NerdWallet's Smart Money Podcast - Your Money in 2023: Homebuying and Selling

Episode Date: January 19, 2023

What can the housing market of 1981 teach us about 2023? A lot, apparently.  In this episode, Sean Pyles and Liz Weston talk about what would-be home buyers and sellers should think about this year ��� including how the past can inform the present, whether a housing crash is imminent and how to navigate the new twists of the market in 2023. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to the NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Liz Weston. And I'm Sean Piles. To send the nerds your money questions, call or text us on the NerdHotline at 901-730-6373. That's 901-730-NERD, or email us at podcast at nerdwallet.com. Follow us wherever you get your podcasts to get new episodes in your feed every Monday. And if you like what you hear, please leave us a review and tell a friend. This episode, Sean and I are continuing our series about how to manage your money in 2023. And this time around, we're joined by mortgage nerd Holden Lewis to talk about what would-be homebuyers and sellers can expect this year.

Welcome back to Smart Money, Holden. I'm pleased to be here, although maybe with a little bit of trepidation. Understandably, yeah. Well, with that, let's just dive right into it. Holden, interest rates have been rising throughout the past 12 months, and they've really transformed the housing market. How are you thinking about the current moment for homebuyers and sellers? I've been looking at how fast mortgage rates have gone up, and I've just been sort of obsessed with looking back at the last time this happened, which was 1980 and 1981.

Home affordability was at its rock bottom back then. 1981, really, really bad year to buy a home. And there's just a lot of parallels. Homeowners were reluctant to list their homes for sale because they didn't want to trade their low rate mortgage for a higher rate mortgage. And of course, homebuyers, they didn't want to buy a house with a 14% mortgage, although some folks did. Wow. Yeah. That's the amazing thing, isn't it? It was double digit interest rates and people were still buying homes. Yeah. And we're talking about seven or so percent being really high, but 14% is, I can't even imagine. For a while, they even got up to about

18.5% for a 30-year fixed rate mortgage. So I looked back at some classified ads from those days and people were advertising a sale on mortgages. You could get 11.5%. That was very, very exciting back then. They got out of the situation eventually, but I think we're going to have to get out of our situation in a different way. And let me explain why. Back then, most mortgages were assumable, which meant that, let's say a house, someone bought that house five years ago and had an 8% mortgage, you know, and today mortgage rates are 14%. Well, you could assume that 8% mortgage, which means essentially you buy the house and you get the mortgage along with it. For a lot of people, that's how they could afford a home. Now, home values go up. So people would have to

get some kind of financing, the difference between the price and the outstanding loan amount. And so a lot of times the way they did it was they just simply signed a promissory note to the seller. I'm going to pay you $500 a month until a certain amount is paid off. And it was called creative financing. Yeah. There are different terms for it. Things like wraparound mortgage, that was a popular type. But I just don't think creative financing is going to come back.

Well, one of the big issues, right, Holden, is that the supply just isn't nearly keeping up with the demand. There's a debate about how many more homes we actually need, but one of the statistics I've seen is that we need 7 million more homes. A lot of cities aren't keeping up with home creation the way they are with creating jobs. I was looking at a piece in The Atlantic that said out of all the large cities, basically maybe less than a quarter are actually creating enough homes to cover all the jobs that they're creating. So there's a huge undersupply of homes. And it is in the millions. I've seen estimates from 3 million to 7 million. And it's a conundrum because it feels like the housing shortage is a national problem, but really the supply is a local issue.

And a lot of cities and counties, they really want to restrict growth because they feel like that's protecting the home values of current homeowners. So they restrict building. And I guess the hope is that the neighboring cities will approve housing too. But the neighboring cities often don't do that. So we're really, really stuck. And it's not only local governments that are restricting things like deliberately, but also things like regulations. There are just different kinds of regulations that restrict building. And right now, with interest rates so high, home builders, they borrow money to build the houses. And now their borrowing costs are a whole lot more. And so they're less inclined to build.

It's just, it's a complete mess. And then on top of that, you have rate lock in. Rate lock. You better explain that. Yeah. So, okay. So on one hand, we have this problem of not enough houses are being built. On the other side, we have the current houses

and we have people living in those houses who maybe would want to sell. Maybe they're getting older, they're retiring and they want to downsize and buy a condo and move out of their house. Or they want to move somewhere in search of opportunity, but they don't do it because they have such a low mortgage rate on their current home. They don't want to trade a 3% mortgage for a 6.5% loan, so they stay in their house instead of putting it on the market. So that is also restricting the supply of homes that are available to buy. You've outlined a pretty bleak picture for the housing market right now.

We have housing crises across the country, but we like to give it straight to our listeners, and I think it's our job to do that. But what do you think all of this means for would-be homebuyers and sellers this year? We're going to see fewer people being able to buy just because they can't afford to buy homes at the current high interest rates. We're also going to see houses stay longer on the market, partly because the sellers essentially, they could see how much they could get for their houses, say, in February or March of 2022. And a year later, they don't really want to accept less than that. So, you know, there's a saying that house prices are sticky. Home sellers don't want to reduce their prices. And by not reducing their prices,

the houses are just going to stay longer on the market. So from that standpoint, you might see buyers have a little bit more choice because if it's taking longer for houses to sell, then they just kind of pile up and you'll have more houses available to at least look at. Yeah. It seems like a continuation of the trends that we saw in the latter half of 2022. That's right. And home prices started falling in some places around the middle of 2022. And so we has to be in good shape. It has to be in move-in shape. You really have to look at what is this house going to be worth in a few weeks? Oh, yeah. If prices are falling right now, I read this observation on Twitter. Someone said,

the seller who cuts first cuts least. And what that means is, you know, if you're the first one to cut the price, you're probably going to be the first to sell it. And you're going to have to cut the price once instead of two or three times. So I think that that's the really important thing for sellers to do is to, frankly, hire a real estate agent and listen to that agent's advice. Even if it's really painful to hear someone tell you that you need to list it for a lot less than you could have sold it for a year ago. There's a psychological phenomenon of anchoring that when we hear a certain number, that tends to be what we anchor our expectations. And people looked at Zillow or looked at some other place that put their house at a certain value. And it doesn't matter how much appreciation they've had up to this point, or the fact that they could sell

it at a much lower price and still make a huge profit. It's like, ah, I want that top price. You just have to understand you are not going to get it. Yeah. You know, people don't want to look at how much they could have sold it for in 2018 because in 2023, they're going to be able to sell that house for a lot more than they could have in 2018 or 2019. Yeah. Because prices went up so fast in 2020 and 2021, but they're going to be looking at what they could have sold it for in the middle of 2022. Right. Well, if home sellers are feeling kind of anchored, I can imagine home buyers might be feeling a little unmoored, if you will.

Because they want to buy a house and they see a certain price and they're thinking, OK, is it going to be less expensive next month? What would that mean for their mortgage over the next 30 years or so? How do you think they should think about that? Really, the best way to think about it is, do I like this house? Is this a price that I can live with? Am I going to live in it for more than five or six or seven years? Then go ahead and buy it. Maybe if you waited six months, you could get that house

for less. But you know what? In six months, the house is probably going to be sold by someone else. So really, I think the important thing to consider is the time frame. In 2023, don't buy a house for just a couple of years. If you think you're going to live in it for just two or three years, it's probably not a good idea to buy. And that's good advice in any market, really. I guess so. I mean, I think about the first house I bought, I lived in it for two years and then sold it. But that wasn't the initial plan. It's just a different job popped up. So sometimes you can win, but from 2023 to the end of 2024, probably you shouldn't expect a home's value to increase. It might, but don't expect it to. Not like we saw over 2020, 2021.

That's right. Yeah. Those are the days, right? Well, I want to turn to interest rates and dig into that a little more. With interest rates as high as they are, what are your thoughts about buying down a mortgage rate and how can someone determine if that's a good idea for them? Right. There's two ways to buy down the mortgage rate. And one, you, the buyer, you buy down the mortgage rate by paying discount points. Let's say you borrow

$200,000 and you pay one point, that's 1% of the loan amount. So you borrow $200,000, you pay $2,000 and you'll get a discount of roughly a quarter of a percentage point off the interest rate. That kind of thing, it usually takes six or seven years for you to recoup that money. And this is just really not the market to do that. The other kind of buying down the mortgage rate is something that the seller does as a concession. And it's called a rate buy down. So you say to the seller, tell you what, I'll buy the house if you buy down my rate for the first two years. So right now, the interest rate is 6.5%. You'll pay a fee to my lender, and I'll pay at a 4.5% rate in the first year, a 5.5% rate in the second year. And then after that, I'll pay my regular payments at an interest rate of six and a half percent. Now, essentially, what you're asking the seller to do is pay part of your monthly mortgage payment for the first two years. And I think a lot of sellers are going to be willing

to do that because, first of all, it's a way of making a concession without cutting the price so much that their neighbors get mad at them. And that's really a thing. They don't want to leave their neighbors in a lurch by like selling that house for $10,000 less than the neighbor sold their house a few months ago. You know what I mean? So why not spend $5,000 or $10,000 buying down the buyer's mortgage payments? This is a tactic that waxes and wanes in terms of popularity. I want to talk also about negative equity, meaning that folks' houses are worth less than they owe for it. And this could be an issue for more homeowners in 2023.

What do you think folks should do if they find themselves in the situation? The best thing to do is just ride it out. Just keep your home, keep making those mortgage payments, and eventually the home's value will recover. There are few people with negative equity. If prices go down this year, there will bought a house in 2021, the home's value went up so much between then and now that a price drop might not even drop you into negative equity territory. But for those who maybe bought in the middle of 2022, they might be in a different situation. Yeah, that goes back to that advice. Just keep making those house payments,

wait for the prices to recover. Now, if you lose your job and you're having trouble making those mortgage payments, that's a scary situation. But really, federal policymakers have kind of made it clear that they don't want another wave of foreclosures like we had from 2008 to 2012, where people who lose their jobs permanently or temporarily, I think that there's just going to be programs to help those people keep their homes until they get back on their feet financially. We saw that during the pandemic. And if we have another recession and a lot of layoffs, I think that we'll see policies to keep people in their houses. So in the past, we've talked about how the best

time to buy doesn't necessarily have to do with what the market's doing, what interest rates are doing. The best time to buy a house is when you're ready, both financially and mentally or emotionally to be a homeowner. So even if somebody is ready right now, do you think that advice still holds true? Or would people be better off waiting? Generally speaking, I think that advice holds true, especially if you plan to live in that house for at least five or six years. I mean, I look back at 1981. Home sales did not stop. People bought houses. And they turned out okay in the long run.

And, you know, here's something that just really shocked me. Even when mortgage rates were higher than 15% and the unemployment rate was higher than 10% back in 81, 82. Home prices never fell, at least nationwide, looking at the whole calendar year, which is just really, when you look back at that, that's just truly amazing. And I think there are a lot of demographic factors back then that are similar to now. You know, you had the oldest baby boomers were 35. You had a humongous group of people in their early 30s looking for their first home. And I think that you have a lot of millennials who are a little bit older because they're hitting those milestones a little later in life. And there's just a lot of millennials who are ready to buy their first house or maybe ready to move up to their second house. I have one last thing I want to ask you about Holden. I've been hearing predictions of a housing bubble bursting,

especially in the murky areas of personal finance TikTok, probably over a year at this point. And I just roll my eyes every time I see them. But I want to get your take on this. What do you think is going on with the housing market? Is a bubble the right metaphor? Or maybe it's more like a kettle that's cooling off? What do you think? More on the side of the kettle. I just don't think the bubble is the right metaphor. Now, house prices, yeah, they might fall, although they might not. The Federal Reserve is certainly hitting the housing sector really hard. And we're going to see a lot fewer people buying houses. And I just don't see home prices plunging like they did back in 2008, 2009. And let me add one more reason for that. Back then, like from 2006 to 2008, lenders were just super, super careless. They were giving people mortgages who it was really clear that within a year or two, those borrowers weren't going to be able to afford their loans. That has not been the case.

That has not been the case since about 2012. Lenders are very strict. They're acting extremely rationally. You can't get a mortgage if there's much doubt that you can pay it. I mean, today's mortgages are just so much safer and saner than they were during the bubble. And so that's going to protect us even in the event of a recession. You're just not going to have a whole lot of foreclosures caused by people not being able to afford their homes. And so without a surge of foreclosures, you're not going to have a humongous decline in home values, and therefore, you're not going to have a bubble pop. Okay. Well, I have to admit, I lied, Holden. I do have one other last question for you. If you could give one piece of advice to those who are navigating

the home buying and selling world this year, what would that be? With home buyers, I would counsel patience, but be ready to pounce. There really aren't enough houses for sale right now. With home sellers, really the main thing is to price it correctly, preferably with the advice of an experienced real estate agent. And really to have that house in very nice shape. Buyers need to know that they're not going to face any catastrophic issues, say with the roof or the furnace or the air conditioning in the first couple of years. Yeah. Gone are the days of people foregoing inspections. Oh, my gosh. You know, that's just going to be, it's going to be one of those things where you just,

it'll be like a fashion that you laugh at, right? You know, like sometimes you'll see a movie set in the late 60s and you go, oh, my gosh, look at those ties. What were those people thinking? Well, in a few years, people are going to say, oh, yeah, folks used to just regularly wave inspections and people are going to go, what? I'll say it's worth noting that we at the time were also going, what? We couldn't believe it. That is true. It was counter to our base advice.

All right. It was counter to our base advice at Neural Wallet. All right. Well, thank you so much for sharing all of your insights with us, Holden. Oh, it was my pleasure. And with that, let's get on to our takeaway tips, and I will start us off. First up, buying and selling are both more challenging this year. More houses are on the market, but they're taking longer to sell as higher interest rates cut into demand. Next, sellers put in the work. To sell your house this year, make it move-in ready, price it reasonably, and be patient since it may take longer to sell. Finally, buyers consider asking for a rate buy-down. This can be a helpful way to strike a deal with a seller who doesn't

want to cut the price. And that's all we have for this episode. Do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com and visit nerdwallet.com slash podcast for more information on this episode. Remember to follow, rate, and review us wherever you're getting this podcast. This episode was produced by Liz Weston and myself. Kaylee Monahan edited our audio. Jay Bratton wrote our show notes. And a major thank you to the pros on the NerdWallet copy desk for all of their help. And here is our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

And with that said, until next time, turn to the nerds.