A recent glance at any real estate news platform reveals the same results: interest rates are up, and transactions are down. Conversely, inventory is up. Way up, in some places.
There is no end to the irony here since we’ve gone through years of limited supply, forcing buyers to compete for rare offerings, pushing prices higher. Now that we actually have homes to choose from, buyers are suddenly sitting on their hands.
For those of us with many years under our belts, we understand that this is actually the optimum time to buy: Even with the recent hikes, rates are still in line with 30-year averages (factoring out the artificially low rates during the foreclosure crisis and pandemic).
Additionally, sellers on the market this time of year are there because they need to sell and, due to seasonal slowdowns, are usually willing to negotiate to get into contract.
Buyers sitting on the sidelines
Unfortunately, we face an uphill battle against what I will call “herd mentality.” Rather than view real estate agents as trusted advisors, potential homebuyers will happily ingest advice from the news media, fellow workmates or a third cousin thrice removed who bought a home 20 years ago.
Most of these sources warn buyers of a market destined to collapse, rates at a record high, declining transactions and imminent threats of falling skies. As a result, like thousands of other homebuyer wannabes, they heed the negative advice and follow the pack instead of thinking for themselves and recognizing opportunity for what it really is.
Consequently, we are surrounded by a virtual sea of potential buyers who should be taking advantage of the current market but have chosen to park their dreams in hopes of better prospects down the road. We are also seeing a disproportionate number of transactions fall apart as buyers, initially excited about their purchase, fall victim to “buyer’s remorse.”
The resulting vacuum provides a wonderful opportunity for agents who understand the situation and have the tools to properly educate their clients. There is a caveat, however: Not every property is worth considering.
As agents, we have a fiduciary responsibility to our clients to, in the words of the medical community, “first, do no harm.” Medical professionals, when confronted by a person in need of care, must weigh the potential risks of a treatment against its expected benefits.
For example, the condo market in states such as California and Florida has been devastated by calamities and the ensuing government legislation. The result has been soaring HOA fees, numerous assessments and an inability to secure normal financing, all of which have dramatically increased ownership costs and rendered units in both states virtually unsellable.
Get buyers off the fence
So how do you educate buyers as to actual opportunity? In response to this question, Inman has developed a new Market Calculator to help agents and their buyers make sense of the opportunities available to them.
Using the calculator, I ran the numbers contrasting an average three-bedroom condo in Seattle versus a three-bedroom apartment. The condo price was $780,000 with a monthly fee of $800, while the apartment rent came in at $3,500/month.
Since many do not have any significant saving habits, I set both “Spent it/Save it/Invest it” toggles to Spend it. The results showed that if you sold after 11 years, you would have been better off renting an apartment — by about $100,000.
As near as I could tell, the calculator did not include offsetting federal income tax benefits or any potential gains from improvements made to the condo. I also did not see cost-of-living increases applied to applicable rent. Even then, at 16 years of ownership, the condo begins to pull ahead, with the gap widening significantly as the years progress.
Another factor not included was the leverage potential of accrued equity — a fact that is nonexistent with rented properties.
Using an average single-family home price of $900,000 in Seattle versus an average $3,850 rental for a comparable property, the breakeven point came at 12 years and rapidly escalated after that.
If we use the calculator in Columbus, Ohio, however, the results are dramatically different. Using a single-family home price of $285,000 versus a rent of $1,800, the breakeven point comes earlier, at seven years.
One thing is clear after playing with the calculator: In the short term, renting beats homeownership. Given the long haul, however, the benefits of owning your own property far outweigh those of being a lifelong renter.
An additional factor is the benefit to potential heirs. For those who live in apartments, the beneficiaries receive a suite full of belongings. In contrast, those inheriting property are receiving actual property value.
Like any significant investment, the play should be for the long haul. Given this, and the fact that interest rates are unlikely to go down any time soon, this can be a valuable tool to help buyers understand that over an extended period, the multiple benefits of homeownership far outweigh the costs of continuing to rent.
At the end of the day, given the long-term trends, there is no reason why buyers who are serious about owning should not jump in now and take advantage of the current market. If your clients do not understand the benefits of jumping in sooner rather than later, Darryl Davis’ article, “Buyers waiting for lower rates? Here are the scripts you need now,” should be your next read.
Carl Medford is the CEO of The Medford Team.
