Review of all things Real Estate: Dramatic change in the real estate market gives buyers leverage that has been lacking for several years

Oh, the difference six months can make! Our local real estate market went from a slam seller’s market to a neutral-bordering-on-a-buyer’s market starting in May 2022 when the effects of rising inflation and soaring interest rates were starting to become apparent.

These factors resulted in some buyers no longer loan qualified and/or no longer having the will to compete for real estate purchase. Discouraged, many buyers were frozen in place. Additionally, world events and unclear national decisions created uncertainty in the public’s mind; and since real estate transactions are purchases of confidence, the herd of qualified, willing buyers thinned.

As buyer interest decreased, seller interest increased which resulted in rising inventory. Seller’s previous reticence was partly due to the question, if I sell, then where do I go? Even if the intent was to move out of state, the real estate wildfire was burning across the nation.

Yes, people who sold California real estate were generally positioned to compete better in other states since the price of our real estate is regarded as very expensive. But for some people, the thought of competition is unpleasant. That is, until sellers started feeling like they missed their opportunity to capitalize on the high levels of the market which suddenly focused their interest on selling. Hence the increased number of listings currently available to sell.

So, here we are and those sellers who want to sell are becoming increasingly amenable to negotiating price and terms, and even to incentivizing buyers. And these factors create opportunities for buyers.

Buyers can now ask for seller credits in closing towards buyer closing costs, when just six months ago it was unheard of. Buyers can use these credits to buy down mortgage interest rates. Recently we closed a VA client for whom the seller credited the buyer $10,000, and other agents in my office have experienced similar success getting seller concessions for their clients.

One method being used by my primary loan officer, Martin Quiroz, is a 2-year interest rate buydown. The first year the rate is 2% less than the note rate; then the second year, the rate is 1% less than the original note rate. To demonstrate the significance, for a $720,000 purchase with conventional 20% down payment, the $600,000 loan payment is approximately $700 less a month for the first year, then approximately $350 less a month the second year.

Some economists (including Laurence Chun of the National Association of Realtors) are forecasting that mortgage interest rates will return to the 5% range (down from current +7%) in 2023. Until they do drop the 2-year buy down will be a nice savings, and if/when rates do drop, the buyer can do a traditional refinance at the lower future rates.

When the market was a red-hot seller’s market, buyers were often required to remove their loan, inspection, and/or appraisal contingencies (protections) when their offer was submitted just to be able to be considered with the multiple competing offers above list price. These practices were virtually unprecedented, and I am wondering if there might be a surge of lawsuits when buyers find they purchased less than quality properties essentially under duress.

We are witnessing lower prices due to inflation and high interest rates, and longer market time. So now, instead of asking buyers to waive their home inspection, sellers are increasingly making repairs called out by the home inspector.

For VA and FHA, required repairs by those government loan programs are also increasingly being untaken by the sellers who don’t want to lose the buyer with whom they are in escrow… because it may be the last buyer that they will see for a while. Especially since we are in the traditionally quiet time of year in the fourth quarter and upcoming first quarter in 2023. Sellers aren’t going to lose money though; they will just give back some of the 38-40% gains that were accrued over the last several years.

The last comment is in response to a question I get repeatedly; is the market going to crash and will we see good deals in the form of foreclosures? There is too much money (equity) in the market to crash and, for the same reason, it is unlikely that we will see massive foreclosures.

I will expand these thoughts in a future article but economist Laurence Chun thinks prices will go up about 1% in 2023. If interest rates do go back into the 5% range, it is certainly possible. So, is it a good time to buy? Often, in a quiet market, it is. Marry the home, date the rate.