Back to the 80’s? Loan Assumptions, Rate Buy Downs, and Incentives
More Choice for Buyers: Supply Up 22% in 10 Weeks
The 4th quarter is here, and this is the best time of year to be a buyer in Greater Phoenix! Inventory continues to rise, up 22% in 10 weeks to be exact, and price reductions typically peak in October and November. Most sellers listing in October are motivated to close on their homes before the end of the year, but few are more motivated than builders. New homes make up 22% of active MLS listings and 29% of Maricopa and Pinal County August sales. Builder incentives are including not only closing cost assistance, but select upgrades and significant permanent and temporary rate buy downs. For perspective, let’s use a $350,000 loan. If a buyer uses the seller’s or builder’s closing cost assistance to buy down the mortgage rate by 3% it would save more than $650/month on their payment. Buying the rate down by 2% saves $450/month. Builders are not the only ones with incentives, however. Last month, 45% of all closings through the Arizona Regional MLS involved sellers paying buyers’ closing costs with a median of $8,500, about the cost of a 2/1 temporary buy down on a $365,000 loan. Buyers would be smart to consider areas with heavy competition between builders. The cities of Coolidge, Maricopa, Tolleson, and Laveen collectively saw 70% of sellers agree to closing cost assistance with 50% of them paying out $10,000 or more. First-time home buyers may feel like the difficulties they’re facing in today’s housing market are unique and unprecedented. However, high rates like today bring out tools and opportunities for buyers that only emerge when the market is stressed, and they disappear when the market recovers. Baby Boomers, considered to be the wealthiest generation today, didn’t have it so great when they were in their 20’s and 30’s. In the midst of building their careers, growing their
families, and purchasing homes, the economy experienced 4 recessions, 4 rounds of high unemployment, and mortgage rates that soared over 10 years from a low of 7% to 18%; it took another 10 years to get back down to 7%. During that time, home sales were low but home values did not decline, similar to today. Here are some stories about how a few of our Baby Boomers and Gen-Xers purchased their first home:
- Mike, 72yo – first home in 1976 for £9,600 at 8.25%, gifted down payment from family and rent-to-own appliances. Sold it 3 years later for £19,000.
- Tom, 68yo – bought his first home in the 70’s together with 3 friends at 9% as tenants in common.
- Chris, 58yo – first home 1989, paid a distressed seller $4,000 and took over their FHA mortgage payment.
- Thomas, over 59yo – first home was a distressed HUD foreclosure he bought for $55K and fixed it up himself.
- Michael, 66yo – sold his boat and car to purchase his first home at 8.5%
- Raejean, 57yo – purchased her first home in 1985 at 16.5%
- Kathleen – purchased in 1979 with gifted down payment and 3-2-1 rate buydown
- Kathryn – first home in 1981, interest rates were 18%, but she assumed the seller’s VA loan at 6%
- Nick – bought first home in 1988 with his brother, assumed the seller’s VA loan with $4,500 down and got a roommate to help make the payment, didn’t care about the rate
- Jon – first home in 1981, assumed a VA loan at 10%, seller financed the rest at 10%. Existing rates were 18%
Each one said their decision to buy their first home was a good one in hindsight, even though money was tight and rates were high. Especially today, it’s highly recommended to consult with a Realtor® and a lender who is fully aware of available loan programs, FHA and VA loan assumptions, seller incentives, down payment assistance, and other tools designed to help you on your way to home ownership and building wealth.
The seller market is weakening in the wake of rising mortgage rates as we head into the 4th quarter. Greater Phoenix is still in a seller’s market, but at the current rate of decline it could see a balanced market by year end. This means that sellers should allow for longer marketing times, improving the condition of their homes prior to listing if necessary, and staying open to funding rate buy downs. Prices are holding tight and are not expected to decline significantly for now.
Commentary written by Tina Tamboer, Senior Housing Analyst with The Cromford Report
©2023 Cromford Associates LLC and Tamboer Consulting LLC
We are moving quickly to a balanced market and will, in my opinion, head into buyer’s market territory very soon. With prices stable, interest rates still above consumer comfortably, and inventory levels on the rise- we will see listings sitting longer and demand continue to decrease.
It’s funny how quickly we get used to/forget markets of the past, which is the general tone of the Cromford Market commentary; and let me expand on that. When the market was on fire and everyone was paying tens of thousands over asking, waiving all their contingencies, and often times being completely outbid and overlooked- that was not a feel good market either! When the inventory was at all time lows and interest rates were starting to climb, that was not a feel good market either. Both of these markets were within the last three years!! It might always feel like it’s not exactly the right time to be a buyer- but that’s because spending a significant amount of money never feels good and you question yourself every step of the way- no matter what the market looks like.
For buyers in this market, you are in a good spot. All of the things we have been talking about over the last handful of months are available to you- seller concessions, rate buy downs, negotiations, and of course the mentality that if and when rates go down, you can refinance. It still may not feel like a win due to prices and rates, but it is, especially this time of year. Take a look at homes that have been on the market over two weeks and especially those over 30 days, you may be able to negotiate a significant price reduction and get moved before the holidays.
For sellers, consider all outcomes before you list your home. It is very rare to get offers on day one, unless you are a significant property- historic, architectural, designer, etc. The listing success rate is going down, the days on market are creeping up, make sure you have a gameplan- days and benchmarks where you are evaluating and even a contingency plan (potentially renting your home) if need be. There is no telling what next year will look like, so stay the course if you can, and work with your Realtor to make changes. This is no fun for you either- but then again, buying and selling homes has always been one of the most stressful life activities! Make sure you are working with an agent you trust and like- your relationship will be involved and lengthy in this type of market.