You’re not helpless when it comes to mortgage interest rates! A lot of buyers are concerned about monthly payments now that the interest rates have gone up.
I talked with Chris O’Connell at Loan Depot about 4 options that home buyers have to pay a lower interest rate and therefore a lower monthly mortgage payment. Chris had one that was surprising to me and we talked a bit about the one that seems to be getting a lot of attention in the real estate world right now, the 2/1 buy down and why that may not be the BEST option.
Take a look at this video interview if that is something that is worrying you as you think about buying a house now.
Next week I’ll give you another neighborhood profile – I’m excited about my small town series, and I have one I love and plan to talk about, but this week I’m going to beat a dead horse a bit and talk some more about what is happening in the real estate market in the Twin Cities metro area. I don’t usually do “market update” posts or videos on my YouTube channel, but the fact of the matter is that right now I’m actively helping 6 buyers try to navigate this market and I want to share a bit of how we look at the market and measure it and then also show you what that means for the Twin Cities right now.
I feel like anecdotal evidence about how many offers a listing gets, how fast something sells or how far over list price the offers are is shocking at times or maybe sounds like a fish tale that we like to tell – “the big one that got away” kind of thing. Stories are great and interesting, but in this post I want to talk about DATA. Weee! Exciting!
Not exciting? Well, I disagree. I think this tells a very clear story and because it looks at the entire market and then breaks it down by price it might tell the story in a way that makes sense in a different way to more people. This is the WHY behind the HOW that I’ve talked about before when I’ve done videos/posts about making the best offer.
How DATA tells you if it is a buyer or a seller’s market: Meet the “Absorption Rate”
These are my words, not something from a real estate dictionary somewhere.
When we look at a market and try to decide who it favors we look at the number of active listings available in a 30 day period and then look at the sales. It’s a ratio. But the way that I think is easiest to visualize this ratio is as the “absorption rate”. This rate shows us how long it would take for ALL houses actively listed to be sold if NO OTHER homes were put on the market during that time.
We are measuring time in months for this exercise, and the magic number of months where REALTORS feel that the market is in balance is 5 (not set in stone, some argue for 6 months etc). This means that when it would take 5 months for every home to be sold should no other homes be listed, the market does not favor either a buyer OR a seller.
Any number smaller than 5 indicates a sellers market. The smaller the number the more it favors sellers. This works in the converse as well, the LARGER the number over 5 the more the market favors buyers.
What is the Twin Cities absorption rate today?
Emphasis on TODAY because this rate changes seasonally and with market forces – I’ll talk a bit about what those are too.
The current absorption rate for the Twin Cities metro is 0.86. LESS than one month’s supply of homes. Very much in the favor of the seller. And it is not getting better – in the past 6 weeks the rate has consistently decreased from 1.32 the first week of January to where we are today.
The last half of 2020 was a crazy market, due to Covid hitting in spring and the uncertainty that brought with it there was a lull in what would typically be the busy spring market, but once everyone got their bearings it was off to the races and it never really slowed, even during the holidays. Add extremely low interest rates into the mix (under 3% for a pretty extended stretch), and a bubble of Gen Y aging into home ownership and bumping up what was already high demand from buyers, and things have just not cooled at all. All of this to say we sold a LOT of homes last year and possibly ate into what would have been inventory for this year. January 2021 started with 38% FEWER listings than we had in January 2020.
Supply continues to drop, particularly in the under $300K price range where new listings are down 15% YTD. The over all market YTD has 6.9% fewer listings. If you’ve taken any economics classes at all you’ll know that price is a function of supply and demand. We have low supply and high demand and that is pushing prices higher as people bid against each other for homes.
Absorption rate by price point
The best way to show this is to give you a screen shot of the table that we looked at in our data meeting this week. I love this table because it breaks it out by general price points and you can see the trend over the past 9-10 months for each. You’ll notice that higher price points have slightly looser markets because there are fewer buyers that can manage those budgets. I do think that the $500-$1M may need to be broken up a bit because at $500K there is still a quite a large bubble of buyers that are able to enter the market and compete for homes at that price. There may be a break closer to the mid $600’s where the ratio gets closer to 1.4, but I think $500 is still quite competitive.
So, that is the data geek light version of the market at this point in time in the Twin Cities. An opportunity again for me to encourage you to be as prepared as you possibly can be before you enter the fray. You really need to be in the best position possible if you want to land at the top of the heap when you get into this market.
oh my gosh… being a buyer right now is like being thrown into the Gladiator pit. It. Is TOUGH. During our team meeting the other day agents that have been at this for many many years are saying that this is the roughest market for buyers that they have EVER seen.
I thought it was crazy last summer. And then I think everyone kind of held their breath and hoped that one “positive” of having a pandemic may be a bit more balance in the housing market. It has not happened.
So, if you want to buy a home in the Twin Cities metro, there are things you need to know and understand up front before you innocently walk into the pit thinking you can take your time, or not be prepared, or ask for seller concessions. Just for fun I’m going to post some screen shots of a discussion we recently had on our office facebook group – a bunch of agents discussing what it’s like representing buyers right now. Hold onto your hats! Horror stories coming!
So what is a buyer to do? Well, I am going to tell you!
FINANCES. The most important thing you can do is to be pre-approved for a loan. Know what you can afford and have proof in the form of a letter that you can attach to a purchase agreement. In addition to this, know that a conventional loan with a decent downpayment or a cash offer are far more attractive to sellers than an FHA loan or another that puts requirements on the seller and indicates that credit may not be as clean as it could be.
SPEED. Do not use one of the big search engines to find a home. Zillow and others are notoriously inaccurate and will not have updated info available in a timely manner. Your agent will set up a search that reflects exactly what YOU want and can set it to send the listings to you immediately. Speed is very important! If you can be the first one to see a listing (or have your agent see it and do a virtual showing as I often do) and put in your offer you are far better off than coming in to a multiple offer situation.
CLEAN. Have as few contingencies as possible. What is a contingency? Well, it’s any barrier to closing the deal. If you have another home to sell, have to get approved for financing, want the home to pass an inspection, etc. Your best bet is to have your financing ready, be able to perform on the purchase of the home without needing to sell, and make your inspection contingency as light as possible. If there are contingencies related to selling a home, you MUST have a contract on that home already and a close date to add to the contract.
CLOSING COSTS. the best approach is to plan to pay them and not ask for seller contribution OR ask for very little, possibly with the sale price elevated to account for it, essentially rolling them into the mortgage. The big catch here is that you’ll pay interest on them over time and the house needs to appraise for the amount you offer if you’re getting a loan.
SKIN IN THE GAME. Earnest money. Here in MN we typically do 1% of the sale price as earnest money. Earnest money is your good faith deposit on a home. If you increase the size of this deposit it shows that you are more serious about the property, and some are even stipulating that all or part will be non-refundable to the buyer for a home that is particularly desirable and in multiple offers. It shows a seriousness about the offer and is a tempting carrot for the seller to know they will get at least X$.
INSPECTION. Make your inspection period shorter if possible. Typical has been 10 days and I really work to still get that for my clients because I work with a lot of relocation clients and traveling to MN or arranging for inspection remedy long distance can be a challenge. That said, sellers want to have a good idea if a deal will go through or if they should take the next offer as quickly as possible so that they do not have wasted days on market without the potential to sell to someone else.
INSPECTION PART II. Request only health and safety remedies. If things are functioning but not brand new, that is acceptable. No house is perfect. EVERY house has flaws, even brand spanking new ones. One of the best favors you can do for yourself is to get the inspection as early in the inspection period as possible. This is important for a couple of reasons: 1.) if the house doesn’t come near to passing inspection in your opinion, you can exit the transaction and be on to the next one as soon as possible and 2.) if you request remedies, there is time to work with the seller on it and not be forced into a corner. What I mean is that if you get an inspection on the last day of the period and require remedies (fixes), if the seller doesn’t respond to that request by the end of the period your options are to a.) accept the original agreement as written (no fixes) OR b.) cancel the agreement entirely. In this market that favors sellers 100% because they likely have another offer waiting and are fine with a cancellation.
MOVE IN DATE. From a risk perspective, you always want to take possession of the home at closing. However, your best option for getting to that point is knowing what the preferred closing date is for the seller if you have any wiggle room at all. Many of them are being cast into the same pit to find a home and may need some extra time to do so, knowing their preferences up front may sweeten the deal for them because having that uncertainty may be worth more than money.
*LETTER. This one can be a tipping point or make no difference whatsoever. If you write a letter to the seller telling them why you love their home and neighborhood and how you look forward to caring for it and enjoying it in the way that they have. Avoid mentioning anything to do with protected groups and focus on what you love about the house and area and what made you pick that home. Most people have some emotional attachment to their home and want to feel that they are passing it on to someone who will care for it.
HGTV makes it look really easy and smart to buy a fixer but before you do, think about the following things:
Give the location and the price a really hard look. This is where your agent will come in and help you make a clear-eyed decision based on actual data to see if what looks like a good purchase actually IS a good purchase.
You’ll want to have a clear sense of what other homes in the neighborhood have gone for and what the homes offered. How updated are they? How far would this home have to go? Is it cosmetic changes or do you need to shore up the foundation? And even if the foundation is the problem – is it priced where this would make sense to invest in it?
Look for instant or inexpensive ways to create equity. Is the worst thing about the house the flocked wallpaper and shag carpet? If it’s mostly surfaces that need refinishing, and you’re good with a paint brush and can pull up old carpet, your cost for the return will be really low. A fresh coat of paint goes a really long way. One thing that I have considered in the past is what would make the most impact – floors & walls are enormous parts of the home and resurfacing those pieces can really make a big impact on value. MOST people can’t seem to look past bad decorating. If you can – BONUS!
If there are projects that will require professional help – make sure that they are projects that will bring you good return on the cost of having to hire out. Going back to surfaces – having wood floors refinished is a good return. In Minneapolis we have to have our homes inspected for energy efficiency and paying for insulation will increase the price that the home commands, in addition to paying dividends in reduced energy costs. And there are a lot of incentives provided by the city and energy companies in the form of rebates and low interest loans to help home owners achieve the highest efficiency possible. If you live in Minneapolis you know you want low bills and a snug home.
Lastly – evaluate your ability to live in or with chaos. It can be hard at times if you’re living in a construction site. Even if you’re not and you’re trying to manage the project from outside of it, make sure that you can handle set backs, messes, etc. It always looks so much worse before it gets better.
If you’re curious about a way to do this while having someone else help pay – check out my video on house hacking. 🙂
Comments or questions? I’d love to hear from you. If there is a video that you’d be interested in seeing or a topic that you’re curious about, let me know.
Did you know that the SELLER pays the commission for the buyer’s agent? It’s true! If you are embarking on your first home purchase, you may be wondering about that and it can feel weird to ask.Buying your first house can be intimidating on a lot of levels, but especially financially, so this is a great benefit if you are on the buy side- you get all of the services of an agent and the seller pays!
How does this work?
When someone puts their home on the market, they negotiate a fee with the agent that is listing their home. Generally, this fee covers the marketing cost of the home (advertising, flyers, listing photographs etc) as well as a commission for the listing agent (which they split with their broker) AND the agent of the buyer (usually called the “selling agent”).
So, if the listing agent charges 6% they will offer some percentage of that to the selling agent as a commission – let’s say that it’s half. If the home is $100,000 that means that the selling (buyer’s) agent will get a check for $3000 at close and they will then split that with their broker at whatever percentage they have agreed to. From whatever remains, the agent will have to put aside 30% for income taxes, some percentage for costs of doing business and then keep whatever is left as income to pay bills.
In my office, the only fee that a buyer pays directly is a $399 administrative fee and that goes to the broker as well. As part of this fee, the records on the transaction are maintained and accessible to the client forever.
And that’s it! If you are a buyer – do not hesitate to find yourself a great agent to help you through the process!
If you’ve never bought a home before you might think the best way to go about this is to drive around or check whatever app you use until you see a house you like, and then call the agent on the sign so you can go take a look.
Groovy – I guarantee they will ask you if you have signed an exclusive buyer representation agreement or not. I feel like making a flow chart here, but I’m going to stick to words…
If you HAVE signed with an agent – GREAT –call them and let them know you want to see the property. Do NOT call the listing agent. You are having your agent do the job that you have hired them to do! You are NOT bothering them.
Your agent wants to see what you see and see it not only through YOUR eyes, but also through their own. They are there as your advocates and will be looking for anything that may impact your use and enjoyment of the home. In fact, an agent is a “fiduciary” – which means that they are obligated to act in YOUR best interests! Even if it conflicts with their OWN best interests. For example – if the agent were looking for a similar property to the one that you wanted and knew that the property would suit you and that you would buy it – they would be OBLIGATED to make sure you knew about that property even though they may then not be able to purchase it themselves. You want someone like this on your side.
If you have NOT signed with an agent of your own and are walking into that house unrepresented with the listing agent you should be aware of a couple of things – 1.) that agent owes a fiduciary duty to the SELLER of the home – NOT YOU. You’re like a fly that just walked into the spider’s web. 2.) Anything that you say to that agent can and will be shared with the seller!
So if you are walking around the property and you’re beside yourself with joy because this is exactly what you’re looking for! And your budget is 10X as high as this house is priced! Isn’t that great?!? Well, now the seller knows how badly you want it AND that they probably don’t need to give any ground on the price.
But wait! There’s more! If you’re cool with all of that (and there are reasons why you might be) and you go ahead and sign with that agent for the purposes of purchasing that home you need to know a couple more things – one… that agent will “take both sides” of the commission, meaning they get the commission for both being the agent of the seller AND the agent of the buyer.
In addition to this, let’s go back to fiduciary duty … if an agent is bound to only actions that would benefit their client and they are in the middle of a transaction, representing both, they are between a rock and a hard place when it comes time for one of the key functions of an agent – NEGOTIATING and ADVISING. They can give you information about prices and time on market and other stats, but anything that they advise you cannot adversely affect the seller. Tough spot and maybe not where you want to be as a buyer – particularly if it is your first home purchase.
In MN, we are legally obligated to explain what agency relationships mean at the first “substantive contact” with a potential client. No dual agency can occur unless both parties agree to it, and in MN, dual agency means MORE than just the same AGENT representing both the buyer and the seller. This is a twist worth understanding when you are deciding whether or not to agree to double agency in MN – here is applies to any agent working for the same broker. So while I may represent you, I cannot show you a home listed by an agent in my office (my BROKER – not the company) unless we’ve agreed to dual agency. It’s like dual agency lite. Your agent will still work on your behalf, but they aren’t in that middle space between the seller and yourself and they do not get “both sides” of the commission even though dual agency technically still applies.
While agreeing to dual agency may not be right for every occasion it can be right for some. And in the current market in Minneapolis not having access to every home on the market in your price range can be a large detriment to your search. If you’re not comfortable with it and your agent has a listing of their own that is PERFECT for you – you can ask to be referred to a different agent.
Now for sellers… This has happened to me personally when I sold a house in another state, my agent had an open house, an unrepresented buyer came through and wanted the home, and our agent signed that buyer. If we hadn’t agreed to dual agency we would not have sold our home to that person and we were READY to go. So while in the end, we didn’t get too much help with the negotiating, we had already had the benefit of understanding what the market would support for our house and we could negotiate fairly comfortably, but it’s up to each seller to make that decision.
You found a house! Your offer’s been accepted! Clear sailing from here on out, right?
Well, maybe, but you should know what comes next.
As part of your offer you will submit a deposit, called “earnest money” (I did a video on that – check out my YouTube channel if you’re interested.) It’s basically putting some skin into the game so that you have some incentive to adhere to the terms of the contract and perform the duties that you are committed to on the schedule that you’ve agreed to.
You need to meet the deadlines and SO DOES THE SELLER. If you don’t, there is the potential that the seller keeps your earnest money and the house goes back on the market. If they don’t or the contingencies around inspections, appraisals and loans aren’t satisfied, you can break the contract and have your earnest money refunded.
Inspection and Appraisal
Well, as part of the purchase agreement you’ll negotiate some terms, like an inspection, the fact that the your financing depends on the home appraising for the amount you’ve agreed to pay, that you can have your financing approved and ready to go by a certain point in the process.
If you decide that you are, or the seller is, willing to fix whatever is discovered in the inspection, or if you can work out a credit to the price to compensate for the issues (and there are ALWAYS some issues!), the process keeps moving – if not, you can ask for a refund of your earnest money and look for something else.
At the same time, the lender is completing your loan approval. You’ll want to be very responsive to your lender as they request documents etc, because missing a funding deadline can either delay closing or put you in breach of your contract enabling the seller to keep your earnest money and sell to someone else.
As a part of obtaining financing the lender will also order an appraisal of the home. The bank wants to know that the collateral on their loan (the home) is worth what they are lending you and they will be able to sell it and recoup their money if you default for some reason.
If the home does not appraise for the amount that you’re borrowing, a few things can happen. You can renegotiate the price downward to make up for the difference, you can come up with the cash to make up the difference, or you can walk away if the financing contingency is not met and specified in the contract.
On the flip side, homes have been known to appraise for MORE than you’ve agreed to – in this case it’s like you’ve been given a prize because it’s effectively instant equity in the home that you didn’t have to wait or pay for. Yay!
While your lender is working on your loan, you’re having your inspections done and the sellers are making their repairs, the title company is doing a search to make sure that the title is clean and there are no other claims on the home so that you can take possession at closing. When you get to the closing table you will be encouraged to buy title insurance, and that is a very good idea! Should something come up in the future, you’ll be protected.
Now it’s getting real!
The night before or the morning of closing, you will go to the home and take a walk though. You’re looking at the condition of the home to make sure that everything you expect to see there is present and in the right condition, that the home looks the way it should and that when you sign the papers and the home becomes yours that the house is the way it should be.
Your lender will let you know to the penny what you need to be prepared to bring to the closing table financially. They will also tell you how that money will be transferred – often it is simply a wire transfer from the bank.
You’ll sign a lot of loan documents that reaffirm the interest rate, dollar amount, how much the loan will cost you over the term, how long the term is, when payments are due etc etc. And, if you are in MN, you will leave with a set of keys to your home because you take possession immediately unless you’ve agreed to another arrangement.
If you will be living in the house, do NOT forget to file for your homestead exemption!! This is a big discount on your property taxes because you’re occupying the house. You’ll get this info at the closing table, but make sure you put it on the top of the pile so that you don’t forget.
Once you have determined that you are financially ready, you’ve selected an agent, and you have that pre-approval letter in hand, you are ready to start looking!
See what is out there…
Many buyers will have already started looking at what is on the market via online real estate sites, Realtor.com, etc, but be cautious with Zillow! It is notorious with agents for having very outdated or inaccurate information. People often find listings on Zillow that are under contract and not available or have not been taken off the site despite being sold.
You’ve selected a realtor, hopefully you had a conversation about what things you MUST have – how many bedrooms, where the home needs to be located, if it needs to be single level living, etc, so let them send you listings. You decide how often you want them – Immediately? Daily? Weekly?
We have access to the MLS and the information on there is ACCURATE. You won’t be looking at homes that aren’t available. We can select very specific areas via a drawing tool on a map, search by commute times to and from your job at particular times of day, add or eliminate homes based on very specific criteria that is important to you – patio space? Gym in a condo building? Access to a pool? Main floor bath? Let us send you what YOU want to see.
Understand how the market is behaving…
Buyers should look for a home that fits the 80/10/10 rule – 80% of what you love, 10% that you can change, and 10% that may not be your favorite but you can live with it.
Your agent can help you learn what the market is like in your area – is it a buyers market or a sellers market? What percent of asking price are sellers able to get on their homes? How long is it taking for sellers to get their homes under contract? Do sellers typically contribute to closing costs?
Realize that depending on the market you may not get your offer accepted on the first home. At this moment in Minneapolis, anyone buying a home under about $350K can expect to have some competition on their offer and also needs to be prepared to act quickly. In other words, it’s a sellers market and your best bet is to make the most attractive offer possible.
Head out and view properties!
Finally – start looking with your agent. Plan to give 24 hours notice if at all possible. Selling is hard – people want to clean, they may have kids and dogs they need to take somewhere, it’s just courteous. Best case scenario they have moved already and the home is available to show as needed, but be prepared to give some notice.
Do you have questions? Click one of the links below or leave a comment!
If you have never purchased a home before the whole process may feel like a big mystery.
It’s something most people don’t do more than a few times in their lives and it’s the biggest purchase that you’ll likely make in your life. Well, good news! It’s not as complicated as you may think!
6-12 months from your purchase…
To answer the question “How long does it take to buy a house?” though – the answer is “it depends”! Don’t you love that? It makes me think about when I was a kid and wanted something – “Mom! Can we…?” “It depends…”. Ugh.
Well, one of the most important first steps is getting ready financially. If you have a good credit score (700+) you’ll likely not have a problem getting a mortgage. Many people have some work to do here first though. That means that you need to find out what your FICO score is (you are entitled to a free credit report annually at AnnualCreditReport.com). When you see your report there may be things on it that you want to dispute because you’ve paid them. You can also see what debts you owe – the goal is to get your debt to income ratio low. Lenders want the sum of your payments to creditors to be under 43% of your income for TOTAL payments – including your mortgage!
You’ll also want to make sure you have money for a down payment (minimum of 3.5% of the purchase price) and potential closing costs (2.5 – 3% of the purchase price) as well as cash on hand for things like home inspections and any deposits you may need for services, plus moving expenses.
If you need assistance in finding a loan officer that can help you find the best mortgage for you, ask a realtor! We work with them ALL THE TIME and typically know who is reliable, provides good service and has a nice array of loan products that they can offer you.
If you are a cash buyer, your timeline will include inspection and title search, but you can close FAR more quickly.
3 months from your purchase…
OK – that’s the hard part over! NOW you can start looking for a home. Because you have your finances in order, you know what you can afford. And your agent will know what you can afford as well! While it is a lot of fun to look at homes that are super fancy, if you can’t buy them… it’s a waste of time.
Finding the right home can be really fast or not as much. Some of that depends on you, and some is dependent on the market. As I type this, in Minneapolis, it is 110% a sellers market for anything under $350K. Homes are going quick, and inventory is low, so you may be outbid if you find one or there simply may not be a home available that meets your needs. However – you’ve done your homework, you have financing lined up and a down payment ready so when you find something you can submit a strong offer and push yourself to the top of the pile!
6-8 weeks from move in …
You find a home that you LOVE! You submit an offer that is attractive to the seller and you are prepared to close with! They ACCEPT!!
You will submit your earnest money (I have a video on that on my YouTube channel!) Typically, in Minnesota, that starts the clock on the inspection period. Frequently this is 10 days in which you have the opportunity to have a home inspector look at the house and give you an idea of what you are actually buying and if there are “material facts” that would inhibit your “quiet enjoyment” of the home. In other words – is there anything alarming that should be fixed before you can safely & comfortably inhabit the home?
Inspectors find things. If the items they find are things that you are willing to fix yourself, then ok. Or you can request the sellers fix it or rebate some of the purchase price so that it can be fixed in the future at no cost to you. If you cannot come to an agreement you can cancel the contract but you’ll be back to the house search stage … I need a flow chart in here. 🙂
30-45 days from move in …
Most lenders can get your loan underwritten and ready within 30 days. During this same time, a title search will be conducted and the sellers will complete any repairs agreed upon. If you have an FHA loan it can take an extra couple of days.
So! How long does it take to close on a home?It can be as little as a week or two for a cash buyer or as much as a year if you need to get your financial house in order. It’s all dependent on preparation on your part and being ready to make a clean offer.
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