“One of the first things we do with first-time homebuyers is to ask them: ‘What have you heard about the current state of the real estate market?’” says Sarah Knight, a broker at Windermere Real Estate in Spokane, Washington. “We try not to discourage them, but we make it clear right up front that it’s competitive out there.”
Knight is working in one of the hottest housing markets in the country — Spokane was third in a December ranking of the housing markets positioned for growth in 2022 from Realtor.com. Even in a relatively small market like Spokane, a recent listing went up for $350,000, she says, and almost immediately received more than 35 offers. It sold for more than $450,000 soon after.
What’s happening in Spokane isn’t an aberration. Across the country, the housing market has gone haywire, largely (but not completely) due to the pandemic, with home prices reaching record levels, and buyers scrambling to stay competitive with all-cash, no-contingency offers.
A recent report from the National Association of Realtors points to the “double trouble” of the housing market as the culprit: One, we’re in an environment in which home prices are at record highs, and two, inventory is at record lows.
The report notes that households earning between $75,000 and $100,000 annually can currently afford to buy 51% of active listings nationwide (based on the idea that a family should spend no more than 30% of its income on housing costs). In 2019, they could afford 58%. Effectively, home affordability has eroded 7% in only three years.
The 2 "troubles” affecting the U.S. housing market
Since 2019, the NAR report continues, home prices have risen nearly 30%, and the typical house now costs $80,000 more than it did before the pandemic. But that’s not all buyers are contending with.
“Many people’s wages may have also increased over the past two years, but not at the same pace as home prices,” says Nadia Evangelou, a senior economist and director of forecasting at the National Association of Realtors. “That means buyers need to spend more of their budget on housing compared to 2019.”
In other words, inflation has struck the housing market, and many buyers — first-time buyers, in particular — are getting squeezed out.
In addition, Evangelou says the number of homes for sale has dropped significantly in recent years. “There are about 1 million units available for sale [nationwide] today when there were about 4 million for sale back in 2007,” she says.
And when the pandemic struck, it led to a rush of buyers, many from large cities, seeking more space and affordability, often in smaller markets, such as Spokane. “People are moving to smaller cities, and they can work remotely. These areas are more affordable,” she says, which leads to many people asking themselves: “Why not move somewhere more affordable?”
Knight says this is precisely what’s happening in eastern Washington. “People are moving here from Portland, Seattle, or California — they’re selling their homes for cash, and then buying in Spokane.” The migration to less-expensive cities such as Boise, Salt Lake City, and Spokane, is a big reason the market, in aggregate, is seeing price increases across the board.
The issue with housing supply, too, predates the pandemic, according to Evangelou. New home construction peaked in 2006, and has been slow to recover since the housing bubble and financial crisis. Construction is picking up again, but supply chain issues have stymied things.
Evangelou expects the combination of more construction and a rise in mortgage rates to cool things off over the next couple of years. She predicts home values won’t fall, but will stop rising at such a rapid pace.
What buyers should know
This is as difficult of an environment for buyers as there ever has been, especially in some markets. Buyers should be prepared for a potentially long, drawn-out home search, and for inevitably being outbid.
Most buyers “are not going to get a house at list price,” says Knight. “They’re going to need as much cash as they can get their hands on.”
Further, Katie Brewer, a certified financial planner and founder of the Texas-based financial firm Your Richest Life, says her plan of attack when working with clients who are ready to buy a house is to figure out their budgets first, and then to see how that budget matches up with what’s available on the market.
“When we look at what they can afford on paper, but then go out and survey the inventory,” Brewer says, “it may require some ‘budget negotiation.’ Sometimes the inventory doesn’t match what their budget is.” Many people aren’t going to be able to afford what they were hoping for and will need to reassess.
Knight says there isn’t much room for negotiating — at least not in current market conditions. “Some people can still get an inspection, although a lot of the time, even those are being waived. Right now, that’s really the only thing you can negotiate on in my market,” she says.
Smart moves buyers can make in a wild housing market
The main thing both Brewer and Knight say buyers should do is to prepare for a long home search. While there may be some softening in the market in the months or years ahead, buyers who want a home in the short term, and particularly those who don’t have piles of cash at their disposal, will need to be patient.
While rising interest rates may slow demand and potentially ease things up in the market, it’ll also increase the cost to get a mortgage. But for those who want to forge ahead, despite the wild housing market, Brewer has a few tips:
Figure out what you can afford: Set a budget, Brewer says. That means determining the realistic amount you can afford for a monthly mortgage payment (plus taxes and insurance). Also, figure out what you can do to get at least a 20% down payment. It may be difficult for some buyers, but will get you the best mortgage terms.
Know exactly what you want, and get in line: It’s okay to be choosy when buying a home, but know that you’ll likely need to get in line behind several other buyers who are thinking along the same lines. Be ready for a potential bidding war.
Have everything lined up: Don’t start shopping unless you’re pre-qualified for a mortgage, Brewer says. “Things like that are not optional in this market,” she says. “You need to be good to go” and make an offer — there’s no time to waste when things are this competitive.
Most importantly, Brewer says, is to stay within your parameters. Don’t make an emotional decision and make an offer way out of your price range, for instance. “You can be excited to make an offer, but don’t leave yourself with $5 in your bank account at the end of the month.”
Finally, it’s probably best to give up on hoping that you’ll find a discount, or that you’ll be able to get a “good” price on a home. In this environment, it’s just not going to happen, says Knight.
“There’s no such thing as a ‘deal’ in our current market,” she says.
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