Buying in 2013? Here’s what to expect.
I don’t really spend much time talking about the home buying market. There’s plenty of folks who write well about that side of the business. I feel that renters and landlords are somewhat under-served, so I focus on them. However, the changes occurring in the Chicago residential market are going to affect everyone this year. It’s time that we have a little talk about what to expect if you are moving from renting to buying.
You’ve probably heard a lot over the past several years about the depressed housing market. If you’re renting, you may have thought you still had some time to take advantage of the lowest home prices and mortgage rates seen in decades. Guys, you’re running out of time. Prices are climbing, inventory is short, and rates are starting to move up again. While the prices aren’t likely to spike back up to 2006 levels any time soon, the bottom of the market has passed you by.
Even so, you should not rush into buying unless you’re ready. In fact, as a result of the problems that caused the housing market to crash there are a lot of restrictions that will prevent you from buying unless third parties give their seal of approval that you’re ready. So if you’re planning on jumping into the 2013 home market, here’s my take on what you can expect.
Now more than ever, you will need cash. While there are still options available for down payment assistance grants, and programs like HomePath and FHA allow you to buy in with 3 to 3.5% down, the penalties for doing so are very high. You will wind up paying a much higher monthly rate. In the case of FHA loans, you’ll have to pay mortgage insurance premiums for the entire time you’re carrying the loan.
You will also wind up losing out on a lot of deals when you come up against buyers who can pay all cash and close quickly. Buyers who are using a mortgage to purchase a home need 30-60 days to close in most cases. Cash buyers can close within a week. If you were a home seller, who would you choose?
In terms of mortgages, there’s a new question to ask your lender in this cash-heavy market: how fast can you close? Over the past year I’ve seen many clients lose out because their lender needed more than a month to process their loan. Unless your lender can close in 30 days or less, move on and find a new lender.
Over the past few years, many sellers have been stuck in their homes for far beyond the point when they should have moved on. Families have grown but remained in houses that are too small. Owners on fixed incomes have not been able to make necessary repairs. Even the best houses that were rehabbed to enter the market at the beginning of the downturn in 2007-08 have now been sitting for five years. Some have been occupied by renters. Others have been empty, or held by owners who’ve done their best to maintain.
As the pace of the market picks up, you will be seeing fewer empty spaces, fewer staged homes, and more cases where the homes are a bit rough around the edges. We’re past the point where a house had to be in immaculate condition to sell. The perfectly prepped houses are still out there, but the competition for them is fierce.
Instead, I would recommend that you fold in at least $50-60k into your housing purchase budget to rehab at least the kitchen or bathrooms in any property you purchase this year. If you’re getting a mortgage to buy the property, talk with your lender about rehab loans too.
The past two years have seen steady improvement in the gap between the final listed price of a property and the offer that the sellers accept. In early 2011, properties across the city were selling for between 90-94% of their final list price. By last month, that had increased to 95-97%. This means that the days of sellers accepting lowball offers just to get the property off their hands are long gone.
Meanwhile, market times for move-in ready homes are much shorter than they used to be. I’m seeing average market times of less than 4 months for the most common property types. You can no longer be assured that a slightly overpriced property will slowly float down into your grasp over the course of a long market time.
Two years ago I was working with buyers and searching for properties priced 10-25% higher than their budget, knowing full well that the price would eventually come down to something affordable. These days, I look no more than 10% above a client’s max buying power, and I do not hesitate to make offers on newly listed homes.
I recently had a conversation with a representative from the Chicago Association of Realtors who mentioned that the number of people studying for their real estate licenses has increased quite a bit this year. That’s good, because as the chart above shows, the Illinois real estate industry took a real beating last year when the salesperson license was eliminated. However, many of the agents who remain have joined the industry since the start of the downturn. They have never experienced a rising market, and many of them have never before been confronted with multiple-offer situations and a fast-paced environment.
If you’re buying a home this year, it’s important to work with an agent who either has been in the business since before 2006, or an agent who has been working in the fast-paced Chicago rental market.
If you’re buying in 2013, here’s a rough idea of where you’ll be able to afford an average or slightly above average home.
|Area||2 bed Condo||3 bed Single Family Home|
|Albany Park, Avondale, Humboldt Park, Irving Park
Edgebrook, Portage Park, Jefferson Park
Bridgeport, Chinatown, Pilsen
|Edgewater, Forest Glen, Logan Square, Rogers Park,
Lincoln Square, Ukrainian Village
|Bucktown, Lakeview, NorthCenter, Old Town, Wicker Park
South Loop, Hyde Park
Of the areas I studied, West Rogers Park/West Ridge is the least expensive place to find a 2 bed condo, with an average price of $65,330. The lowest priced single family homes can be found in Humboldt Park, with an average price of $90,906.
Hopefully this gives you a decent idea of where things stand as we head into a new and more optimistic real estate market. I’ll be back on Friday with a little fun for the apartment hunters out there. See you then!