Between the office meetings I spoke at this week, to our monthly webinar, to my coaching clients around the country to the conversations in our own office – I kept hearing a narrative this week about the wealth gap widening. And of course this has implications for real estate because we are where affordability being shitty really hurts. If you’re reading this post from my local market, we’ve seen really dramatic drops in affordability. For the majority of my career when I looked at the data on the affordability of real estate in Washoe County – it was almost 100%. Meaning 100% of the people who live and work here, who earn the median income could afford the mortgage payment on the median priced home. The main hang up used to be down payment funds. In the past two years, affordability has fallen to 70% here.
Which sucks. Not because it’s less people I can sell a mortgage to. That is in fact true because it means I can qualify less of the leads that come in. But what really sucks is that I know, because I’ve seen, how homeownership changes the course of someone’s life. How the trajectory of their financial future improves.
What sucks more was hearing real estate professionals say we have to just focus on the people who have money for the next few years and forget about the rest. I disagree. My team is helping so many first-time homebuyers this month - YES, THIS MONTH - and I don’t think in previous markets we would have been able to put together deals for them. The next few months could be one of the biggest opportunities for buyers that we’ve seen in years – as inventory rises slightly, while most of their competition couldn’t take the heat of rates and left the market.
Also though, I don’t want to leave anyone out – so let’s look at a couple of different groups of buyers and sellers and see where the opportunity lies for each, given current market conditions.
Luxury
I am seeing listings over a million sitting quieter and longer. Which doesn’t really fall in line with this concept of the rich getting richer, while the poor get poorer. Theoretically, the wealthy aren’t feeling the effects of inflation and a looming recession as much. So they should still be wanting to buy those fancy houses. And some are. But they’re doing something you wouldn’t normally see at this price point. Negotiating for a seller credit to buy down their rate.
Typically seller concessions are for those who can’t afford the monthly payment or the cash to close. Not your fancy business owner or high wage earner. But guess what? If they’re smart, they like a good deal. So while the social algorithms may not be filling their feed with videos about seller buy downs – you should be. I recently ran numbers for my clients looking at listing at $1.275M. We compared them offering $1.2M with a full price offer including a $72k credit to buy down their rate.
My ego said no way, this isn’t going to make sense for them to spend that kind of money to buy down their rate when rates will likely go down within 18 months and they could refinance. But I ran the numbers and numbers don’t lie. The monthly savings were great, 5-year savings also huge, but even if they refi’d in 18 months – the credit still made more sense.
If you need to sell your luxury home right now, consider marketing something like this. If the monthly payment on your house is better than the monthly payment on any other home at the same price point – you’re likely to get more showings.
Move Up/Down
Now this strategy is not going to be for everyone. But if you are a buyer and a seller who needs a new place but is open to keeping their current home as a rental – I need to show you a really cool strategy with lots of great implications.
If you want to move up or down but the house you are in has an amazing interest rate and a good chunk of equity in it. You were planning to use that equity, once converted into proceeds from the sale for your down payment. We could use our bridge loan product to help you make non-contingent offers but maybe you don’t want to be a seller in this market. You could be a landlord though, because as buyers leave the market – single family homes as rentals are more and more in demand. Sure there’s tons of apartment buildings with vacancies but not every family wants to live in an apartment.
We can take out a HELOC against your current home to use as the down payment funds for the new place. Then you can take advantage of buying while the market is a little more in your favor and also keep your beautiful interest rate on the departing primary, now rental.
But this gets a little better. I’ve been deep diving into tax strategies this year. (My compliance guy is panicking right now so please be advised that you need to consult with your CPA on this next paragraph – I’m not licensed to give you tax advice.) The first year you make that house rental is its first year in service. That’s a great time to do a cost segregation study on it and get huge tax benefits from the accelerated depreciation. Yes, you need to keep in mind the depreciation recapture when you sell this property but maybe you won’t – maybe you will see how beautiful this game of real estate investing is.
First Time Homebuyer
As mentioned, this fall and winter could be the best time for these guys to put together a deal and break into homeownership. Someone just needs to tell them (or tell you!) because they are tired and discouraged and frankly beat up from trying to buy a home this year. Here’s a fun fact: if a seller is putting their house on the market this year, they are likely quite motivated. So let’s run numbers for each house, let’s play with a combination of a permanent buy down with a temporary buy down and see what we can do to get the payment into your comfort zone.
In Closing – a little economic update and I’m going to keep it short and sweet. We got our jobs report this morning and while the market was expecting $170k jobs added, the report blasted expectations showing $336,000. Remember the Fed is only watching inflation and the labor market. Inflation is not at the 2% target yet and the jobs market is holding strong in spite of higher interest rates, sooo they can keep doing what they need to do to bring inflation down.