The housing market is getting hot—and that is changing the game for both home buyers and sellers.
In many cities, including those hard hit by the downturn, bidding wars are breaking out and winning offers often exceed the asking the price. A relatively low inventory of homes for sale is feeding the scramble.
Existing-home sales were up 13% in May compared with the previous year, reports the National Association of Realtors, and the median home price was up 15%, to $208,000, the biggest jump since October 2005. Average home prices for the most recent S&P/Case-Shiller 20-city index were up 12% in April over a year ago.
For first-time buyers and those eager to move up, it could be a good time to buy. Prices still are well below the mid-2000s highs. Interest rates have shot up, but they remain low by historical standards. The average rate on a 30-year fixed-rate mortgage was 4.37% for the week ended Thursday, up from 3.35% in early May, according to Freddie Mac’s weekly survey. Until 2009, rates were above 5% going back to the early 1970s.
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Initially, rising rates could drive potential buyers into the market before mortgage costs climb more. But if rates continue upward, they could help put an end to the boom.
While an active market can be good for both buyers and sellers, a sizzling market poses challenges. In some areas, real-estate agents have been accused of holding back choice homes for sale from the Multiple Listing Service database so they can market them first to their own clients. Bidding wars can leave potential buyers feeling bruised and frustrated. And climbing home prices mean appraisals might come in below the agreed-on price.
Here are some tips for navigating this evolving market:
Cash matters. It helps to have a bundle of cash to get the home you want. Down payments today range from 3.5% for a loan backed by the Federal Housing Administration to as much as 40% for homes over $1 million.
A typical down payment on a regular mortgage is 5% to 10%, says Bob Walters, chief economist at Quicken Loans. Buyers who need a “jumbo” loan—or one bigger than $417,000 or $625,500, depending where you live—might have to put down 20% or more.
If the lender’s appraisal of the home falls short of your purchase price, the buyer and seller must negotiate whether the seller will reduce the price or the buyer will pay the difference in cash—or some combination of the two.
Get prequalified. Mortgage lenders still carefully scrutinize borrowers’ ability to repay their loans, and sellers might be leery of bids that are contingent on getting financing. Potential buyers will be more attractive if they already have qualified for a loan, even in calm markets, like Connecticut, says Terence Beaty, director of the new-homes and land division at Prudential Connecticut Realty, based in Wallingford, Conn.
That means picking a lender and providing pay stubs, bank and brokerage statements and, for those who are self-employed, tax returns. Generally, you will need a credit score of at least 640 to get a mortgage, says Greg Gwizdz, executive vice president at Wells Fargo Home Mortgage, the nation’s largest residential lender—and it will need to be higher if you want the best rates.
