: LOOK INTO NEW BUILDS
As of right now, there are still some builders who are putting incomplete construction under contract before they hit the market. Depending on your budget, this could be a wonderful option. In fact, this is exactly how I found my next home, which will be completed in the summertime. Find a real estate agent who has access to these sometimes off-market properties.
STRATEGY 3: ADJUST YOUR EXPECTATIONS & YOUR CRITERIA
Life is hard and sometimes you have to make sacrifices.
In the world of Austin real estate, maybe that means expanding your radius to be a bit further from downtown. Maybe that means lowering your bedroom or squarefoot count. Maybe that means buying a home that's a "stepping stone", meaning it won't be your forever home, but you could see yourself living in it for a few years.
Here's a good exercise: Try making a list of qualities and features your ideal home would have, this should be pretty easy. Now try making a Must Haves list with 3-5 things that you simply can't or won't budge on. This is much harder. Ask yourself why you want each thing on the Dream Home list and be as honest as possible with yourself.
We used this strategy last year and it worked super well. We moved from a 2 bedroom, 2.5 bathroom, 1,050 sqft home into a house where our baby has her own room AND we also each get an office space. Once we are ready to move out and expand our family further, it will become an appreciating and cashflowing investment property. Major win!
STRATEGY 4: RE-FRAME YOUR PRICE RANGE
This was also in my last update, but this is also a good strategy to use, perhaps in combination with the others mentioned above.
For clients who need a home yesterday or are more time sensitive, it’s really important to go in with the understanding that to win in a multiple-offer situation, we will need to submit offers that are over the asking price.
Because of this, it’s a good idea to get pre-approved by a local lender and then look for homes that are anywhere from 10%-20% below that topline number. This is because you will likely need to pay anywhere from 10% - 20% over asking price in some scenarios, especially if the home is a “hot home” that fits most of the boxes that everyone wants (i.e recently renovated, large yard, beautiful kitchen, walking distance to restaurants, etc).
It’s also important to understand that, if you’re not paying cash, we will also need to submit a full appraisal waiver to be competitive and have the offer considered. When financing the home, signing an appraisal waiver makes it more like a cash offer in the seller’s eyes. You can read more about appraisal waivers here.
This is a good strategy for someone who wants to stick to their budget and is willing to realign their expectations to become a homeowner.
Ready to talk about your options? Feel free to drop me a line!
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