Don’t Be Scared of Those Rising Interest Rates – They’re Actually Good for Housing!
Here in San Francisco, we are beginning to see two interesting trends in the real estate market. The first trend pertains to the method of payment in transactions: cash. During the first half of 2013, 35% of the transactions were cash. This tendency toward cash could be due to an increasing difficulty in getting a loan or it could be that the seller wants to close fast and is not willing to wait for financing if a cash offer also comes in.
Cash transactions have another added benefit: the guarantee. In my two decades of experience in real estate here in the Bay Area, I know that a small but meaningful percentage of transactions with financing will fail. Many of my sellers tell me they prefer cash deals, even if the sales price is lower.
The second interesting trend is that rising rates are beginning to cause lenders to offer a wider variety of products and underwriting practices are getting back to pre-recession “normal”—no more having to use you’re first born as collateral!
How these two are changes a good thing?
Two reasons: one, with easier financing sellers have started to realize that waiting a few extra days for someone to get a loan is worth getting a higher price, and two, higher rates do take a few buyers out of the market and this will have a gentle cooling impact on the market as a whole. With a reported 25% increase from May 2012 to May 2013, the market needs to cool a bit.
So if you’ve been waiting on the sidelines, it is time to get in the game. The competition is easing and interest rates are still at a near all-time low. Yes, interest rates are rising, but there is no reason to panic – yet.
I think the English saying “Stay Calm and Carry On” is appropriate. It is easy to get caught up in the hype about rising rates but let’s be rational. At Union Bank in San Francisco, jumbo mortgage rates have gone up ¾ of a percent since the beginning of April. Let’s put that in perspective. On a $500,000 mortgage that is around $300/month and once you figure in the income deduction, it is less than $200/month.
Here are some tips on how to Stay Calm and Carry On:
#1: Be as open minded and flexible as possible. It doesn’t have to be the perfect house. It has to be the perfect location for you. Statistics prove that in San Francisco, smart renovations pay off big.
I’m always on the lookout for the “stale” listing. In this market, a place that has been for sale for more then a couple of weeks might be “flying under the radar.” These properties are overlooked buying opportunities. They may have green shag carpeting or not be marketed correctly, but that is where the easy profit for my buyer is….
In San Francisco, buyers are accustomed to a perfectly marketed home. That means the house shows wonderfully, is priced competitively and is exposed to the right audience by the listing agent (the Realtor working for the seller).
If the marketing is off for any reason, buyers won’t give the property serious consideration. These are great opportunities to buy a house without competition – sometimes even below market value. Fix the problem and you’ve got instant equity.
#2: Be ready to pounce on properties that have price reductions or that come back on the market. When a property’s price is reduced or it has been in contract and the buyer backs out, it often causes the seller and the listing agent to doubt themselves and the product. I keep my eye out for these opportunities for my clients to make a strong offer and secure that perfect property. No worries though! When I utilize this fast-move strategy, I make sure my buyers have a contingency to do inspections! The key is to lock down a property in a fast-moving market, so at this point we don’t get too caught up in the property condition.
#3: Be ready, willing and able to go into back-up position. There’s no downside. Offer on every property you like, and don’t be scared of competition. I always suggest that my clients go into a back-up position if they are not the winning bid. I can’t tell you how many times I’ve seen the primary buyer back out and my buyers get the property.
These days, without proper guidance, some buyers get caught up in an “auction mentality.” Once they win, they get buyer’s remorse and back out of the deal. If you are in a back-up position, you’ll have the opportunity to step in.
As a back-up offer, the seller accepts your terms subject to the primary offer backing out. It’s a perfect place to be. This position binds the seller but NOT YOU! You are free to keep shopping for a home and if you are notified that the primary buyer has backed out, it is your option to become the primary buyer.
As you can see, to play in this competitive market you must be prepared to move fast. It pays to have a professional who’s watching the market every day for you. If you are in the market now and want someone that is looking out for you, the buyer, give me a call at 415-813-5083.