It’s true, home prices are absolutely sky rocketing in residential real estate right now! If you are selling your home, most markets are seeing an average of just a few days on market before escrow or contract… at most. So the market is great right? Not necessarily. I’m going to explain exactly what is happening in the market right now, why it’s bad for home buyers, home sellers, and even home owners, and why we might be facing massive problems in real estate.
Specifically, we are going to talk about the ridiculous lack of real estate inventory to buy, the blessing and the curse of multiple offers, foreclosures and forbearance, and the lack of new homes for sale. This is information you absolutely need to know if you are in the process of buying a home, selling a home, or are a homeowner.
So when we look back on 2020, besides the virus, I think one of the biggest story lines is going to be the absolute lack of homes for sale (think low inventory) for buyers to buy. You’ve probably heard, but home loan or mortgage rates are at all-time lows right now and they are expected to stay low for the foreseeable future (at least into 2023 say most forecasters). I believe (and so do many experts) this is probably going to be the lowest interest rates we ever see in our lifetimes. Last weeks rates were around 2.7 or 2.8% on a 30 year confirming mortgage rate! Compare that to just a few years ago when a great home loan rate was around 6 to 6.3%. Historically rates have even been as high as the teens (imagine buying a home and your mortgage rate was 14%… Seriously that was the norm at a not so distant time ago in real estate history). Low rates are luring home buyer, especially first time home buyers, out of the rental market and into the real estate market.
We all know the most common path to wealth is through real estate. You buy your first home, hold for a bit, build some equity (maybe a new addition or two to the family), you sell, buy something a little nicer and a little bit bigger with that equity, and the cycle continues. That’s a viable course of action and it works… in most markets.
The first problem home buyers, especially first time home buyers, are having is actually getting into contract on a home. The act of buying a home or condo right now is super competitive. It’s not uncommon in my market (or market right now) to see double digit numbers of offers. Like 10, 20, even 30 offers on a single property! Why so you might ask? San Diego has been a sellers’ market (this is going to be the case for most southern California locations, probably similar in most of the larger cities and suburbs throughout the state), at least for the last 12 years or so. Not enough good homes and condos for sale to meet the buyer demand. A normal figure for the last few years would be about 2.5 months of inventory give or take.
I have other videos explaining real estate statistics but for now just know anything below about 3-4 months of inventory for sale is a sellers’ market, anything between 4-6 months is usually considered a balanced market by most, and anything over 6 months starts to turn into a buyers’ market. We start to see short sales around 6 months, foreclosures start to appear around 7 months or more.
Right now, we are seeing inventory numbers at right around 1-1.5 months of inventory… That is crazy low. A couple reasons for this:
- The Virus. Many would be sellers are simply waiting out this pandemic. Would you want a bunch of people touring your home during a world wide pandemic? Not unless you had to. The result is we are seeing lots of vacant homes or sellers who really need to sell.
- Sellers are afraid to sell. Why? Well they will become a buyer in most cases and face the same issues other buyers are facing. What if they can’t get into contract on the home they are trading up to, or maybe down sizing to. They are going to be part of fold one of those 15 or 20 offers another seller is selecting from. Do they have the means, the grit, and an agent up to task to get them accepted above all the other buyers. Scary stuff.
Another problem of which I just alluded to is getting your offer selected by a seller. This means you need to offer top dollar, amazing seller friendly terms, and have the competitive financing. Whether you agree or not, most sellers are not even going to consider any type of buyer who has government back financing such as FHA loans or VA loans. The reason being that they view them as being more complicated to close, exposed to more issues, less stable, than conventional financing (A cash buyer is dominates all in most cases, we are strictly talking financed buyers right now). That is kind of dated thinking but it continues to be perpetuated by many in the real estate industry so it’s a factor you will contend with. Be prepared to offer over asking price, sometimes as much as $20k, $30k, or even $50k in some cases. Depends on the price of the house of course. In a different market you are essentially protected from over paying unknowingly for a property by your appraisal and appraisal contingency. Many buyers in an effort to stand out are waiving their appraisal contingency. Here’s an example to show you what would happen if you offered $45k over asking price and your home appraisal came back at asking price:
So imagine this with me: You find your perfect home, it’s absolutely ideal for the family. Perfect street, near the best school, close to shopping center, the house checks all the boxes. Before you submit your offer, your agent informs you there are 12 other buyers bidding for the same property. This is super common in this market. Now you’re not only including your brain in negotiations at this point, your emotions are in the mix as well. See where this is going? The home is listed for sale at $600,000. In order to beat out the other buyers, you decide to offer $645,000 to the seller including a waiver of your appraisal contingency (this is in addition to great terms for timing such as a quick close, reduced contingency time frames, and a few other minor terms). You go into contract. 9 days later, your appraisal is in and it states an opinion of value from the appraiser for $600,000. This essentially means (if the seller will not re-negotiate with you) you are on the hook for an extra $45k in cash due at close. This cannot be financed (at least in this market). So if you’ve been saving your down payment for years, lets say you were planning to put down 10% or $60,000, now your cash to close becomes $105,000… that’s not even including your closing costs. That’s an daunting if not impossible figure for many.
Let’s say you are “lucky” enough to find a home that’s been on market a few weeks, its doubtful you got lucky. More than likely, you found a home that is overpriced or worse, has issues. In an emotionally driven state (think must get this thing in contract before the other buyers find it), you end up going into contract paying more than you should, taking on more debt that’s pulling you farther away from gaining long term equity, and you are probably taking on whatever issue was responsible for making that home sit on market (funky roof, shoddy plumbing? Could be anything). It shouldn’t be available, it’s a scorching hot real estate market.
Its brutal to be a buyer right now. It’s hard to be a seller because once you sell, your going to become the buyer in most cases.
Another avenue that’s facing major turmoil is new construction. This is a different beast than the resale market but the virus and the recent surge of wildfire has made its mark here as well. In other times, you tour a model home, decide it’s the home for you, you pick out a lot, you pick out your finishes, the builder might offer you several incentives, rebates, specials, etc on the price, financing, discounts for the upgrades… We are not seeing that right now. Zero incentives. Prices are climbing here as well. Lumber is a huge concern. Lumber as a commodity has had increasing prices for years but this year, the price has nearly doubled in a year. Just ask my brother building a custom home at the moment. The original budget called for around $145,000 in lumber costs, now he’s looking at… Well you do the math. It’s ugly. These costs are begin passed directly down to the buyer.
So what if you wait it out? What if you decide to rent or continue renting until the market cycles back down? I mean prices have to start slowing down soon right? What if it doesn’t? Prices will slow down at some point, even cycle backward at some point but when? Will they increase another 20%, cycle back 15%? Climb another 40%, cycle back 20%, nobody knows. It’s impossible to predict what will happen. This is a personal decision to make. Just keep this in mind. It’s something that motivated me to make my first real estate move years ago, maybe it will impact your decision as well. Over 51% of people will remain renters their entire life. It’s tough to build true wealth if that’s the case. Don’t get me wrong, real estate isn’t the only way to build wealth but its definitely a popular way to do it.
The final topic I wanted to mention was mortgage forbearance’s. There are a ton of popular YouTube videos out there on the mortgage forbearance crisis. I think for the most part, those videos are often recorded and published to get increased views… Bad new sells right? Just check the internet right now on your favorite news site or turn on the TV. When do they ever report the good news? My heart goes out to anyone in financial crisis right now. I am in the business of putting people in homes, not kicking them out. I hate seeing anyone having hardship, especially losing their home. That being said, some of the mortgage forbearance statistics previously reported appear to be homeowners strategically opting for that (hold that payment in cash penalty free just to see what happens during the virus thanks to the cares act). We are seeing people opt out recently and back on track with their payments. Even if the unthinkable happened and we saw foreclosures, the inventory is so low. I do not think we as the public would see them anyway. The big hedge funds (or ibuyers) are ready this time around and will buy up that inventory long before it ever hits the market as REO for sale like back in 2008, 9, and 10. Very different market.
A don’t want to be a Debbie downer about the state of the market. There are many positives right now. Its definitely not all doom and gloom. I just want to present a true snapshot to you of what is really happening in the real estate market right now and what to expect of you are thinking of buying or selling any real estate. That being said, here are a few tips I came up with to be successful in this market:
Tip #1 is get your financing straight. This means working with a lender who’s local. This sucks but the truth is if a seller and her/his agent are going through 12 offers received and yours is backed with a pre-approval offer from a lender in another state or location is unclear, its going in the trash. The agent will present it but will follow up with a stern warning to the seller on the additional headaches a non-local lender can bring. A good example is with client I just helped. His original lender (from out of state) tried to tell me I didn’t need to worry about a town-home being VA approved because it’s a town home. In California, a town home is essentially a condominium hence you need VA approval to use VA financing. That’s getting into the weeds a bit and ask me if you have questions about that scenario but I can tell you a local lender would know the laws in California and would never have said that. Very bad and an indicator of all the other issues we would have had with that lender. Super mice person just in over her head. In addition, a good local lender will assist in getting your offer accepted. For example, a local lender I work with all the time will call the sellers agent and let them know how qualified you are as buyer. This is in addition to my calls presenting the offer. This is a huge advantage over other buyers. He’s part of the team to get your offer accepted.
Tip #2 is if you have a home or real estate to sell, get it under contract or sell it before you start home shopping. If you are in a multiple offer situation and you have a home sale contingency, your offer will be the first one to be eliminated. I hate to say it but it’s the truth. (don’t shoot the messenger). I understand you don’t want to be homeless in between your home sale and your home purchase. Maybe think of a scenario that works for you? Maybe you rent a short term rental in your target neighborhood as you home shop, maybe you live with your family member temporarily, your best friend, any scenario that allows you to sell first, home shop second.
Tip #3 is to pick an agent up to the task and that can help you craft an amazing strategy to get your real estate goals accomplished. This is so key. The barriers to the industry are so low in this industry. Make sure you are working with a true professionally.
And Tip #4 is to just make sure to keep the end in mind. You are buying and or selling real estate for reason. Whether it’s getting the family into that absolute dream neighborhood next to that amazing school. Maybe it’s selling you’re your home so you can move up or down size to that ocean view beach cottage you’ve always dreamed about. Whatever it might be, a little pain up front is nothing compared to end goal and what you want or need in the long term. It will be so worth it. Trust me.
That’s my take on the current market and what’s really happening out there. There are massive pitfalls you can step into if you are not careful and aware of exactly what is happening.
If you are someone you know is thinking about moving to, from, or inside San Diego, don’t be shy about getting a hold of me. I love making these videos but the truth is I love helping amazing people like yourself get into real estate even more. If there is anything I can do to help you reach your real estate goals, I will 100% make it happen.