The Advantage to Buying, Even in this Aggressive Market: One Buyer’s Scenario

I would like present a scenario I recently heard about for a 1st-time Homebuyer (aka a Renter). Fast-rising rents have many people seeking the protection that a consistent, fixed mortgage payment provides. Through this narrative I hope to demonstrate the advantage to buying a home, even in an unprecedented Seller’s Market like the one we are in now.

A Buyer is living in an apartment, paying $2,050 a month in rent. They are ready to buy a townhome. They have been fully approved by their lender for $325,000 but have decided to search under their maximum approved amount so they have some room to bid up, as is a common tactic in the current market. A desirable townhome was listed for sale for $250K; it is more spacious than the Buyer’s current apartment, and has many features the Buyer values. The Buyer put in an offer at $260K with an Escalation Clause, capping it at $2K higher than highest competing offer.

Putting an Escalation Clause in an offer may be one way to place your bid above others on a given home.

The Seller received multiple offers with the highest offer at $298K, $38K above the Buyer’s offer. The Seller’s Agent contacted the Buyer’s Agent and gave the Buyer the opportunity to invoke their Escalation Clause and win the contract. The Buyer’s new offer with Escalation Clause would be $300K

The Buyer rejected the opportunity, refusing to pay $50K over list price, which they considered an excessive amount for the home, even though the Buyer aspires to own a townhome just like this one. (List price is actually irrelevant — how was that price set? Was it set below market value, to bring in more prospective buyers? Over market value, by an aggressive and inexperienced Seller?)  Let’s examine the advantage of buying that home, even at what seems like an excessive price for that property. We will use a five-year period to examine the differences in Renting vs. Buying, as the Buyer wants to “wait it out”.

In this case, the Buyer’s monthly mortgage payment (PITI — Principal, Interest, Taxes, Insurance) and HOA (Homeowners Association) payment for the home would equal the same amount they were currently paying rent for their apartment: $2,050. One of the strongest advantages to buying is related to that monthly payment: With a mortgage, that number never changes. Rent payment will increase yearly, at an average of 5%. Realistically, due to the current increased demand of rental properties, rents are increasing quite a bit more than 5% per year. However, using the modest 5% increase in our model, a rent today at $2,050 will go up approximately $100 per month every year. After five years, that rent is $566 per month higher — $2,616, while a mortgage payment remains at $2,050.

We know that rent rates increase an average of 5% year over year. We also know that home values increase year over year, around the same rate. Following this estimate, the value of a $300,000 home after five years is $382,884.

Including the payments made on principal ($26,684), and market value increases (at a modest 5% Y-O-Y) the Buyer will have $109,568 in equity in their home after five years.

The Renter will not have gained any equity, but has likely been building the equity and wealth of their landlord. Over five years, the Renter will have paid $142,764 to their landlord. Total monthly mortgage payments and HOA equal $123,000. Even after accounting for $7,000 to cover closing costs, the Buyer still comes out thousands ahead of the Renter as far as monthly payments go.

There are definitely costs associated with homeownership that are not part of a renter’s budget: the initial downpayment, home repairs, HOA special assessments, taxes, and insurance. Home ownership can also take up more personal time than renting, as there is not landlord to manage repairs and maintenance.

Since they declined the opportunity to go Under Contract on the townhome, the Buyer is still searching the market. With multiple offers on almost every property and very few days on the market, it remains challenging to win a contract. However, interest rates have risen over 0.5% since they put their offer in and declined to invoke their Escalation Clause and win the contract (winning a contract is no easy feat).

Due to the increase in interest rates, the Buyer’s dollar will not go as far as it did in months before. For every 1% interest rates increase, buying power decreases by 10% of purchase price. A higher interest rate lowers the amount paid on the monthly principal included in that $2,050 purchase price. The Buyer cannot afford the same priced home that they could a few months before. The Buyer will also end up spending more money on interest over the life of the loan. Home prices are rising steadily month-over-month as well, so a townhome that sells for $300,000 this month may sell for $315,000 or more in just a couple of months.

No one wants to buy at the top of the market, and no one wants to pay top dollar. The Buyer’s reservations are understandable. However, our current market is the result of supply and demand. The increase in price appreciation is the direct result of low inventory and high demand. New home construction was low even before the pandemic began, and Millennials and Gen Zs are now in the active buyer group, increasing the number of buyers searching for homes. There are no signs of the market slowing down, and if readers are worried about a crash similar to 2008, this is not that market. That market held high inventory, high demand, and very low financial requirements to acquire a mortgage, with buyers even leaving the closing table with some extra cash, such as with an unsettling 125% loan. That scenario is not happening today, mainly due to more stringent regulations. 

Are home values too high? Are they inflated? Below is a chart that shows a house price index for the Atlanta/Sandy Springs/Alpharetta, Georgia area, from 1995-2022 [fred.stlouisfed.org]. Recessions are shaded in gray. Notice that during and after each recession, home prices continued in their trajectory upwards, except 2008 (The Great Recession), where conditions were very different from today. The housing market has adjusted — recovered — over the last decade, and home prices are back on a similar trajectory as they were before 2008. And apart from The Great Recession, most Buyers always paid “top dollar” for their homes because home values have consistently been on the rise.

As far as protecting yourself against inflation —  what better way to protect yourself than to lock in a mortgage payment and keep your largest monthly cost the same year after year, all the while growing your equity in an investment?  Consider spending $142,764 in rent over 5 years, resulting in $0 equity, or spending $123,000 over 5 years on mortgage payments, ending up with $109,568 in equity . . . It is a good time to buy a home.


I would like to extend sincere thanks to Marc Garfinkel, my colleague and my preferred lender, who works with Prosperity Home Mortgage, part of our Family of Services at Harry Norman, Realtors. Marc initially shared this scenario with me and then encouraged me when I decided to present it here. He enthusiastically assisted me as I worked to create all these charts and figures. I love working with Marc, and my Buyers always benefit from Marc’s down-to-earth approach. Marc provides numerous options to Buyers and he gives clarity to all of us in every situation: he strives to help prospective Buyers think outside the box. He makes himself available to clients after business hours; the demand for this is unavoidable in the climate of this challenging market. (Shout out to Marc for writing up a “Fully Underwritten Approval” letter for my clients’ offer on Thanksgiving Day — we won that contract!)


Low Mortgage Rates Benefit Many — Not Just Buyers

Mortgage rates are continuing to hold below 3% this spring. Rates were at record-breaking lows throughout most of 2020, during the unprecedented real estate market during the global pandemic. After rising a fraction in early 2021, the rates for a 30-year mortgage were averaging at 2.98%  on April 29, 2021. It’s natural to see homebuyers as reaping the real benefits from this. But consider others who benefit … even if you are not in the market for a new home, you could benefit from these low rates.

Advantage for buyers

It’s obvious that homebuyers are the most directly benefiting from the low interest rates. Says Realtor.com® Chief Economist Danielle Hale, “Today’s mortgage rates give home buyers a much needed boost in purchasing power that will help them navigate higher home prices, which nearly every housing market across the country is seeing right now.” Perhaps reluctant would-be homebuyers are actually ready to act now in response to the lower interest rates. With the usual springtime increase-in-inventory, the market is turning a little more friendly to buyers the coming months.

Now is also a great time for 2nd-home buyers to make their dreams come true. Even if a great purchase price bargain is hard to come by in today’s housing market, you can still lock in at a respectable low interest rate and save a lot of money in the process. If owning a beach condo has been a goal for your family, this is a great time to buy, as the market for condominiums is not quite as competitive as the market for single-family detached homes.


Advantage for sellers

The climate of today’s housing market is by far the most advantageous for the seller. Low mortgage rates spur buyer demand, plain and simple. The more buyers, the more bidding wars and the higher the sales prices go. This also gives more negotiating power to the seller. 

Houses are on the market for a shorter time right now, with the average days on the market (DOM) being 18, as compared to the average over the last few years being 35-50, depending on the city. Higher DOM can make buyers wonder what’s wrong with the home, and after a few weeks, as interest drops, the appeal of the home drops. 


Advantage for the homeowner not planning to sell 

Lower rates are a positive incentive for refinancing, which can reduce monthly mortgage payments.  An increase in the homeowner’s equity can result, as well as the possibility of eliminating the pesky mortgage insurance.

All this can enhance a homeowner’s overall financial status. Quoted on the CNBC.com website, Matt Schulz, chief credit analyst for LendingTree says, “One of the best things Americans can do right now is build up their savings while trimming their debt.” When any loan balance is high compared to the original borrowed amount, credit scores are lower. Eliminating debt leads to financial security and peace of mind.

Even an advantage for renters

Landlords may take advantage of refinancing their rental property, which can lower their monthly payment and thus eliminate the need for increased rents during the hard times of the pandemic.

Many Americans are purchasing rental properties, taking advantage of the low interest rates. This makes more homes and apartments available to renters. “There’s just been extraordinary demand for rental homes in a lot of these secondary cities, tertiary cities, suburban markets, where a lot of the single-family rental properties are located,” said Gary Beasley, CEO of Roofstock, a marketplace for buying and selling single-family rental properties. According to an article on money.com, large portion of rental purchasers are first-time investors and many of those are moving from renter to landlord. Many of these properties become short-term rentals, through Airbnb or VRBO platforms. Since the onset of the pandemic, there seems to be a move away from hotels and motels and a trend of vacationers choosing detached homes, or condominiums, which don’t require as many close physical interactions during the vacation stay.


What’s next?

Mortgage rates are inching upward monthly. March saw the first dramatic increase over the previous 12 months, but the trajectory has slowed back in the last month. Rates are expected to stay below 3.20%, which is still a relatively low rate compared to the last few years. 2021 looks to be a safe time to make that home purchase, or secondary home purchase. Still, it’s good to keep in mind, the market is volatile, and speculation is just that. But home value growth is sure to remain in 2021.



If you are interested in selling or buying a home, I’d love to be of help as your Harry Norman Realtor. As a seller listing your home with me, you can be assured that your home will have the best market exposure. Harry Norman properties are featured on thousands of real estate websites visited by millions of qualified viewers. No other Atlanta residential real estate brokerage offers greater local, national, and international exposure. We are relocation specialists, so your home will be marketed not just to local Georgians, but specifically to the thousands of buyers relocating to the Atlanta area. We will present your home in the best light, with an eye toward the shortest time on the market and the best selling price. As a buyer’s agent with Harry Norman, I will work closely with you, taking in to account your specific and individual needs in the home buying process and I will be your exclusive advocate. It is to your advantage as a buyer, especially in this erratic market, to have a realtor who can make sure your offer stands out from the others, and that the contract is aligned with your best interests.

If you have questions about your neighborhood housing market trends, or are interested in buying or selling, I’d love a chance to chat with you about it all. Please contact me via email at ElizabethKay.Pinder@HarryNorman.com so we can set up an in-person or phone appointment.

Elizabeth Kay Pinder, Realtor ~ Harry Norman, REALTORS ~ 404-394-4646, mobile ~ 404-394-2131, office ~ ElizabethKay.Pinder@HarryNorman.com ~ ElizabethKayPinderWeb.HarryNorman.com

Sources

https://www.cnbc.com/2021/04/28/the-fed-keeps-rates-near-zero-heres-how-you-can-benefit.html

https://www.realtor.com/news/real-estate-news/mortgage-rates-drop-home-prices-rise/

https://www.opendoor.com/w/blog/why-days-on-market-matter

https://money.com/historic-low-mortgage-rates-new-investment-property/

PANTONE Color of the Year = Springtime

PANTONE Color System is best known for its PMS (Pantone Matching System). This color matching system is used internationally among designers in graphic, interior, and product design, and printing. The system is used to assure that colors are accurate when products go into production regardless of the various equipment used, whether by professional designers or amateur artists.


Starting in 2000, PANTONE assigns a Color of the Year annually, to provide a cohesiveness across design industries. Complimenting lifestyles with color, they declare, “has always been an integral part of how a culture expresses the attitudes and emotions of the times.” All design industries immediately engaged in this approach and this resulted in a unified theme across genres of design, connecting color ideas in clothing, to interiors, to products and even printed materials.

When PANTONE announced its 2021 Color of the Year, they looked ahead, past the tumultuous condition of our lives over the last 12 months and offered an inspiring approach to 2021.


Last year’s color, Classic Blue (PANTONE 14-4052), offered peacefulness with a sense of elegance. Announced well before we were all sequestered by the pandemic, PANTONE still saw the need for “reassurance, confidence and connection that people may be searching for in an uncertain global milieu.” As the year unfolded, PANTONE executive director Leatrise Eiseman suggested how appropriate the themes of “tranquility,” “clarity,” and “restfulness” continued to be, and encouraged incorporating them into our lives through the Classic Blue color.


Looking ahead to 2021, this year offers much promise to many.  In presenting two independent colors, Illuminating Yellow (PANTONE 13-0647) and Ultimate Gray (PANTONE 17-5104), PANTONE hopes to encourage “people to look for ways to fortify themselves with energy, clarity, and hope to overcome the continuing uncertainty, spirited and emboldening shades satisfy our quest for vitality.”

“PANTONE 13-0647 Illuminating is a bright and cheerful yellow sparkling with vivacity, a warming yellow shade imbued with solar power. PANTONE 17-5104 Ultimate Gray is emblematic of solid and dependable elements which are everlasting and provide a firm foundation. The colors of pebbles on the beach and natural elements whose weathered appearance highlights an ability to stand the test of time, Ultimate Gray quietly assures, encouraging feelings of composure, steadiness and resilience.” PANTONE announcing 2021 Color of the Year


Even though the Color of the Year was announced in December 2020, the nature of the colors selected lend themselves to Springtime decorating! I’ve collected some images that may inspire you to incorporate these colors into your home decor. No need to change your whole design theme, just add these colors as you are inspired! When used as accents, they are harmonious with most palettes. For 2021, PANTONE offers “A marriage of color conveying a message of strength and hopefulness that is both enduring and uplifting.”

Let’s hear it for resilience and power! 



Atlanta’s Real Estate Resilience

What made the ATL real estate market resilient last year? How is it possible that we had a market boom during a pandemic? I believe the resiliency of the Atlanta real estate market was due to the very nature of our great city: the strong economy for jobs and growth, and the housing affordability of Metro Atlanta. Add to that the fortunate favorable mortgage rates, and you have a resilient real estate market.

Jobs and growth

Georgia showed impressive economic progress in the first half of 2020, despite alarming closures and job losses. And according to an article in the Atlanta Journal-Constitution, by the end of 2020, while jobless rates were still considerably lower than in 2019, employment rates were growing in 10 of the 14 metro areas. Labor commissioner Mark Butler spoke enthusiastically of “the resilience that Georgia has to offer during this economic rebound.” Where are all these jobs?

Buckhead’s Financial District employs over 13,000 — almost half the finance workers in metro Atlanta. Spanning across GA 400 and the MARTA rail system RED Line is the landmark Atlanta Financial Center.

There has been an increase in jobs in construction, legal, tech, finance, and the education and health industries. Many Atlantans already worked from home pre-pandemic, and this number certainly and necessarily increased in 2020. Last year many jobs were retained in Atlanta due to the flexibility of both employers and employees.

Tech Hub

1105 WEST PEACHTREE
A 410 foot tall multi-use development designed to offer “an unrivaled office community designed to help companies recruit and retain the best talent.”

Metro Atlanta has a significant and growing tech hub and home to 23 Fortune 500 companies. That equals a continual increase in jobs; many of them high-paying. Under construction now are Midtown Union, the new Invesco headquarters located at W. Peachtree and 17th Street; 1105 West Peachtree — a mixed use development which will include Google’s Southeast headquarters; and the Norfolk Southern 1.5 million sq. ft. headquarters, also located on W. Peachtree. Microsoft just announced its new hub in Atlantic Yards, bringing 2,500 jobs with it, and future plans for developing the mixed-use Quarry Yards in West Atlanta. These developments not only provide construction jobs now, but they guarantee thousands of jobs in the tech and hospitality industries and ultimately increase the demand for housing in Metro Atlanta.

Entertainment Industry

The entertainment industry loves Georgia — we rank #1 for film production. In 2019 over 400 feature films and tv shows were shot in Georgia. And despite the pandemic, in 2020 $2.2 billion was spent filming. Over 40,000 production workers will be employed on an expected 75 production projects during the next year, with 50 currently in production or filming prep.

Although still down from pre-pandemic levels, Metro Atlanta job-growth has doubled for the last few months. All these factors show Georgia’s economy to be resilient.



Lower Interest Rates

Mortgage rates are one of the primary drivers of the success of the housing market. Interest rates in 2020 reached lows not seen since the 1970s. Rates dipped as low as 2.66% in December for a 30-year fixed rate mortgage. This factor alone can boost home sales dramatically. Millennials are leading the way for first-time homebuyers thanks to these low rates. Leading institutions indicate that although there will be increases in 2021, rates will remain relatively low, possibly reaching 3.4%. Rates are predicted to increase more in 2022, making 2021 a promising year for new mortgages.


Mortgage Interest Rates Forecast
Source
20212022
Fannie Mae2.7%2.9%
Freddie Mac2.9%3.2%
Mortgage Bankers Association3.4%3.9%
Harry Norman, REALTORS® Metro Atlanta Residential Real Estate Forecast


Metro Atlanta’s Affordable Housing

Even with housing prices increasing by an average of 8% last year, Metro Atlanta has remained an affordable place to live.  The national monthly average cost of home ownership is 30% of income. Metro Atlanta comes in at 23.8%. Compared to New York City (40%) Atlanta is in the upper tier of affordable cities with a large population. For many people relocating to Atlanta from more expensive real estate markets, the increase in the local cost of housing here was not an obstacle.

Over 20 homes at various stages of construction in a new neighborhood, Newbury Place, going up in Loganville, GA. The builder, Starlight Homes, based in Alpharetta, is popular with first-time homebuyers.

Affordable housing, a robust (but still unsettled) economy, and job growth are factors that combined last year for an expected increase in real estate demand. Add to this: changes in lifestyles, relocations for jobs, and the record-breaking low interest rates and the results speak for themselves. Atlanta has a booming real estate market. One plain obstacle to a thriving market in 2021 is the short supply of homes. But even that angle won’t slow the Metro Atlanta market. Although there are building materials supply challenges, new construction is expected to increase 9% in 2021, with a forecast for 50,000 new units (MetroStudy). In this exciting and profitable market, many would-be sellers are recognizing the opportunity and are ready to cash in on their equity.


What is your experience with the 2020 housing market? Do you have any stories to share? I’d love to read about them…please comment below!

Peachtree Corners, GA