It’s going to be tough out there for homebuyers this summer. The housing market has been on a tear for over a year now, and even as the coronavirus pandemic recedes, home buying challenges remain.
Challenge number one: home prices are sky-high. The national median existing-home price climbed to $350,300 in May, up 23.6% percent from a year ago, according to the National Association of Realtors.
Challenge number two: listings are in short supply. According to title insurer First American, only 115 out of every 10,000 homes were for sale this spring — the lowest share on record.
The takeaway: a glut of buyers are competing for a limited number of pricey homes. But with 30-year mortgage rates still below 3%, this can still be a great time to buy a house — if you approach it strategically.
If you’re shopping for a home this summer, these tactics will help you come out ahead.
Get pre-approved for a mortgage before you start shopping
In order to be ready to make an offer on a home in today’s market, you must get pre-approved for a mortgage, says Joel Kan, an economist and industry analyst at the Mortgage Bankers Association.
A mortgage pre-approval is a written statement from a lender affirming that you’ve qualified for a home loan based on a preliminary review of your credit report, income, debt and financial accounts. Including a pre-approval letter when you submit an offer on a house shows the seller that you’re a serious and qualified buyer.
But because rates vary by mortgage lender, you’ll want to shop around and apply for mortgage pre-approval with at least three lenders. If you’re denied a loan, find out why and then take steps to address the issue. You may need to repair bad credit by paying off credit card debt or buff up your down payment funds to get pre-approved.
Team up with the right lender and agent
Houses are flying off shelves. In May, homes lasted on the market just six days on average before sellers accepted an offer, according to Zillow data. Since there’s a good chance you’ll need to have a pre-approval letter at a moment’s notice, says Kan, working with a loan officer who is available on nights and weekends is especially important.
In addition, finding a real estate agent who has good relationships with other agents in your market is critical, says Jeff Checko, a real estate agent at The Ashton Real Estate Group of RE/MAX Advantage in Nashville, Tennessee. “Homes are going under contract even before they go on the market,” he says. “You need to have an agent who hears about listings before they go live.”
When meeting with prospective agents, ask what the agent does to find listings before they go on the market, suggests Dana Bull, a real estate agent in Marblehead, Massachusetts. For example, Bull belongs to a Facebook group where agents in her area share information about buyer needs and upcoming listings.
Be prepared to offer asking price — or higher
For the first time ever, more than half of U.S. homes sold above asking price in May, according to Redfin. The average home sold for 2.2% above its listing price.
In Suwanee, Georgia, real estate broker Jennifer Baxter says buyers are being forced to offer well above asking prices because they’re facing competition from flush buyers who are moving to the area. “A lot of buyers who are relocating here are cash buyers from big cities who are basically using Monopoly money, because homes are super affordable here compared to what they’re used to,” she says.
Therefore, the best approach for buyers, Baxter says, is to shop for properties that are listed at prices below the top of your budget so that you have room to offer above the asking price for the right home.
The drawback, though, is that contracts for homes that are sold above list price are more likely to face an appraisal gap (an appraisal that is lower than your offer). It’s important to have a game plan for how you’d handle a low appraisal. For instance, you could potentially reduce your down payment so that you can come up with the cash to cover the difference.
Write a “clean” home offer
In a more balanced market, it is common for real estate contracts to include so-called contingencies, which lay out conditions that must be met before a sale can be completed and allow a buyer to walk away if something goes wrong. For example, a home inspection contingency allows buyers to ask sellers to make repairs if they uncover problems during a property inspection. A financing contingency requires that the buyer’s mortgage get approved before they’re obligated to close on the property.
But with many sellers getting flooded with offers right now, buyers have less room to require contingencies. As a result, sellers prefer a so-called “clean” offer that waives contingencies, Baxter says.
Some contingencies, though, are riskier for buyers to waive than others. For example, if you waive your right to a home inspection, you’re effectively agreeing to purchase a home as-is.
One way to waive a home inspection while still protecting yourself is to perform a pre-offer inspection, where the seller allows you to make sure there is nothing seriously wrong with the home before you make an offer. You’ll have to pay for the inspection up front — inspections typically cost $300 to $400 — but it can give you the information that you need in order to avoid purchasing a home with major defects.
Don’t get discouraged
With such limited supply, you may have to bid on a lot of homes before you have an offer accepted. In May, seven in 10 home buyers faced bidding wars, according to a Redfin report. So don’t let a few rejections derail your home search. “It’s frustrating to lose out on a home, but that’s the market we’re in right now,” Baxter says.
The bright spot? Buyers are starting to get more homes to choose from, says Danielle Hale, chief economist at Realtor.com. The number of U.S. homes for sale rose 3.9% in May from April, the Zillow study found. That’s the first monthly increase since July 2020.
Meanwhile, construction of new homes is picking up. U.S. housing starts — the number of new homes that builders have started construction in a particular month — in May rose 3.6% from April, with home builders adding 1,681,000 new units, according to Census Bureau data.
The bottom line: it will still be a seller’s market, but you should have a larger selection of homes to bid on in the coming months.