November 4th, 2021
Real estate is a hot topic. Prices are soaring, homes are being snapped up above asking price before the ink dries on the MLS description. Interest rates are extremely low. It’s the perfect time for your clients to sell, right? Maybe.
Now could be the ideal time for your client to sell, but it’s important to be careful. The market is cyclical. What goes up must come down, and what’s gone down must also come up. Let’s break that down. Interest rates are down, but they will eventually come back up. Real estate prices are up, but they will eventually come back down. This could leave buyers who don’t plan to hold on to their properties for 5-7 years in a bind.
Let’s say you’ve got an entry level buyer, who wants to a monthly mortgage payment of about $1,200. With a 6% interest rate, your buyer’s price range would be around $150K. In the current climate, because real estate is on the up-side of its cycle, inventory is pretty darn low. Finding a great house for $150K is hard. But with current interest rates as low as they are, hovering at less than 3%, there’s a temptation to nudge the budget up a bit. At an interest rate of about 3%, for example, your buyer could purchase a home in the $200K range and still only have a monthly payment of $1,263 or so.
Great right? Well, maybe and maybe not. When the number of available homes is low, the concept of supply and demand kicks in. Scarcity drives cost up. People are willing to pay more for homes that are not necessarily worth more. Price per square foot in Oklahoma City saw a 24% increase between 2019 and 2020, which is not even close to our market’s normal annual increase of 4-6%.
This means our entry level buyer who planned to buy a $150K home, but bought a $200K house instead, could become underwater in an instant, when the bubble bursts, as all bubbles do. As the real estate market corrects itself, interest rates increase, and the inflated home values decrease. It’s entirely feasible that our buyer would find herself in possession of a home now worth far less than the principal she owes on her mortgage.
That’s what it means to be upside down or underwater. Now, a year later, imagine something catastrophic like a job loss, or something exciting like a terrific job offer in another state for our underwater buyer. She needs to sell quickly. But there’s a $30,000 gap between what she owes and what the home will now sell for. And she does not have the funds to cover the gap. That is a disaster. Her credit will be ruined, and the personal toll that kind of stress will take is huge.
It takes fortitude to advise your clients to hold onto their properties in a market this hot. You’ve got to take the time to understand your clients’ long-term plans. In a market like this one, unless a buyer is planning to hold onto a property 5-7 years, the smarter move might be to wait.
As Brokers and Agents our job is to advise and do right by our clients. They rely on our experience and expertise to guide them through choppy waters. The more information you have, the better a skipper you’ll be.