San Diego Union-Tribune (Sunday)
BOOM IN HOMEBUYING
Before engaging in a bidding war in the current high-flying market, slow down and take a deep breath
Housing market analyst offers this advice in today’s hot homebuying market: Slow down.
Housing analyst Ken H. Johnson has been scrutinizing home prices for decades, and he offers this advice for buyers in today’s hot housing market: Slow down.
“I would be careful about buying near the top of the market, especially if I want to be in the home for only a few years,” says Johnson, a real estate economist at Florida Atlantic University and coauthor of the Beracha, Hardin & Johnson Buy vs. Rent Index. “If you look to buy, bargain aggressively and be willing to walk away. Real estate most definitely is a good investment, but don’t just buy now because that’s what everybody else is doing.”
With mortgage rates at record lows and inventory tight, home prices are soaring. The National Association of Realtors says the median price of homes sold in October rocketed 15.5 percent from a year earlier, and bidding wars have grown common.
Johnson acknowledges that the housing boom of 2020 caught him by surprise. “I thought the real estate market was going to crash back in March,” he says.
While he doesn’t foresee a crash now, he does expect home prices in much of the nation to reach a plateau. He spoke to Bankrate about the housing market.
Q: Home prices are soaring, and everyone who can afford it wants to move up or buy a second home. What advice do you give them?
A: Everybody’s buying right now. We’re clearly getting to the peak. So you need to be a lot smarter about how you buy. You need to do a lot more due diligence. You need to ride the neighborhoods. Look at the sold properties — don’t look so much at what’s for sale as the prices of what’s sold. Be aware that you’re buying at the peak.
Do you want to be the last person to buy at the peak of the cycle? A lot of people have said that to me — “I bought in 2007, right at the very top.” I know people are thinking that right now. We’re near the top of the cycle. I wouldn’t not buy now. I’d just bargain aggressively. I’d put in a lot of due diligence. Shop your mortgage rate, and make sure you get the best mortgage rate. Ride the neighborhoods. Spend time looking. Spend time getting to know the area you want to live in.
Q: It seems buyers are doing the opposite or aggressive bargaining. We’ve got bidding wars in many parts of the country.
A: If I have to kiss several frogs to find a prince, I’ll do that. You shouldn’t get impatient and get into bidding wars. Don’t be afraid to walk away from a transaction. There’s gonna be another house — there’s just gonna be.
You’ll see houses go under contract, and then they come back on the market after the inspection period. People get cold feet, and those houses are coming back on the market.
As hot as the market is, you wouldn’t expect houses to be coming back on the market, but they are. Maybe buyers get as far as the appraisal, and the appraisal comes in significantly lower than the purchase price. The way the vast majority of contracts are written, the buyer doesn’t have to perform if the loan cannot be made on the property.
Q: So is the housing market setting up for a crash?
A: We’re at the peak in much of the country. We just are. That leads a lot of people to ask, “Are we going to crash like we did last time?” There’s no signs of that. Last time, we had a lot of people in homes who couldn’t afford them. Now, we have record-low bad credit. That’s like a double negative, but it’s at record lows. It was near record highs back in 2006-07. Interest rates were higher then. Now, interest rates are at record lows.
The underwriting process is much stronger today. Before, if you breathed, you could get a loan. Ultimately, we had a foreclosure crisis. Today, it’s tougher for people to borrow money. Their credit is stronger. They’re not going to walk away from these homes. We’re just not going to see a huge downswing like we did last time. But for those same reasons, we are not seeing a huge upswing. Prices probably won’t crash, but they’re just not going to keep going up.
There is going to come a reckoning. I just don’t think it’s going to be anywhere near the reckoning we had last time. Prices are going to go flat. Interest rates are going to go up a little.