Feeling pretty flush, are you? Most of us who have owned property for several years are pretty happy with the equity we have accumulated. But if you are selling and purchasing another property, be careful. That equity can slip through your fingers at lightning speed.
A recent study by UCLA Anderson School of Management discovered that for every dollar of equity gain that a seller receives, he or she overpays by 7.9 cents on the next home purchase.
There are a few theories about why this is happening, one of which is that with higher equity comes lower capital constraints, allowing buyers to consider larger homes they are willing to pay more for. Also, a buyer with a nice equity cushion can offer more and sometimes will pay more to avoid a time-consuming search for a new home or to place themselves at an advantage above other buyers. Either way, these actions are driving offers higher than they should be.
Naturally, overpaying contributes to escalating housing costs, compounding the effect of fewer homes on the market and pushing up selling prices. This is more bad news for buyers who are competing with high equity buyers who are cornering the market with a lot of equity and cash bidding up prices.
Buyers who overpay for a property are risking that the property values will stay high when the time comes to resell. If a buyer is in the property for the long haul, it might be a smart risk to take for a property you want. However, if a buyer is looking at a short-term purchase they could get caught in an unexpected downturn of the market.
With residential mortgage interest rates approaching 7.5%, not only are buyers caught in the vice, but banks are also starting to see their profit margin caught in the same vice. Applications for home purchase mortgages dropped to their lowest levels since 1995 a few weeks ago, according to the Mortgage Bankers Association. Buyers aren’t buying because of low inventory and high rates and potential sellers aren’t selling and giving up their ultra-low mortgages – a perfect storm in a not-so-perfect real estate market.
But there are still high-end buyers who are jumping into the real estate market. The only difference is the jumbo loans these buyers typically are looking for are not as available as they once were. A jumbo loan is a non-conforming loan that exceeds the conventional loan limit set by the government housing authorities. The limit is currently set at $726,200 or higher in some high-cost areas in the country. For instance, Hawaii would be considered a high-cost area. These loans typically were considered low-risk loans the banks kept on their books that attracted wealthy customers, many of whom used the same bank for additional business transactions.
These loans usually carried lower rates than regular mortgages. However, the lower preferential rates for jumbo loans have reversed in recent months and now the jumbos are also approaching 7.5%, forcing home buyers to reconsider their financial options or even whether it’s a good time to buy. Since we’re living in an area with many high-end properties for sale, these higher rates could influence our market.
Whether you’re buying a car or a pair of shoes, it’s the same. If you have more, you pay more and if you pay more, you borrow more. Americans love the best of the best. Be careful that the money doesn’t slip through your fingers.
