The Expert Podcast

Are you in the process of trying to buy a house? Have you been trying to buy a house for a long time? What has your experience been like? What have you faced? Are there any easing of the challenges of getting a house? Are you running into fewer bidding wars?

Here’s an article in The Wall Street Journal about what it takes to buy your first home now, meaning that it might be different than what it was before. They talked to a bunch of people about the market, where supply is thin, interest rates are going up, and there are still bidding wars even though the price is higher.

Let’s look at a couple of the factors and see how this matches your experience. This couple they talked to first is in North Georgia, a town called Canton, which is in Cherokee County—a beautiful little area up 575 in North Georgia. They were looking to spend about $350,000, which, you know, is a decent amount of money. They quickly discovered that’s going to be a tough number to hit. They had a lease on their apartment that ended in July.

The mortgage interest rate went up while they were house shopping, and they knew they didn’t want to keep looking; they wanted to lock it in. In May, they faced 14 other buyers. They paid $395,000 for a house listed at $359,000—10% over the asking price. This was after the interest rates went up. How did they handle that difference?

Well, they had to borrow money from relatives and spend about $5,000 to buy down the mortgage rate. They still ended up paying close to 6%. They took money out of their retirement account and weren’t happy with the timing, but there wasn’t much they could do. Houses don’t stay on the market. This was in May 2022, after interest rates and home prices had both gone up.

There are still bidding wars because people are still out there trying to buy a house. The amount they paid was right on track. The median existing home price was $400,000—almost exactly what they paid. That’s a record, never higher, even accounting for inflation.

Here’s the big problem with mortgages: Because rates and prices are higher, it’s becoming much more difficult to qualify, even for buyers with good credit, because of income requirements. For example, a $350,000 house at a 3% interest rate a couple of years ago might have had a monthly mortgage payment of around $1,800. Now, at $400,000 and a 6% rate, that payment could be near $3,000 a month or $2,800. Depending on your income, this could push you out of the debt-to-income ratio banks require for approval.

Here’s a clue from a broker: Instead of having 15 to 20 offers on a house, they’re seeing maybe 3, 4, or 5, said a real estate agent in Honolulu. But it doesn’t matter if it’s 15 or 5—there are still more buyers than houses for sale. It’s still musical chairs.

One couple took the opposite approach. They were trying to buy a $300,000 house. They went to open houses with 30 to 40 other shoppers. When interest rates went up, they tried bidding on some houses but didn’t succeed. So, they decided to lease for another year.

The question is: What happens if prices go up even more? That’s a real risk. Many current homeowners and prospective sellers don’t want to sell their houses. If you own a house with a mortgage, it’s tough to sell because you first have to find another house—and there aren’t many. Second, even if you do find one, you’ll have to pay a higher mortgage rate, which might defeat the purpose of moving. This puts less inventory back on the market.

Even The Wall Street Journal notes that buyers stepping back from the market could find it harder to save for a purchase. Inflation and rent are going up, making it tougher to save for a down payment. Meanwhile, home prices continue to rise.

If you do the math and hold off on a purchase for a year or two, and the house goes up 10% during that time, you’re just chasing the market. You’ll need to save more for a down payment, and your mortgage payments will be higher. For many people, a better option is to buy a cheaper house that isn’t perfect but at least gets you into homeownership.

These lower-priced houses, maybe around $200,000 to $250,000, might not be in the best condition. They might need some paint, light maintenance, or other fixes. However, they’re an opportunity. Once the house appreciates, your down payment is in the house, and you can later flip it for a step-up home. This way, you avoid being locked into renting and paying a landlord for the next two years.