February 11, 2022

WHAT’S A BUYER TO DO?

Frustration and fear are rampant in the real estate market today. Time and time again, we’ve witnessed buyers agonizing over their current situation. They’ve gone to showing after showing, written multiple offers, made big decisions under intense pressure and timelines, only to be thwarted repeatedly.

A lot of these buyers are faced with the decision to either keep looking, or to step back and continue to rent until they either have a larger downpayment, or cross their fingers that the market changes.

This situation – a generational housing crisis – is frequently discussed, but we can often feel a bit removed from the anonymous group of ‘buyers’. Chances are you know someone going through this exact situation – or maybe you find yourself among this group of frustrated buyers.

Today’s blog post tells the story of two buyers in this exact scenario.

It’s January of 2019, and Beth & Graham (not their real names, of course) were planning to purchase their first home in Guelph, with a budget just under $500K. The median sales price in Guelph that January was $478,500. That bought you a detached home, typically 3 bedrooms and approximately 1,500 sqft, in a typical East or West end subdivision. For an entry level buyer, this home required around $100K upfront (a 20% downpayment of $95,700, plus land transfer tax and closing costs).

That month there were 266 homes that were listed for sale in Guelph, of which 125 sold. Looking back from today, those numbers look great! In perspective, we were already one year into a tight market for inventory, with prices rising and multiple offers beginning to gain traction. Beth and Graham lost out on several homes they bid on, were generally frustrated and not happy with the selection of homes available in the Guelph market at that time. The frustration was high enough that they decided to step back from the market and continued to rent, with the plan to boost their savings, wait for market conditions to change, and interest rate increases to tame the speed of the market.

Fast forward to January 2022.

Over the past 3 years, the median sales price Guelph has risen to $950,500 – a 98.6% increase over the 2019 sales prices, and inventory has become even tighter, dropping from 1.4 months of inventory to 0.3 months this year.

Beth and Graham had been diligently saving, and had added another $75,000 to their downpayment – and like most young professionals, their incomes have enjoyed a reasonable increase as well. They were ready to jump back into the market – however, they’ve been watching the market over the past 3 years and are now fearful that they have been priced out and will never be able to afford a home. They now regret not buying 3 years ago.

The pandemic-driven economic stimulus program has put the anticipated interest rate increases on hold, and helped fuel real estate prices to new heights. The market has increased significantly, and there are now even fewer homes to choose from.

What should this couple do now?

They have a number of options.

OPTION 1: MAX OUT THEIR MORTGAGE

They could borrow more money in order to afford the higher prices. While most buyers will not want to spend the maximum amount they qualify for, the increased monthly payments and mortgage amount is manageable for Beth & Graham. However, they still want to have a life and not be ‘house broke’.

OPTION 2: ASK FOR HELP WITH DOWNPAYMENT

Like many new buyers, they consider borrowing additional money from their parents to boost their downpayment – if those funds are available. Unfortunately for Beth & Graham, this is not an option.

OPTION 3: DRIVE TO QUALIFY

Beth & Graham could move to a less expensive city or town. Relocation is an option, but one that requires a significantly longer commute, and a major change in lifestyle.

OPTION 4: WAIT IT OUT

At some point, this market should slow down. Interest rates will increase, and supply will increase. There is a lot of hope riding on this option – and Beth & Graham know their choice to wait in 2019 did not pay off.

OPTION 5: BUY SOMETHING SMALLER

Beth & Graham were looking for a small detached home in 2019, but now they are considering a townhouse or condo. Not their first choice, but a viable strategy to gain a toehold in this market. Many buyers go this route in order to avoid being permanently sidelined from homeownership – that is, if it can work with their lifestyle.

OPTION 6: RE-EVALUATE THEIR ‘MUST-HAVES’

The final option that Beth & Graham consider: changing their perspective and expectations. This may not be the time to find the perfect home in the perfect neighbourhood. It may be time to re-evaluate the ‘must haves’ and ‘would be nice’ lists – scale back on some features, consider a home that needs a bit of work, start looking in slightly less expensive neighbourhoods.

What strategy or option would you recommend?

There is no perfect answer. Each strategy will work for different people.

What I have learned first hand from working in this industry is the following:

The best time to buy real estate was 5 years ago. The next best option is to buy now.

I’ve been in this industry for over 35 years, and I have watched this pattern repeat time and time again. Typically, anyone that bought 5 years earlier has never regretted their decision. The real estate market – like every market – has its ups and downs, and usually it’s impossible to time the market perfectly. When you step back and look at the long term – 10 years, 20 years, 30 years – prices may go up and down in the short term, but the long term trend has been a slow and steady climb to new levels.

If you find yourself in Beth & Graham’s shoes, what is the right option for you?

A good Realtor will be able to walk you through all the options to find which one best fits your needs and long term goals. Like the tree in your dream home’s backyard, the seed needs to be planted years before that shade can be enjoyed.

You’re likely wondering how this story ends.

Beth & Graham reconsidered what they needed in a home, and prioritized getting into the market over waiting for the ‘perfect home’. Although it wasn’t a simple solution – they still faced competition, and the search still took some time – they now enjoy their new home, and have a long term plan to get themselves into their forever home.