Home buyers have accepted the new normal of 7% mortgage rates, but now they’re feeling a sense of déjà vu as real estate is back to being a competitive sport in many parts of the U.S.
At the beginning of this year, buyers were still holding on to hope that mortgage rates would go back down — they didn’t — and business waned for real-estate agents like Aaron Lanning, an agent with Century 21 based in Menifee, a city in Riverside County, Calif.
“Business was just gone,” Lanning told MarketWatch, looking back at February and March. But all of a sudden, at the end of March and April, the machine sprang to life: Buyers were biting the bullet of higher rates and purchasing homes.
But as they’ve braved the market, buyers are contending with a slew of challenges. Higher mortgage rates present one new obstacle for buyers, who are also contending with some of the challenges of the pandemic-era property market. All-cash offers, bidding wars and waived contingencies like home inspections and appraisals are all in the mix.
In Chicago, real-estate broker and investor Rashauna Scott has observed a similar change among buyers.
“We’re definitely seeing a lot of competition,” Scott told MarketWatch in a recent episode of Barron’s Live. “There’s a lot of competition because the inventory is getting taken up and not only just by home buyers, but you’re also competing with investors in that same space,” Scott, who specializes in multifamily properties, added.
Low inventory is another hurdle for today’s buyers. The number of homes for sale in May was 1.4 million — the lowest figure since Redfin RDFN began recording data in 2012, the real-estate brokerage noted in a report published Wednesday.
The number of new home listings dropped 25% from the same period last year, the company added.
“As the pool of homes for sale shrinks, homebuyers in many markets are grappling with competition, which is preventing home prices from plunging despite a cooldown in buyer demand brought on by elevated mortgage rates,” the report stated. Nearly half of the offers written by Redfin agents in May faced at least one competing bid, the company said.
Down in Miami, Rafael Corrales, a real-estate agent with Redfin, told MarketWatch that he continues to see a steady stream of out-of-state buyers from places like New York, New Jersey and California, as well as foreign buyers from as far away as the Middle East and Asia.
“We’re still seeing increases in our home prices,” he said. But “the real elephant in the room is … the lack of inventory,” he added, which along with high mortgage rates is making the market very challenging for buyers.
Where is Corrales seeing the most competition in Miami? Homes that are renovated and updated in Coral Gables, Coconut Grove and other affluent neighborhoods are selling “within a very short period of time,” Corrales said.
Buyers are getting frustrated by how competitive the Miami real-estate market is, he added. The single-family homes in desirable areas are “going to always have the competitive, multiple offers situation,” Corrales said. Plus, most first-time buyers are competing with cash buyers at this point, he added, given how high mortgage rates are.
Corrales’s top tip for buyers: Prospective buyers who want to be competitive should get all of their financing in order and, particularly, be prepared to offer a larger earnest-money deposits, to show that they’re serious. “The more skin in the game, the better it’s going to improve their chances of having their offers awarded,” he said. Earnest money refers to funds a buyer puts down before closing on a home to show they intend to follow through on the purchase.
“We’ve got to go back to our old 2021 and ’22 ways right now,” Corrales said. “And that would be just being a little bit more flexible with the contingencies that we may need to be waiving to make our offers as competitive and aggressive as possible.”
Back in Riverside, Lanning said that if a house is priced at market value, it is “almost guaranteed” to get a minimum of two offers. In the last month, he sold seven homes, he said, and 22 people showed up at the last open house.
But that’s nothing compared with the frenzy of the pandemic-era days, he added: In July 2021, he had an open house that 96 people visited in one day. Overall, during the initial COVID years, he generally had 30 to 40 people visit his open houses, he added.
Right now, that number has dropped to around 15 to 20, he added.
Lanning’s top tip for buyers: Adjust your expectations.
He described a Los Angeles client who was looking to move to Fontana, another city in California, who ended up looking at homes eight or nine times. That was unusual. Most buyers make just four or five visits. Each time this client lost out on a potential purchase, it was due to being outbid by a competing offer, or because of issues with the appraisal.
It’s pretty much a seller’s market at this point, Lanning said.
“Low interest rates turned a lot of homeowners into landlords,” he said. “They don’t want to get rid of this home that has a 3.5% mortgage. They want to rent it out. That’s hurting us.”