Buying Advice: Home prices and mortgage interest rates are rising, and people looking to buy a home for the first time are feeling the pressure.
Rock-bottom inventory is fueling a run-up in home prices as interest rates rise and ratchet up pressure on buyers to act. Should you be desperate? Will prices continue to surge to new heights?
We’ll ask agents, a housing analyst and an economist what to expect this year, and we’ll also check in with the latest housing statistics.
Wishing, waiting, worrying
For buyers in many tight markets, the task of buying a home this summer seems almost Herculean. Scarce supply and an influx of cash investors have made it hard for many prospective buyers to get a bid accepted.
It’s a dogfight. With less than a month’s supply of homes on the market there and investors accounting for 37% of sales, it’s hard for regular folks to make a deal.
Many buyers are exhausted after making up to 40 or 50 unsuccessful offers on homes. Those buyers can start to feel hopeless.
Buyers are beginning to feel the pressure now that interest rates are once again climbing.
“Every tenth of a point that rates go up makes buying more expensive,” says Jed Kolko, Trulia’s chief economist. “It will almost certainly be more expensive to buy six months, a year or even two years from now.”
A rise in rates from 4.5% to 5% adds $75 to the monthly payment on a $300,000 house with $50,000 down.
But Kolko says rates will have to rise to at least 10.5% before renting becomes cheaper, on average, than buying a similar home. “It’s still 41% cheaper to buy than to rent on average nationally.”
And we’re still far from the double-digit rates that many first-time buyers’ parents experienced in the 1980s. Capital Economics predicts that rates for a 30-year-fixed mortgage will average 4.5% at year’s end, rise to 5% next year and to 5.5% the following year.
To be sure, inventory is slowly beginning to rise as prices have come up, giving many homeowners enough equity to move from their current home and others a reason to downsize. “There are more homes on the market now than there were six months ago, and that’s even taking into account the spring jump in inventory,” Kolko says.
Many analysts and economists predict that the pace of price growth will taper off in the latter half of the year, as rising interest rates take a bit of steam out of sales. Swelling inventory and slightly less competition may mean that buyers who are still in the market six months from now could pay slightly more, but will have a better shot at finding exactly what they want.
“With more inventory, you’ll have a better chance of finding something that’s a good fit for you. It’s less likely you’ll have to compromise,” Kolko says.
And, with fewer bidders, there’s less stress in the equation. Carlsen says there will also be less need to waive contingencies as many bidders are now doing.
For those who are willing to consider it, analysts say, there’s also the option of variable rate mortgages.
“Prices are going up,” Carlsen says, “but nobody has gotten priced out of their neighborhood they want yet.”
Housing-market update: Low inventory, big price increases
The housing recovery continued in earnest in May, with existing-home sales rising 4.2% to 5.18 million from 4.97 million the previous month. That puts sales 12.9% above the 4.59 million unit pace set in May 2012.
These rising prices should prompt more homeowners to list their properties. However, Lawrence Yun, the National Association of Realtors chief economist, says that the recovery is strengthening and that he expects inventory to be limited for the balance of the year in much of the country.
“The housing numbers are overwhelmingly positive. However, the number of available homes is unlikely to grow, despite a nice gain in May, unless new-home construction ramps up quickly by an additional 50%,” he says.
Total housing inventory at the end of May rose 3.3% to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace, down from 5.2 months in April.
Source: MSN Real Estate