We are NerdWallet’s Smart Money Podcast, where we answer real-world money questions.
This week’s episode continues our series on managing your money in 2023. We continue with a discussion about homebuying or selling.
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Before you create a budget
Keep track of all your spending to see trends and identify savings opportunities.
It’s helpful to look back at 1981, when the housing market was similar to what it is today. This will give you an idea of what 2023 may hold for potential home sellers and buyers. Similar to today, people were discouraged from listing and buying homes due to limited inventory and high mortgage rates.
A rate buydown can be used by buyers to reduce their interest rates. A rate buydown lowers your mortgage payment temporarily by lowering the interest rate. The seller usually pays for the difference between the actual rate or the buydown rate.
The seller also benefits from a rate buydown, as it may help them get their home off the market. It can reduce the time it takes to get the house ready for move-in and price it fairly.
Selling and buying houses is more difficult this year. As higher interest rates reduce demand, it’s taking longer for them to sell.
Sellers put in the effort. Make your house move-in ready. Price it fairly and be patient as it might take longer to sell.
Buyers should consider asking for a rate cut.
Learn more about buying or selling a house on NerdWallet:
Liz Weston: This is the NerdWallet Smart Money Podcast. We welcome you to send us your money-related questions and we will answer them with the help our brilliant Nerds. I’m Liz Weston.
Sean Pyles: I’m Sean Pyles. For money-related questions, text or call the Nerd Hotline at 901-730-6370. That’s 901-730-NERD. You can email us at [email protected]
Liz Weston: Subscribe wherever you have your podcast to receive new episodes every Monday. If you enjoy what you hear, please give us a review so we can tell others. Sean and I continue our series on how to manage your money for 2023. This time, mortgage Nerd Holden Lewis joins us to discuss what potential home buyers and sellers can look forward to in 2019.
Sean Pyles Hello, Smart Money!
Holden Lewis Hello, I’m glad to be here.
Liz Weston: Understandably. Yep.
Sean Pyles: Let’s get into it. Holden, the interest rates have been increasing over the past 12 month, and they have really transformed the housing market. What are your thoughts on the current situation for home sellers and buyers?
Holden Lewis: I have been looking at the rate at which mortgage rates are rising and became obsessed with looking back to 1981 and 1980 as the last time it happened. The affordability of home was at an all-time low back then. 1981 was a terrible year to purchase a house. There are many parallels. Because they were unable to exchange their low-rate mortgage for higher-rate loans, homeowners were reluctant to sell their homes. Home buyers didn’t want to purchase a house with 14% mortgage. However, some people did.
Liz Weston, Yes, that’s an amazing thing. People were still buying houses, even though it was double-digit interest rates.
Sean Pyles: Yes. We’re talking about 7 to 10% being very high, but 14%, I don’t think is possible.
Holden Lewis They were able to get up to 18-and-a half percent for a 30-year fixed rate mortgage.
I was reminded of those classified ads and realized that they were being advertised as mortgage sales. One-and-a half percent was possible. It was very, very exciting back then. Although they managed to escape the situation, I believe we will have to find a way to do so in a different manner. Let me tell you why. Back then, most mortgages could be assumed. This meant that if someone purchased a house five years ago, they would have an 8% mortgage. Today, mortgage rates are 14%. You could also assume an 8% mortgage. This means that you purchase the house and get the mortgage. This is how many people could afford a house.
People would need to finance the difference between the home’s price and the loan amount. They simply signed a promissory to the seller saying, “I’m willing to pay $500 per month until you pay off a certain amount.” It was known as creative financing. It came in many forms, including wraparound mortgages, which was very popular. However, I don’t believe creative financing will return.
Liz Weston, Liz: Liz, the problem is, Holden, that the supply isn’t keeping up with demand. While there is much debate over how many homes we really need, one statistic I have seen is that we need 7,000,000 more. Many cities aren’t able to keep up with the pace of home construction as they are with jobs creation. A piece in The Atlantic stated that only 25% of large cities are creating enough housing to support all the jobs they create. There is a massive shortage of homes.
Holden Lewis: It is in the millions. There are estimates ranging from 3 million to 7 millions. It’s a problem because although it seems like there is a housing shortage, it is actually a local issue. Many cities and counties want to limit growth, as they believe that it protects the home values of existing homeowners. They restrict building and hope that neighboring cities will also approve housing. But, often, neighboring cities don’t. We are stuck. It’s not just local governments that restrict things, but regulations as well. There are many types of regulations that limit building. Homebuilders borrow money to build their homes right now because of the high interest rates. Their borrowing costs are now much higher. They are less likely to build. It’s a mess. You also have rate lock-in.
Liz Weston: Rate lock. It’s better to explain.
Holden Lewis: Yeah. OK. On the one hand, there is the problem of too few houses being built. On the other hand, there are the existing houses and people who might want to sell those houses. They might be getting older or retiring and want to downsize, buy a condo, and move out of the house. They may want to relocate in search of better opportunities, but their current mortgage rate is so low that they can’t afford it. They aren’t willing to sell a 3% mortgage to get a 6-and-a half percent loan so they keep their home instead of selling it. This is also limiting the number of homes available for purchase.
Sean Pyles: Your outlook for the housing market is very bleak. There are housing crises all over the country. But we like to share it with our listeners. I believe it’s our responsibility to do so. What does this mean for home-buyers and sellers?
Holden Lewis: People won’t be able to purchase homes because they are unable to afford them at current high interest rates. Houses will also stay on the market longer because sellers could see what they could get for their house in February or March 2022. A year later, they aren’t willing to accept anything less. There is a saying that house prices remain high. Sellers don’t want their prices to drop and if they don’t reduce their prices, houses will stay longer on the marketplace. From this perspective, buyers might have a bit more choice. If houses take longer to sell, then the houses just pile up, and there will be more houses for you to look at.
Sean Pyles This seems to be a continuation from the trends we saw in 2022’s second half.
Holden Lewis: Yes. In some areas, home prices began to fall around the middle 2022. We’ll see this trend continue in 2023, particularly on the West Coast. If you are selling your home, you must price it reasonably and make sure that the house is in good condition. It must be ready for you to move in. It is worth considering what the house will be worth in a few weeks.
Prices are dropping right now. I saw this observation on Twitter. Someone said that the seller who cuts first cuts the least. This means that if you are the first to lower the price, it is likely that you will be the first to sell it. You’ll also have to reduce the price only once. Selling should honestly hire a real agent to help them. Even if it is really hard to hear that they think you should list it at a lower price than what you could have sold it for one year ago, I believe that this is the most important thing.
Liz Weston: We anchor our expectations by hearing a certain number. People looked at Zillow and looked at other places that had their house listed at that price. It doesn’t matter how much they have appreciated or if they could make a lot more, it was like “I want that top price.” It’s not possible to get it.
Holden Lewis: People aren’t interested in comparing what they could sell it for in 2018 and 2019, because they will be able, in 2023 to sell the house for much more than they could in 2018 and 2019. They’ll be looking at the price they could have sold it for by 2022, despite the fact that prices rose so quickly in 2020 and 2021.
Sean Pyles: If home sellers feel anchored, then I can see home buyers feeling unmoored if they are. They see a price for a house they are interested in buying and think, “OK, will it be cheaper next month?” What does that mean for their mortgage in the next 30 years? What do you think they should consider?
Holden Lewis: The best way to look at it is “Do I like the house?” Is it a price I can afford? Are I going to be able to live there for five, six, or seven years? Go ahead, buy it. You might be able to get the house for less if you wait six months. But, six months is a long time and the house will most likely be sold. The most important thing is the timeframe. You shouldn’t purchase a house in 2023 for less than two years. It’s not a smart idea to purchase if you don’t plan to live there for more than two to three years.
Liz Weston That’s great advice for any market.
Holden Lewis: I guess so. When I think back to the first house that I bought, I am reminded of it. It was my first house. I lived there for two years before selling it. It was just another job that came up. You might win sometimes, but you shouldn’t expect home values to rise between 2023 and 2024. You shouldn’t be surprised if it happens, but it won’t.
Sean Pyles We haven’t seen this in 2020, 2021.
Sean Pyles: Those were the days. Now, let’s talk about interest rates. What are your thoughts on buying a lower mortgage rate? How can one determine if it’s a good idea?
Holden Lewis: All right. There are two ways to lower the mortgage rate. One is by you, the buyer. Discount points are used to buy down the mortgage interest rate. Let’s assume you borrowed $200,000, and you pay 1 points. That’s 1% of your loan amount. If you borrow $200,000, your interest rate will be 1%. You’ll pay $2,000 to get a discount of approximately 25%. This is a long-term deal. It usually takes six to seven years to recover the money. This is not the right market for this.
Another way to lower the mortgage rate is to make a concession. This is called a rate purchasedown. You tell the seller that you will buy the house if the seller buys down your rate for the first two-years. The current interest rate is 6 and a half percent. My lender will charge a fee and I’ll pay a 4-and/half percent rate the first year, and a 5-and/half percent the second year. Then, I will continue to pay my regular payments at a 6-and-a half percent interest rate. ”
You’re basically asking the seller to pay a portion of your first two-year mortgage payment. It’s an easy way to make a concession and not have their neighbors mad at you. That’s a good thing. They don’t want their neighbors to be in financial distress by listing their house for $10,000 less than they sold it for a few months back. You see what I mean? Why not spend $5,000 to $10,000 on a buyer’s down payment? This tactic is popular but it fluctuates in popularity.
Sean Pyles: Let’s also talk about negative equity. This is when homeowners find their homes are worth less than what they owe. This could become a problem for many homeowners in 2023. What should people do if they find theirself in this situation?
Holden Lewis: It’s best to just let it go. Keep your home and continue making mortgage payments. Eventually, the home will be worth more. Negative equity is rare. There will be more people with negative equity if prices fall this year. However, if you purchased a house in 2021 the home’s worth went up so much that a price drop may not make you into negative equity.
Sean Pyles : However, for those who bought after 2022, it is possible that they will be in a completely different position.
Holden Lewis: Yeah. This goes back to the advice. Keep making house payments and wait for the market to recover. It’s very scary to lose your job, or have trouble paying the mortgage. Federal policymakers have made it clear that they do not want another wave foreclosures, as we saw from 2008 to 2012. People who lose their jobs temporarily or permanently, I believe that programs will be created to ensure that they can keep their homes and help them get back on the financial footings. This was evident during the pandemic. I believe that policies will be put in place to help people stay in their homes if there is another recession or a lot more layoffs.
Liz Weston: We’ve discussed in the past that the best time to purchase a house doesn’t necessarily depend on what the market is doing or what interest rates are doing. When you are ready to become a homeowner, financially as well as emotionally, the best time to purchase a house. Do you believe that even though someone is ready now, this advice still applies? Or is it better to wait?
Holden Lewis: I believe that this advice is generally true, especially if you intend to live there for more than five or six years. I’m thinking back to 1981. Home sales did not stop. People bought homes, and they did well in the end. Here’s what really surprised me. Home prices have never fallen despite mortgage rates being higher than 15% and the unemployment rate higher than 10% in 1981, 1982. If you look at the entire calendar year, it appears that this is true nationwide. That’s really amazing, if you look back. There are many demographic factors that were similar back then to what we have today. The oldest baby boomers were 35 years old. There was a huge group of people in their 30s searching for their first home. You have a lot more millennials that are older because they reach those milestones later in their lives. There are a lot of millennials that are ready to purchase their first home or move up to their second.
Sean Pyles: Holden, I have one more question. Over the past year, I have been hearing rumors about a housing bubble burst, particularly in the murky areas that make up personal finance TikTok. They make me squint every time I look at them. But I would love to hear your thoughts. I want to know what you think about the current state of the housing market. Are you referring to a bubble or a kettle that is cooling down? What do you think?
The bubble doesn’t seem like the right metaphor at the moment. Yes, house prices might drop, but they may not. The Federal Reserve is definitely hitting the housing sector hard. We’ll see a lot less people buying homes, and I don’t see home prices plummeting like they did in 2008, 2009. Let me add another reason. From 2006 to 2008, lenders had been super careless. Lenders were giving mortgages to people who knew very well that they wouldn’t be able to pay back their loans within a year.
This has not been true. This hasn’t been true since 2012. Lenders are extremely strict. They act very rationally. If you have doubts about your ability to pay the mortgage, you won’t be able to get one. Today’s mortgages are safer and more affordable than during the bubble. This will protect us in any recession. There won’t be many foreclosures due to people not being in a position to pay their mortgages. Without a significant increase in foreclosures, there won’t be a huge decline in home value and, therefore, a bubble pop.
Sean Pyles: Okay. Holden, I must admit that I lied. One last question. What is one thing you would recommend to people who are trying to navigate the selling and buying of homes this year?
Holden Lewis: I advise patience with home buyers but be ready to strike. There are not enough houses available right now. The most important thing for home sellers is to correctly price the property, preferably with the guidance of an experienced agent. It is important to keep the house in good condition. Buyers should know that there won’t be any major problems with the roof, furnace, or air conditioning within the first few years.
Sean Pyles: Yes. No more inspections.
Holden Lewis: Oh, my gosh. It’s going to be one those things that you can laugh at. Sometimes, you might see a film set from the late 1960s and think, “Oh my god, those ties!” Was that what those people were thinking? In a few years people will say “Oh, yeah, people used to just wave inspections regularly.” People will say, “What?” Why? ”
Sean Pyles: It’s worth noting, I’ll be honest, that at the time, we were also saying, “What?” It was unbelievable.
Holden Lewis: It is true. We were not to follow that base advice because it was contrary to it.
Sean Pyles: It’s all right. Holden, thank you so very much for sharing your insight with us.
Holden Lewis It was a pleasure.
Sean Pyles: Let’s move on to our take-away tips. I will begin. Selling and buying are more difficult this year. There are more houses on the market but it takes longer for them to sell because of higher interest rates.
Liz Weston: Now, it’s time to put in the work, sellers. It may take longer to sell your house this year if it is not move-in ready. Also, be patient as it might take longer.
Sean Pyles: Buyers might consider asking for a rate cut. This is a great way to make a deal with a seller that doesn’t want the price to drop.
Liz Weston: That’s it for this episode. Have a money question? Call or text the Nerds at 901-730-6370 to ask your questions. That’s 901-730-NERD. You can also email us at [email protected] and visit nerdwallet.com/podcast for more information on this episode. Keep listening, rating and reviewing us wherever you get this podcast.
Sean Pyles: This podcast was produced by Liz Weston, myself and Liz Weston. Our audio was edited by Kaely Monahan. Jae Bratton created our show notes. We also want to thank the NerdWallet staff for their assistance. Here’s a brief disclaimer. We are not investment or financial advisors. This Nerdy information is for general entertainment and educational purposes only and may not be applicable to your particular circumstances.