Velocitydrift

Help buyers understand the long-term impact of a real estate purchase instead of getting hung up on short-term market challenges, Luke Babich writes.

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Stubborn inflation, high interest rates and other negative economic indicators have cooled many real estate markets. It’s a confusing landscape for prospective home buyers, many of whom have no idea if home prices and interest rates are heading up or down.

To complicate matters, many potential sellers who have locked into low-rate mortgage rates lean toward staying put, especially when selling a home costs tens of thousands of dollars between commissions, repairs and moving expenses.

In an uncertain market, a real estate agent is a well-informed, responsible voice for buyers navigating an expensive home purchase. Here are some of the most common ways inflation is affecting buyer behavior and how agents can counsel them toward a decision that’s right for them.

Interest rates are still causing buyers to hesitate

Although mortgage rates have dropped over the past year, they are still nearly double the historically low rates buyers enjoyed during the pandemic. As a result, many prospective home shoppers are delaying their home search until rates come down.

There are a few reasons this may not be the best approach. The first is that it could take years before mortgage rates meaningfully decline. Meanwhile, home prices are projected to rise 3.9 percent or more by summer 2026, which will eat into potential savings from lower interest rates. Waiting may only lead to marginal gains for buyers.

There are steps buyers can take right now to get a better mortgage rate. One is to aggressively compare mortgage lenders. Advise your clients to get quotes from several lenders to see who gives them the best rate.

You can also tell them about options like a rate float-down, which will let them access a lower rate if rates go down after they’ve already locked in a loan. Finally, stress that they can simply refinance when rates go down. It may be wiser to buy a house today and refinance later than to blindly hope future rate reductions won’t be negated by rising prices. As a general rule, home prices will never be as affordable as they are today.

Make sure clients have realistic expectations

Buyers almost surely know about higher interest rates, but they may not know exactly how that impacts their purchasing power.

Experts say that each 1 percent increase in the mortgage rate can decrease a buyer’s purchasing power by as much as 10 percent. For buyers in some markets, that means their budget from five years ago could be reduced by as much as half.

To illustrate this effect, a recent Redfin report found that starter home sales are rapidly increasing, but only because many buyers are being forced to slash their budgets and look at lower-priced homes. As an agent, it’s important for you to clearly communicate market realities to your clients so they don’t waste their time or yours looking at properties they won’t be qualified to purchase.

Debunk the myth of low supply

There just aren’t enough homes on the market to meet demand, but housing supply has crept up over the past year as a wave of new builds has started to hit the market.

Starter-home listings are up 13 percent, pushing inventory of those homes to a level that hasn’t been seen since 2016, according to Redfin’s report. For cost-conscious buyers, it may actually be a very good time to find their next home.

Many builders are highly motivated to sell their newly constructed homes, and they may offer financial incentives, such as closing-cost coverage or interest-rate buydowns. In a market that’s still somewhat slow, buyers may be able to bargain for more deals at the negotiating table.

Some buyers are waiting for a crash

With inflation pushing up home prices, some mainstream housing analysts have started to believe there may be a housing bubble. A few experts even predict a housing market crash on par with the 2008 crash.

Although these pessimistic forecasts are in the minority, the generally poor economic outlook among consumers has allowed them to take root. Some prospective buyers are actively waiting for a crash to buy a home at a lower price.

If you’re an agent with a client who’s crossing their fingers for a big downturn that’ll chop the price of their dream home, gently bring them down to earth. A big crash is unlikely, and there are costs to sitting out of the market. While they’re waiting for a crash that may never come, prices will likely keep rising in many markets, and they’ll miss out on potential home equity. A year from now, they will likely regret their inaction.

Even in a crash, buying a home during a downturn can be complicated. Homebuying is a long process, and in the aftermath of a downturn, the market will be disordered, with some sellers pulling their properties. Finding the perfect home would be much harder under those conditions.

Then there’s the matter of securing financing. Lenders are spooked by crashes. In the aftermath of the 2008 crash, it was notoriously difficult to get a mortgage. Finally, a housing crash would have a dramatic ripple effect on the rest of the economy. What good are lower home prices if you’ve just been laid off?

Final thoughts

There’s a simple fact underlying all this advice: The best time to buy a house is yesterday, and the second-best time to buy a house is today. Although this might sound like a cliche, it reflects a solid economic reality.

The market is unpredictable in the short term, but more predictable in the long term. It’s nearly impossible to predict what the market will do over the next month or the next six months, but it has consistently gone up over time.

When buyers get fixated on the short term — speculating on how rates or prices will fluctuate over the next few months — sometimes the most responsible thing an agent can do is redirect their attention to the bigger picture.

Luke Babich is the CEO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.

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