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At the Money: The Best Way to Buy a House · Masters in Business

• 0:00
  Speaker 1: Has there ever been a worse time to buy a
• 0:03
  Speaker 1: house in America? Inventory is at record lows, competition has
• 0:08
  Speaker 1: been intense. Home purchases are the most expensive they've been
• 0:12
  Speaker 1: relative to renting in a couple of generations. In the
• 0:17
  Speaker 1: face of this mess, what's a potential home buyer to
• 0:21
  Speaker 1: do is a very very fine house. As it turns out,
• 0:29
  Speaker 1: there are some ways you can make the process of
• 0:31
  Speaker 1: buying a home better or at least less bad. I'm
• 0:35
  Speaker 1: Barry Ridhelts and on today's edition of At the Money,
• 0:39
  Speaker 1: we're going to discuss how to buy a home in
• 0:43
  Speaker 1: today's market. Let's bring in Jonathan Miller of real estate
• 0:47
  Speaker 1: appraisal and data firm Miller Samuel. For the past thirty
• 0:51
  Speaker 1: seven years, Jonathan Miller's monthly and quarterly housing sales, data
• 0:56
  Speaker 1: and rental reports are must read in the industry and
• 1:00
  Speaker 1: have made him the most quoted man in real estate.
• 1:04
  Speaker 1: Jonathan Miller, Welcome to At the Money. Let's just jump
• 1:07
  Speaker 1: in to the first question. How challenging is it to
• 1:12
  Speaker 1: buy a house today?
• 1:14
  Speaker 2: It's incredibly difficult home buyers. Not only prices haven't really
• 1:20
  Speaker 2: come down given the spike and mortgage rates, because inventory
• 1:25
  Speaker 2: is absent from the equation, buyers don't have a lot
• 1:29
  Speaker 2: of choices. So as a result, what we're seeing bidding
• 1:33
  Speaker 2: wars have been rising.
• 1:35
  Speaker 1: Even as rates have gone up.
• 1:36
  Speaker 2: Yes, because the number one thing to look at really
• 1:40
  Speaker 2: as a metric is supply inventory and inventory. The rates
• 1:47
  Speaker 2: began rising with the FED pivot at one of the
• 1:51
  Speaker 2: steepest climbs in four decades. That it's really challenging the consumer.
• 1:57
  Speaker 1: So before we get into even more specific days in details,
• 2:01
  Speaker 1: let's just talk a little bit about psychology. If you're
• 2:04
  Speaker 1: a buyer, how should you approach the idea of purchasing
• 2:10
  Speaker 1: a house from a psychological perspective? Where should your head
• 2:13
  Speaker 1: be at? Well?
• 2:14
  Speaker 2: I think the most important thing is to look at
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  Speaker 2: this as a long term transaction. I always look at
• 2:20
  Speaker 2: housing as a long term asset. There have been various
• 2:24
  Speaker 2: cycles where people were thinking of it as a stock
• 2:27
  Speaker 2: and it's just not that liquid. So you know, you
• 2:31
  Speaker 2: buy it, you hold it. The average person, you know,
• 2:35
  Speaker 2: the numbers are kind of ranging. The average person stays
• 2:38
  Speaker 2: in a home seven to ten years on average, so
• 2:41
  Speaker 2: you're really looking at it from a much longer window.
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  Speaker 2: And within that window, you know, markets trend up and down.
• 2:48
  Speaker 2: It's you know, there's various cycles, various reasons. I think
• 2:52
  Speaker 2: that's one of the most important things to look at
• 2:54
  Speaker 2: to treat the asset as it actually is.
• 2:57
  Speaker 1: So you and I have discussed what a buyer should
• 3:00
  Speaker 1: pay for a home, and you say something that's kind
• 3:03
  Speaker 1: of counterintuitive, and I'm guessing it's based on that, Hey,
• 3:07
  Speaker 1: we're going to be here for ten years or longer.
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  Speaker 1: If you pay a couple of percent over what you
• 3:13
  Speaker 1: think is a reasonable price in the long run, it
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  Speaker 1: doesn't matter, does it.
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  Speaker 2: It really doesn't, because you have to remember what the
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  Speaker 2: asset is. It is something that you're going to use
• 3:23
  Speaker 2: and live in and occupy every day as an owner
• 3:26
  Speaker 2: occupied house. In my circumstance a little over a year ago,
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  Speaker 2: I actually bought a house for thirty six percent above
• 3:36
  Speaker 2: the list price, but when I do the details, I
• 3:38
  Speaker 2: probably only paid ten to fifteen percent above, and who cares.
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  Speaker 2: So I'm going to be there for a long time.
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  Speaker 2: It's exactly what we wanted. I don't look at it
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  Speaker 2: as that kind of investment that you would track closely.
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  Speaker 2: And we beat thirty people in a bidding war.
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  Speaker 1: That's unbelievable. So let's talk a little bit about bidding
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  Speaker 1: war What sort of advice do you have if someone
• 4:00
  Speaker 1: finds a house they really love, you don't want to
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  Speaker 1: pay double what it's worth. You'll never get your money
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  Speaker 1: out of it, at least not in a reasonable time.
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  Speaker 1: But what are the guidelines for when it's you against
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  Speaker 1: a couple of dozen people and everybody wants this house
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  Speaker 1: on this block in this neighborhood.
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  Speaker 2: Well, I think human beings need reinforcement. So you probably
• 4:22
  Speaker 2: you're going to have to lose two or three bidding
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  Speaker 2: warriors before you realize the condition of the market, and
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  Speaker 2: the condition of the market is that there is a
• 4:32
  Speaker 2: chronic inventory shortage in nearly every housing market in America.
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  Speaker 1: Let's talk about that for a second. And again you
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  Speaker 1: and I have talked about we've underbuilt single family homes
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  Speaker 1: in the United States for fifteen years following the financial crisis.
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  Speaker 1: Then you had this massive surge of second and third
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  Speaker 1: home buyers during the lockdown of the pandemic, and now
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  Speaker 1: we have this the number I'm familiar with. Sixty percent
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  Speaker 1: of homeowners have a mortgage of four percent or less.
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  Speaker 1: Eighty percent of homeowners with a mortgage have a mortgage
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  Speaker 1: of five percent or less. That creates massive lock in.
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  Speaker 1: No one wants to go right. How long can this
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  Speaker 1: inventory short fall last?
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  Speaker 2: Well, I look at there's two solutions for inventory, and
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  Speaker 2: they're not very one's not realistic, and one isn't good.
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  Speaker 2: The first idea is that rates fall back down. And
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  Speaker 2: when you're talking to many homeowners in our appraisal business,
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  Speaker 2: there is a broad expectation that rates, after going from
• 5:34
  Speaker 2: just below three to almost eight percent, that they're going
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  Speaker 2: to settle back down. And I don't disagree with that,
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  Speaker 2: except they're not going to settle back down to three
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  Speaker 2: or four percent. Five. The economy lucky, If we're lucky,
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  Speaker 2: it's probably high fives, low six is given that unemployment
• 5:55
  Speaker 2: is still very low. The economy is still vibrant. So
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  Speaker 2: I didn't expect a massive rate cut. It would be
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  Speaker 2: my just using logic. No, I have no inside understanding.
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  Speaker 2: So when you have rates drop, each time the rates
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  Speaker 2: sort of incrementally drop, homeowners become sellers and that adds
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  Speaker 2: a little bit of inventory, but not enough, but it
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  Speaker 2: every little bit helps. The other thing to look at
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  Speaker 2: would be some adverse negative event that would cause the
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  Speaker 2: FED to cut rates more sharply, and that would be
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  Speaker 2: a recession. Of course, we've been talking about a recession
• 6:31
  Speaker 2: coming in six months for the last two years, so
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  Speaker 2: you know that seems uncertain. The problem is then you
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  Speaker 2: get job loss, right, and we have job loss, that's
• 6:42
  Speaker 2: less people that will buy homes.
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  Speaker 1: Right, it makes a lot of sense. So we've been
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  Speaker 1: talking about mortgages and mortgage rates. I've always been shocked
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  Speaker 1: whenever I looked at your reports at the rise of
• 6:52
  Speaker 1: the cash purchase. This used to be a mostly high
• 6:56
  Speaker 1: end sort of thing, and now it seems to be
• 6:59
  Speaker 1: working its way down. The economic strata of homes tell
• 7:04
  Speaker 1: us about what's going on with all cash purchases.
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  Speaker 2: So cash has been the method of purchase that's gotten
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  Speaker 2: a lot more popular in the last couple of years.
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  Speaker 2: I don't want to give the impression that hey, everybody's
• 7:19
  Speaker 2: just paying cash. No would need some mortgage. But what
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  Speaker 2: the way to think of cash is the higher you
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  Speaker 2: go in price, the higher the probability the purchase is
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  Speaker 2: a cash transaction.
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  Speaker 1: So ten million and up, those are all cash purchase.
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  Speaker 2: Eighty to ninety percent cash.
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  Speaker 1: What about five million and up?
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  Speaker 2: Five million and up is about the same. It's when
• 7:42
  Speaker 2: you leave, Yeah, when the people that are at the
• 7:46
  Speaker 2: high end that are more susceptible to higher rates are
• 7:50
  Speaker 2: generally the two to five million range because those people
• 7:53
  Speaker 2: aren't paying cash, they're getting financing, and that market has
• 7:57
  Speaker 2: been much more challenged. The lower you go in price,
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  Speaker 2: the more dependent you are on a mortgage. One quick
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  Speaker 2: example is in Manhattan, we had a situation this year
• 8:07
  Speaker 2: where year every year sales fell about thirty percent, but
• 8:12
  Speaker 2: sales for cash buyers fell twenty percent and for finance
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  Speaker 2: buyers fell forty or higher percent. So it has more
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  Speaker 2: of an impact, but cash doesn't bypass the challenge of
• 8:24
  Speaker 2: high rates.
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  Speaker 1: So I used to think of four or five million
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  Speaker 1: dollars as like a big, spectacular house on the water
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  Speaker 1: cash purchased by a very wealthy individual. You're implying that
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  Speaker 1: two to five is now no longer the very rich.
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  Speaker 1: That's the upper class, upper middle class. What is that
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  Speaker 1: range of homes.
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  Speaker 2: Yeah, so you know, upper middle class or lower upper
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  Speaker 2: class is really two to five, and they tend to
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  Speaker 2: be dependent on financing. We have a market in the
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  Speaker 2: New York region known as the Hamptons, and we call
• 8:58
  Speaker 2: it the Hampton's Middle Two to five million, five are
• 9:02
  Speaker 2: higher versus one million or two million or lower. The
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  Speaker 2: Hampton's middle is much the most challenged part of the
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  Speaker 2: market because those buyers are much more impacted by the
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  Speaker 2: spike in rates over the last year and a half
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  Speaker 2: than the five and over, which are more cash.
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  Speaker 1: What about working with the real estate if you're a buyer,
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  Speaker 1: how useful are real estate agents?
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  Speaker 2: So I think one of the things they don't get
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  Speaker 2: credit for, and I know this from personal experience quite often,
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  Speaker 2: is they provide a buffer between the parties. Because many people,
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  Speaker 2: when confronted with the opposition, there's no buffer, they're intimidated.
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  Speaker 2: They may end up not doing well in the negotiation.
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  Speaker 2: That's not everybody, but at least in my experience, that's
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  Speaker 2: that's the service that is provided to have a third
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  Speaker 2: party to insulate you from direct negotiation.
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  Speaker 1: What about those negotiated offers? What we need to know
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  Speaker 1: about the way to make an offer that's most likely
• 10:08
  Speaker 1: to resonate with the seller.
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  Speaker 2: So, you know, I think a lot of people when
• 10:14
  Speaker 2: ask this question, they think it's all about the price. Hey,
• 10:17
  Speaker 2: you know, the higher the price you are, you know
• 10:19
  Speaker 2: you offer, But it really is the terms. So it's
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  Speaker 2: how much finding it? What does your financial situation look like,
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  Speaker 2: how likely are you to be able to close at
• 10:30
  Speaker 2: this price? You know, is there going to be a problem.
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  Speaker 2: And I'm not saying that that. You know, price isn't important,
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  Speaker 2: but it's probably parallel to the terms of the deal itself.
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  Speaker 2: You know, if someone comes in and makes an astronomical offer,
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  Speaker 2: you know, the sellers, you know, if that doesn't close,
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  Speaker 2: the momentum of the house on the market and it's
• 10:52
  Speaker 2: all lost because the transaction starts over. So really your
• 10:56
  Speaker 2: focus is presenting yourself as someone that can afford it,
• 11:00
  Speaker 2: and that brings in whether you're proved for financing.
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  Speaker 1: So do that in advance and come with a clean
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  Speaker 1: offer with a lot of not a lot of contingencies.
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  Speaker 2: Right in this market, you know, it's pretty common now
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  Speaker 2: to have financing contingencies. A year and a half ago
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  Speaker 2: that was non existent. It was you know, there was
• 11:18
  Speaker 2: no hair on the deal, so to speak. But you know,
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  Speaker 2: less is more always when you're negotiating. I think in
• 11:24
  Speaker 2: this market, buyers think that they have more leverage over
• 11:29
  Speaker 2: the seller than they actually have. So for example, in
• 11:33
  Speaker 2: the market the suburbs that surround Manhattan, the share of
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  Speaker 2: closings just in the third quarter that were bidding wars
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  Speaker 2: was forty to fifty percent. Wow, so half the sales,
• 11:47
  Speaker 2: nearly half the sales are selling above the asking price.
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  Speaker 2: So as a buyer, you don't have a lot of
• 11:55
  Speaker 2: strength over the seller at this current time because we're
• 12:01
  Speaker 2: in this incredible inventory situation where inventory is devoid of
• 12:08
  Speaker 2: being president on the market.
• 12:10
  Speaker 1: So we've been talking about existing homes. What about new construction,
• 12:14
  Speaker 1: either buying a plot of land and building your own
• 12:16
  Speaker 1: house or working with a spec builder who's in the
• 12:20
  Speaker 1: midst of constructing a house. How do we navigate those
• 12:22
  Speaker 1: circumstances as buyers.
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  Speaker 2: Well, it's interesting because existing inventory is so low that
• 12:29
  Speaker 2: many markets have a disproportionately high share of new construction,
• 12:34
  Speaker 2: even though it's still a small amount, but more typically
• 12:37
  Speaker 2: you expect ten to fifteen percent of most markets are
• 12:41
  Speaker 2: new construction. And one of the things that large national
• 12:45
  Speaker 2: builders have been doing is buying down interest rates, which
• 12:50
  Speaker 2: has been very well received.
• 12:52
  Speaker 1: To find that what do you mean buying down interest rates?
• 12:54
  Speaker 2: So let's just say that prevailing thirty year fixed is
• 12:58
  Speaker 2: seven and a half percent, they'll buy down the rate.
• 13:01
  Speaker 2: So what that means is that the buyer, when they
• 13:03
  Speaker 2: buy the house. The mortgage rate is five and a
• 13:06
  Speaker 2: half percent. That's not amazing, and that has been very successful.
• 13:10
  Speaker 2: But not all builders can afford to do that. They
• 13:12
  Speaker 2: need scale the financial wherewithal. But when you do that,
• 13:17
  Speaker 2: you're reducing the resistance to the purchase.
• 13:20
  Speaker 1: Huh, really really fascinating stuff. So to sum up, it's
• 13:24
  Speaker 1: still a seller's market. However, as a buyer, you have
• 13:29
  Speaker 1: a lot of things you can do to improve your
• 13:33
  Speaker 1: chance of successfully purchasing a house. Come in with all
• 13:36
  Speaker 1: your ducks lined up, make sure your cash and financing
• 13:40
  Speaker 1: is in place, Try not to hang too many contingencies
• 13:44
  Speaker 1: on your offer, work with a good agent who knows
• 13:47
  Speaker 1: the area, and don't be surprised if you're going to
• 13:50
  Speaker 1: pay a little over the asking price for the house
• 13:54
  Speaker 1: of your dreams. You can listen to At the Money
• 14:01
  Speaker 1: every week finding in our master's and business feed at
• 14:04
  Speaker 1: Apple Podcasts. Each week we'll be here to discuss the
• 14:08
  Speaker 1: issues that matter most to you as an infestor. I'm
• 14:11
  Speaker 1: Barry Ritolts. You've been listening to At the Money on
• 14:14
  Speaker 1: Bloomberg Radio