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You’re out of luck in this post-pandemic, red-hot housing market if you don’t have the cash. Buyers with cash in hand are crushing homebuyers who must rely on financing to achieve their dream of homeownership, especially first-time home buyers seeking to purchase lower-priced homes.

According to a report by RealtyTrac, cash purchases account for 42.1 percent of all U.S. residential sales. This percentage is up from 38.1 percent in November and a far cry from the 18.0 percent in December 2012.

Home prices have been skyrocketing for quite some time, and show no signs of waning. It is becoming increasingly difficult for buyers to find the home of their dreams, especially one that is also affordable. Housing inventories are at an all-time low, and homebuyers must contend with multiple bids and cash offers.
 

Everything Has a Season

Everything in this universe is cyclical, from the sun coming up every morning to the cycle of the seasons. The same is valid for economic cycles, and we could be on a steep cyclical downturn in demand.

Historically, the home buying season is the strongest in the spring and summer because of economic factors and practical reasons. For families with children, it is typically easier or convenient to move at the end or beginning of a school year, or when there isn’t snow on the ground and the weather is cooperative. Hence, the demand will continue to buoy the market through summer, but watch out for a cliffhanger towards the end of this year when some expect the mortgage rates to hit 7 percent.

The last time rates rose that fast was in 1994 when then-President Bill Clinton was leading the country, charging Lloyd Bentsen to head the treasury, and Alan Greenspan to serve as Chair to the Federal Reserve. Many people have drawn comparisons and contrasted how 2022 will be different, but in my humble opinion, it could be worse than 1994. Almost 28 years ago, rates went up from 7 percent to 9 percent, but in 2022, it will be much worse.

A short quarter ago, the first week of January, mortgage rates averaged 3.2 percent, and we are a stone’s throw away from 5.2 percent.
 

Inflation rates and inventory

Higher inflation erodes the buying power of holders of cash. The return that the investor of a bond or loan is holding over time diminishes, as it cannot keep up with inflation. Thus, the same investment is less attractive to investors. When demand drops, the value (i.e., price) of bonds diminish. Prices and yields are inversely related, and so, with bond values going down, yields (i.e., interest rates) go up.

Furthermore, with the Fed cutting back on its bond-buying and mortgage-backed securities, consumer mortgages will rise with reduced demand. It is a double whammy for borrowers looking for mortgage offers that are financially beneficial for their specific financial needs.

Shopping for the best mortgage offer has always been significant, but now it is imperative because it could be the difference between homeownership or rejection.

For borrowers looking for a suitable mortgage offer, housing inventories are at historical lows. Nationally, we are averaging less than two months’ worth of housing inventory. With this spring’s buying season underway, the expectation is that average inventory could creep much closer to one month’s inventory.
 

What can home buyers do?

The obvious answer is to find a bank, lender, or mortgage broker that will offer a mortgage that helps you qualify for the loan and doesn’t stretch your finances in a manner that is not sustainable for the long run. Let me try to explain with an example.

For a loan amount of $450,000, the difference between a 5 percent mortgage versus a 4.85 percent mortgage is $35 a month lower monthly payment. A buyer who can afford a $450K loan can afford monthly payments $35 higher per month. However, most likely, you would have paid an origination point of one percent, equaling $4,500, and $12,600 higher in payments over the life of the loan. This is not even to mention those mortgage offers enticing borrowers with lower mortgage rates on the surface, only to sneak in exorbitant mortgage fees to make the deal a lot more profitable for lenders.

To avoid falling prey to predatory lending, The Consumer Finance Bureau (CFPB) recommends not to make a final decision before comparing official Loan Estimates. There are no tools, no services, and guidance for borrowers to compare official loan estimates.

The CFPB suggests that “negotiation is common, and there’s no harm in asking. The lender may waive or reduce one or more of the fees or lower the interest rate or points.” 

Cycles come and go. Throughout each, we weather the changes and adapt. Wherever there are challenges, there are solutions. Options are out there for the creative borrower who does the legwork that can ultimately lead to their dreams of homeownership.