Competition among home buyers will be fierce in most of the country as home sales heat up in April and May before peaking in June. But you can increase your odds of getting the home you want by casting a wider net, pouncing quickly and not letting minor defects derail the deal. Here are three housing and mortgage trends for buyers and owners to pay attention to over the next three months.
- Seller’s market. If you’re a home buyer, there are strategies to help you rise above rivals in this seller’s market.
- Higher rates. Mortgage rates are expected to keep going up, but not as quickly as earlier this year.
- HELOCs return. If you’re a homeowner and you want to borrow against your equity, you might prefer a home equity line of credit over cash-out refinancing.
It’s still a seller’s market
It’s hard to be a home buyer these days, especially in the major metro areas where there aren’t enough homes on the market to meet demand. Any housing supply under six months is considered a seller’s market — and nationally, it’s been a seller’s market for at least the past four years. In February, for example, all the existing homes for sale would have been sold in just 3.4 months at that month’s sales pace.
As a result, buyers find themselves in fierce competition with one another.
Dana Bull, a real estate agent in Boston, says it’s not unusual for a home to receive more than a dozen offers. One of her clients recently made a bid for a home that had 23 competitors.
Making the problem worse, a lot of would-be sellers are afraid to put their homes on the market because then they’ll become buyers and face the same trouble finding a home for sale, says Mark Fleming, chief economist for First American Financial Corp.
Bull has a few suggestions for buyers who brave the market this spring:
- Expand your search. Look in a wider geographic area and for various kinds of homes. If you can’t find a home you like in the city you want to live in, search one town over. If you’re looking for a condo downtown, be open to buying a house outside the city center.
- Be aggressively available. After a house has gone on the market, “when is the first available time that you can see that property?” Bull says. “Make sure you can get in there early, so that you can start building a rapport with the listing agent or the sellers.”
- Don’t let minor problems be deal-breakers. Make the offer contingent on the home passing inspection, but make it clear that you’re not going to ask the seller to make repairs unless they total thousands of dollars. Bull says her clients typically set this threshold at $10,000 to $12,000. This lets the seller know that “we’re super-serious and we’re not going to walk away unless a major, major defect is found,” Bull says.
Mortgage rates trend upward
Mortgage rates rose sharply in the first three months of 2018, and are expected to continue trending upward. The average rate on a 30-year, fixed-rate mortgage in the fourth quarter of 2017 was 4.08%; that average zoomed to 4.45% in the first quarter of 2018, according to NerdWallet’s daily survey of mortgage rates.
The upward trend is expected to continue, but rates aren’t predicted to rise as steeply in the second quarter as they did in the first. Mortgage lenders Fannie Mae and Freddie Mac and the National Association of Realtors all forecast the 30-year, fixed-rate mortgage to rise 0.2% of a percentage point from April through June.
Fleming says mortgage rates are going up because of the prospect of higher inflation. Unemployment is low, workers have more money in their pockets because of tax cuts and Congress might increase infrastructure spending this year. Each of those factors has the potential to push the inflation rate higher — and mortgage rates respond to the outlook for inflation.
Fleming says there’s some good news here: Inflation could lead to higher wages, and rising incomes mean home buyers can afford more.
His advice is to keep some perspective: In 1981, mortgage rates jumped to 18%, he says — “and, by the way, people kept buying houses back then.”
HELOCs to make a comeback
Home values have rebounded since the Great Recession, with median home prices rising over 30% in the five years ended in 2017. As their homes gain value, some homeowners will want to borrow against their growing equity to pay for home renovations or other expenses.
Millions of homeowners will opt for home equity lines of credit, according to a report from TransUnion, the credit reporting company. It expects 1.6 million homeowners to get HELOCs in 2018, and an additional 8.4 million from 2019 to 2022.
Another common way to extract home equity is through a cash-out refinance. But if you have a low mortgage rate, you’ll probably want to keep your current loan instead of getting a cash-out refinance at today’s higher interest rates.
Be aware that the new tax law changed the rules on deductibility of home equity debt in 2018 and beyond.
First, Congress changed the dollar limits. Borrowers may deduct interest on up to $750,000 in mortgage debt on their first and second homes combined ($375,000 if married filing separately). With the new tax rules, mortgage and home equity debt are both included in those dollar limits.
Second, deductibility now depends on how you use the money. Mortgage and home equity debt is deductible only if the money is used to “buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS. If you use a HELOC to consolidate debt, pay for college or for other purposes besides renovations or homebuying, those expenses aren’t tax-deductible.