Move-up buyers are catching a break.
They’re facing a less frantic housing market than earlier this year. Prices are cooling. More homes are up for sale, so competition is easing. Those shopping for their next property actually can get picky.
Economists say homes are expected to continue appreciating, though at a slower pace, and mortgage rates likely will tick up next year. But there’s uncertainty on the horizon. New lending rules could make it tougher for some who have accrued significant debt to get a loan in 2014.
Many interested trade-up shoppers chose to watch the recent frenzied market from the sidelines. It may be time to update your house-hunting strategy.
The Orange County Register asked agents, mortgage brokers and home builders to offer advice to those looking to move up sooner than later.
Here’s what they said.
1. Homebuyers have juice again; use it.
The housing mix still favors sellers, though it’s not as lopsided as during the first part of the year. “Homes are not flying off the market,” said Steve Thomas of ReportsOnHousing. He noted that the dramatic, month-to-month run-up in prices has stopped. And autumn sales usually are slower than in the spring or summer.
Buyers can make a deal dependent on their own home sale now, agents say, or they can request a credit on a home inspection without having to worry the seller will simply move on to the next offer. And home seekers now have more options and can focus on more choice properties.
“As we transition from a seller’s market to a buyer’s market, buyers must be thinking resale, (so) you want to pick the home with the least flaws,” said Jeff Stokes, broker associate with Coldwell Banker Previews International in Newport Beach, Calif.
2. Keep a close eye on interest rates.
The California Association of Realtors predicts the interest rate on a traditional 30-year, fixed-rate mortgage will increase to 5.3 percent next year, up from an average of 4.1 percent in 2013.
But interest rates could decline or hold steady in coming months, the National Association of Mortgage Brokers said. The group cheered the Federal Reserve’s recent decision to not lower its amount of monthly bond purchases. “The strategic move keeps interest rates low and helps continue to attract buyers to the housing market,” said association President Don Frommeyer.
The Fed is expected to start tapering bond purchases next year, sending interest rates up again.
3. Also watch for new mortgage regulations.
In January, new provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act take effect. The rules prohibit practices common before the financial crisis, such as “no doc” or interest-only loans, and require lenders to verify that prospective borrowers can afford to repay their mortgages. Many lenders are expected to issue “qualified” mortgages, which give lenders greater legal protection and require that borrowers meet stricter rules, such as a 43 percent debt-to-income ratio.
Under the new rules, some lenders say, fewer people would be able to get home loans. Consult a mortgage professional to discuss other upcoming changes in the law and all your options — and do it well before you’re ready to sign a contract.
4. Price your current home to sell fast.
If you’re on the hunt for a new home, you don’t want your old home languishing on the Multiple Listing Service. “Unless you’re in an ascending market, which we’re not in right now, you want to get sold in 30 days,” said real estate agent Mac Mackenzie of Coldwell Banker Residential Brokerage in Irvine, Calif. “Homeowners who want to sell their homes now have an 80 percent better chance because competition is going to be less at the end of the year. Selling at year end can be more profitable to a lot of sellers … and buyers are more serious at the end of the year.”
5. Consider a lease-back deal.
In this scenario, the homeowner sells the property and then leases it from the buyer. The buyer becomes, in effect, the landlord. The seller now can buy their own move-up property with the proceeds of the sale, and without having to sell contingent on finding another home. “This method allows (the seller) to be the strongest seller and buyer possible while allowing them only one move and without the burden of carrying two mortgages,” said real estate agent Adam Brett of Prudential California Realty in Fullerton, Calif.
Lease-backs are especially smart in the current, still aggressive, market, he said, while contingency sales are more desirable in a slow real estate market when decisions don’t need to be made as quickly.
6. Why not build your own?
Homebuilding is surging countywide, to levels not seen since the housing boom ended.
In addition to getting more space, move-up buyers don’t have to mess with renovations. Starting from scratch was perfect for Janet and Jerrold Son, who purchased a new, five-bedroom home at Montserrat, a community of 57 houses by Standard Pacific Homes in Brea, Calif. “That was one of the big reasons we wanted a new home,” said Janet Son, mother of two young children. “Especially having kids, we didn’t want to go through remodeling.”
Prices at Montserrat start above $1.2 million. So far, 37 houses have sold since sales began in March, said Laurie Massas, vice president of sales for Standard Pacific’s Southern California coastal division.
The community is expected to sell out within a year.
7. Once you move up, stay put.
Homebuyers should let the economic dust settle and build equity over seven to 10 years, Mackenzie said. “A lot of homeowners have an expectation that the minute they close escrow they should be making money,” he said. But that’s not realistic, he said. Equity ebbs and flows. He said many short sales during the housing crash were done because people panicked, not because they really had to sell the home for less than what was owed on the mortgage.
“Even if they (buyers) buy right now and they slightly overpay, a seven-to-10-year plan is going to protect them,” Mackenzie said. “(For) a two-to-four-year plan, they should consider a very conservative purchase, not as big or as expensive.”
And if the buyer sees a job transfer ahead or is approaching retirement? “They should buy only what they need,” he said. “Period, end of story.”