There’s a great song from the movie Cabaret that goes something like this: “Money makes the world go ’round, the world go ’round, the world go ‘round.” I like it because it says so much in such a short lyric and is understood by everyone. For buyers and sellers in this real estate market, the money is represented by mortgage interest rates which change so quickly your head could go ‘round and ‘round.
At the July meeting of the Federal Reserve, they raised interest rates by another quarter percent, which was expected, but they did indicate the possibility of easing towards the end of the year. According to Forbes on Aug. 2, the average residential 30-year fixed rate mortgage was 7.47%, not making buyers feel warm and fuzzy.
Interest rates are impacting the real estate sales market as frustrated home shoppers are facing high rates combined with a shortage of available properties that are not moving substantially down. Sellers are happily sitting tight on their 3% mortgages with Cheshire cat smiles on their faces for being so smart.
According to the National Association of Realtors, June sales fell 18.9% nationally compared to June of last year. Manatee County had 17.7% more sales for single-family homes compared to June of last year.
Sale prices are down slightly but still historically high. The national median existing-home price fell 0.9% in June from last year to $410,200, and the Manatee County median sale price for single-family homes was down 4.5% to $525,000. However, based on the new listings coming out daily, I wouldn’t be too worried about our values taking a deep dive any time soon.
There is another way for buyers and those sellers who want to sell to come together despite high rates that may be disqualifying some buyers. Sellers could offer or buyers could suggest that sellers finance a buyer’s purchase of their home. This is called taking back a mortgage and is more common for investment properties but could also offer a solution for some buyers with an interested seller.
Seller financing helps buyers increase their purchasing power by saving on closing costs, setting up escrow accounts, and application fees or paying lower interest rates. It could also help sellers who want buyers to make a full-price or higher offer on the home and are concerned about the property appraising through a conventional bank lender. The transaction is similar to closing with a lender; the buyer receives title to the property at the closing as with a traditional mortgage.
Sellers are assuming the larger risk of taking back a mortgage on their property. If the buyer defaults or doesn’t pay their real estate taxes or insurance, the seller will need to proceed with a foreclosure which is expensive and time-consuming. It’s all a little complicated and risky for all parties including getting a tax advisor involved and, of course, an attorney.
Anxious sellers who have properties that have been on the market for some time could consider holding the mortgage. This could also produce a steady stream of income for the seller if they are in a financial position to delay receiving the proceeds from the sale.
Typically, buyers can negotiate an interest rate lower than the prevailing rate, however, there is a minimum interest rate regulated by the IRS to consider. Sellers could wait out the higher rates hoping for a future decline then apply for a conventional mortgage and pay off the seller.
Money makes the world go ‘round and trying to understand it can make your head explode. Proceed with caution.
