Home Beat – The Middle Market
Although times are tough for homebuyers at every price point, those in the middle market face perhaps the most daunting challenge in the current climate.
Amid the pandemic, interest rates sank to historic lows, and that sparked a high demand from buyers. According to the Massachusetts Association of Realtors (MAR), median February prices for single-family homes and condos surged past figures for February 2020. Meanwhile, inventory reached new record lows. According to MAR, “Inventory is again hitting record lows as single-family homes are down 68.4% over February 2020, and condo inventory is down 33.6%, a remarkable jump from January 2021’s 64.0% and 26.1% respectively.”
Most frustrated by this change are the middle-market buyers who may be caught somewhere between lower-priced condos and single-family homes nearing the $1 million mark. Jarad Gagnon is a buyer’s real estate agent for Team Correia with Keller Williams Merrimack Valley. As of this writing, he is currently assisting over a dozen buyers in their home searches, many of whom are navigating through the middle market. “I cannot believe some of the things I am seeing out there,” Gagnon says. “Obviously, there is a major industry shortage, but that has changed a lot of the mechanics behind our process, especially when writing an offer to purchase contract for a home.”
Gagnon’s concerns stem from recent practices that are becoming commonplace. “I dislike the trend of homebuyers waiving their home inspection contingencies,” he says. “We always advise our buyers not to give away the ever-important inspection [and ability to back out if problems arise].”
The current market stretches a buyer’s willingness to waive home inspections, as well as the buyer’s finances. The vast majority of homes in today’s market are attracting offers well over the asking price. Some receive offers that are tens of thousands of dollars over asking, which can be problematic when it comes to a mortgage since mortgages require appraisers to determine a home’s value. If the home is considered overvalued by the appraiser, the bank will not fund the full amount that was initially offered by the buyer. “We actually haven’t had many of our offers run into appraisal issues,” Gagnon says, “but that certainly is a threat as the market continues to become increasingly competitive. If it becomes more prevalent, this could make the market even more challenging for middle-market homebuyers who are still counting on a lender to purchase a home.”
Purchasing a middle-market home can be vexing for buyers who are generally reliant on a lender to afford their new (or first) home, but find themselves buying in a market where they are pressured to push the limits of what they can spend. Generally, a lender or mortgage broker will give buyers hard “ceilings” where their ability to borrow will be cut off. As home prices continue to skyrocket, the market increasingly favors those with large cash reserves since they do not require an appraisal. We may see a shift in which affluent homebuyers decide to search far below their price range to generate more leverage in order to generate more leverage through cash offers, a development that would be detrimental for middle-market buyers.
Gagnon urges homebuyers to remain patient during this process, noting, “Just understand going into this that you are likely to experience rejection. Things are competitive, and you cannot guarantee anything, but keep your feelings of desperation at bay; that’s when things can become dangerous with the biggest investment of your life.”
My advice? Potential homebuyers should ask themselves what they truly need in a home, and what they expect through the homebuying process. Once this is defined, they shouldn’t compromise their objectives solely because of the market of the moment.