The Expert Podcast

It's very common knowledge that the real estate market is problematic. If you're looking to buy a house, you're facing a lot of headwinds. I talked to a good colleague of mine the other day, and he's looking to buy an additional vacation home for him and his wife and his family, and even though he has good finances, a good income, and a lot of money, he's having trouble finding a property that fits his needs. Even in the face of properties that need work, the sellers are not coming down on price.

So why is that the case? If he's facing it for a second home, that's an affluent, high-net-worth situation. What about first-time buyers? What about workforce buyers? What about middle-class buyers? They're facing even bigger problems.

Here's why. Yahoo Finance has a great article about the math keeping housing inventory so low. We've talked about some of this in previous videos, but let's take a closer dive.

The first reason is for current owners; it's not financially smart to sell your house right now. That's the bottom line. Why? Because if you sell your house, and even if you buy the exact same house somewhere else, first of all, you're going to lose about 10% of your value with closing costs. You're going to lose 6% on a real estate commission for selling your existing house. You're going to have about 3% on points, title fees, and closing fees, not counting moving, buying new drapes, and everything else.

For example, even if you were going sideways on a $500,000 house, which in this day and age is a nice house but not a luxury house, you're going to lose $50,000 right off the bat moving from one house to another. This is not counting the fact that the mortgage on your new house and the payment are probably going to be much, much bigger. For example, if you have a $500,000 house, you have a $300,000 mortgage, and if it was at 3%, you're probably paying about $1,200 a month. Your new house, even if you financed about the same amount, maybe $350,000, if you tack on that $50,000 and put all your equity back in, you're going to be spending closer to $3,000, more than double your mortgage payment. That's for the same house, going sideways. If you upgrade your house to go to maybe a six- or seven-story or $800,000 house, you're going to pay a lot more.

So, people aren't selling. Maybe they're putting some money into their existing house and fixing it up. The other problem is inventory. It's hard to find homes that are available because nobody wants to sell. Certainly, new home builders are constructing new homes. However, the rate and pace at which they're doing that are very small, and they can only do that in certain areas where there's land. You can't do that everywhere.
So, if you're looking to move up in a home as a new first-time buyer, you're probably running into some problems because of what's called the lock-in effect. People who had mortgages they took out four or five years ago can't sell because their mortgage payment would be higher. In fact, some of them wouldn't even be able to get approved for a mortgage on their existing house because of their income.
What do you do if you're a buyer? Well, what we always recommend is to buy the cheapest house you can afford. Maybe this is this is not your dream house. If you're a first-time buyer or renter, buy just anything you can get approved for so that at least you can stand the house. That way, you're in the homeowner market. The house probably won't lose any value. Your money will be going towards the mortgage, not towards rent. In the future, if you do want to move up, you already have some equity built up. If rates stabilize or go down, which may not happen anytime soon, at least now you're a homeowner, and you're in that pipeline, in that assembly, in that conveyor belt of home ownership.

So, it's not looking like it's going to turn around anytime soon. It's bad news for waiting for rates to fall. Even just recently, they talked about the interest rate cuts that may happen this year, but they may not happen at all. As a matter of fact, they may have to raise rates once again.