Home prices are rising as inventories continue to thin out, and that presents a problem for financial advisors counseling clients on getting the best deal for a new home.
Median U.S. home sales prices rose 6.5 percent to $263,800, while inventories fell 7.1 percent in June 2017, according to the National Association of Realtors. Both numbers are compared to June 2016.
“The first half of 2017 ended with a nearly identical number of contract signings as one year ago, even as the economy added 2.2 million net new jobs,” said Lawrence Yun, chief economist at the NAR. “Market conditions in many areas continue to be fast paced, with few properties to choose from, which is forcing buyers to act almost immediately on an available home that fits their criteria.”
Low supply is an ongoing issue holding back activity, Yun said. One positive sign for homebuyers is an uptick in housing starts, which puts more properties on the market.
“The 8.3 percent monthly increase in housing starts injects optimism into the housing market after months of declines in starts and permitting,” said Ralph McLaughlin, chief economist at Trulia. “Amid near historical low levels of inventory, energized construction activity in June for both single-family and multifamily housing could signal the start of a buoyant construction season.”
Preach Caution to Clients
For investment advisors working with clients on a new home purchase in such a volatile environment, the watchwords are caution, communication, and careful preparedness.
“The first thing a person should consider when buying a home is how it’s going to affect their lifestyle,” said Kathleen Cote, a financial planner based in Oakton, Va.
Understanding the added time they will spend on maintenance of a home versus a condo or town house is a good idea, Cote explained.
“For example, if a client buys a home on a half-acre-plus property, they will be spending one-to-two hours a week on yard work eight months out of the year,” she noted. “That is time that will take them away from the things they really like to spend time doing.”
Another lifestyle impact is the commute to work.
“If they move to a home that gives them more than a 45-minute commute, chances are they will begin to resent that extra time they spend commuting to work and eventually regret purchasing a home in that location,” Cote said.
The biggest issue an advisor faces is having a client avoid becoming house poor.
“Try to keep the mortgage payment at no more than 30 percent of a client’s take-home income,” Cote said. “If it’s more than that, then it will cut into fun money for vacation and doing the things a person wants to do. It can even eat into the money your client should be putting away for other long-term goals, like retirement and college savings.”
After the research phase is completed, and lifestyle issues are factored in, advisors should help steer the client to a trusted real estate agent. An agent can help with the budget and provide recent home prices in the area your client wants to move.
“Determining what neighborhood your client wants to live in and understanding what they can and cannot afford will put realistic parameters around a home search,” said Ray Rodriguez, regional mortgage sales manager at TD Bank. “Being transparent with your lender is essential during the mortgage process and can help you avoid roadblocks.”
‘Line Up the Necessary Paperwork’
During the home-buying process, it’s also ideal for clients to have all their paperwork and key documents in order and ready to go.
“Even before your client embarks on the home-buying process, be sure to consult with the mortgage lender and Realtor to line up the necessary paperwork for mortgage pre-approval,” Rodriguez said. “Those who have applied for a mortgage and are pre-approved will have a more legitimate chance of making an offer on a home.”
Home buyers should also check their credit score (which can be done once a year for free through the major bureaus), assess their savings for a down payment and put off any large purchases that might raise an issue during the approval process.
Watch out for unexpected costs, as well.
“Our Mortgage Service Index found that a third of homeowners incurred between $2,000 and $5,000 in unexpected costs throughout the home buying process and an additional 10 percent incurred over $5,000,” Rodriguez said. “Prepare a buffer to allow for any additional costs that could arise throughout the process, like required repairs to pass any inspections or appraisals.”
These are tough times to be a successful home buyer, given skyrocketing home values and spare inventories.
Investment advisors counseling home-buying clients can mitigate some of that risk by working with a solid real estate pro, having all of their clients’ documents at hand, and keeping them realistic on the amount of money they can actually spend on a new home.
If you keep within those guidelines, clients can experience a positive outcome when buying a home, and maybe even get the home of their dreams (and within their budgets) in the process.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at email@example.com.
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