Are you one of the many that are ready to upgrade your home for more square footage, a different neighborhood or just ready for a change, but have felt trapped in your home because of your 3% interest rate?
Over the past few years, I have spoken to many families that want to upgrade but are unable to justify it because of the significant monthly increase when rates were around 6.5%. That would more than double your monthly expense, so most of those people have decided to wait for rates to come down.
It’s time to wake up! Rates are now hovering around 5.3-5.6% as of this week and we may see even lower rates in the coming months. I’ve previously said when mortgage rates drop to around 4.5% you will get many buyers off the fence who have been patiently waiting to upgrade and that will increase the overall demand across the board. I don’t think 3% is in the cards anytime soon, but 4.5% is much more palatable then 6.5% or more. Though it isn’t as easy as just upgrading.
Selling before you buy is not a simple task and there are many key variables to consider:
Sell first and be homeless – if you sell first without having sight on your new home you will likely go into a temporary rental situation or couch surf family and friends.
Sometimes people end up in the rental property longer than they want, which increases stress and pressures you into buying something you may not want out of feeling desperate.
Negotiate a rentback – be in your home during the sale process and negotiate a rentback from the buyer likely no more than 60 days.
This is an option, but occupied homes typically sell for less money because they are not properly prepared for sale. Plus you are just kicking the can because your stress will inevitably increase once the clock is ticking on finding your new home; you will feel pressure to buy whatever is on the market at the given time. You will likely overpay for it because you have urgency compared to other buyers.
Market movement – selling first enables you to know exactly what you have to spend, but what if the market goes up 10% between your sale and purchase?
Being out of the real estate market can really bite you, just like being out of a good stock while it’s on a run, which ultimately impacts your purchasing power especially in a market that is likely to go up instead of down.
Herein lies the buyer’s dilemma -- how do you upgrade before selling?
I think this is a very strategic plan that needs to be reviewed carefully because there are options available and sometimes we have to be more creative than others. Overall buying before you sell is advantageous because you can be more critical of your purchase since you are looking to upgrade your current living situation. Alternatively, if you are moving from a rental property, you are generally more flexible on home features since it is more important to get into the market, especially in a market that is more likely to go up than down.
When you apply for a mortgage, the financial institution looks at all your income and liabilities and will lend a percentage of net income, however, your current home will be counted as debt until it is sold. Therefore, your affordability or maximum pre-approval amount will be lower because of your existing home. In some circumstances, this may be irrelevant to you, but for many that are looking to upgrade this poses a big issue that needs a solution and I have several options available to assist clients in this transition.
I think this is a timely discussion because we are coming out of an unusual market and I want you to be ready for what comes next. In the past several years we have experienced:
High interest rates – mortgage rates swung from 2-7% in a matter of months, which shocked the system and we have been slowly coming off peak over the past year.
High inflation – why is lumber so expensive but flat screen TVs continue to decrease? This is a conundrum I can’t answer, but overall higher inflation has kept prices high from food to travel to entertainment. In the past 4 years we have swung from 1-8% inflation rate – that’s an insane swing in just a few years, but fortunately we are on the way down.
Bad job market – it’s a tough job market, even in tech. I’ve heard that companies are running on the bone with little fluff and the overall sentiment is low. However, there are key roles that are starving for talent and those with the appropriate skill set are naming their price not to mention I’m hearing chatter that hiring will ramp up in early 2025.
During this period, the condo/townhouse market has been overall flat with prices hovering around 2019 values having ups and downs along the way, making it ready for a rebound. There are a few key reasons I think condos/townhouses have struggled over the past several years including:
Interest rates: the condo/townhome buyer is typically purchasing their first home with smaller down payments, so the significantly higher interest rate dramatically impacted their affordability and kept them on the sidelines for a few years.
Over supply: I’ve seen a lot of new construction in dense housing including in Santa Clara and Sunnyvale, which I think has saturated a market that was already experiencing slower demand because of interest rates.
COVID: coming out of COVID people really wanted more space with a yard and are less concerned with an extra commute because they are working from home a few days a week, but we warned, traffic is back and feels as bad as ever.
Alternatively, the single-family home market has seen a rebound despite high interest rates, high inflation and a bad job market, which is why I caution buyers currently on the sidelines. Granted, inventory has been seasonally low because of the missing “upgrade” buyer who would sell to move up, but I think that buyer will come back into 2025. Even though we had low supply and demand, the low inventory environment was enough to keep competition amongst fewer buyers and push up prices (also thanks to a strong stock market).
I think in order for prices to significantly drop we will need to see supply of single-family homes outpace demand and I do not see that on the horizon. The upgrade buyers will in turn be sellers and that will keep the cycle going. There are plenty of buyers to absorb current inventory levels and as more sellers decide to list their homes whether because they are upgrading, relocating, or just the right time, I think buyers will steadily come back into the market as confidence increases and the market conditions improve. As interest rates drop and the market confidence continues to improve, the most likely outcome will be that the number of motivated buyers looking for a home will also increase. The single-family market will overall continue to benefit from these conditions while the condo and townhouse market will follow suit and see a rebound as confident buyers see value in prices.
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