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

• 0:00
  Speaker 1: Has there ever been a worse time to buy a
• 0:03
  Speaker 1: house in America? Rates are at their highest levels in
• 0:06
  Speaker 1: more than twenty years. Inventory is at record lows, Competition
• 0:11
  Speaker 1: has been intense. Home purchases are the most expensive they've
• 0:15
  Speaker 1: been relative to renting in a couple of generations. In
• 0:20
  Speaker 1: the face of this mess, what's a potential home buyer
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  Speaker 1: to douse is a very very fine house. As it
• 0:31
  Speaker 1: turns out, there are some ways you can make the
• 0:34
  Speaker 1: process of buying a home better or at least less bad.
• 0:39
  Speaker 1: I'm Barry Riddelts and on today's edition of At the Money,
• 0:42
  Speaker 1: we're going to discuss how to buy a home in
• 0:46
  Speaker 1: today's market. To help us unpack all of this, let's
• 0:50
  Speaker 1: bring in Jonathan Miller of real estate appraisal and data
• 0:54
  Speaker 1: firm Miller Samuel. For the past thirty seven years, Jonathan
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  Speaker 1: Miller's monthly and hortally housing sales, data and rental reports
• 1:03
  Speaker 1: must read in the industry and have made him the
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  Speaker 1: most quoted man in real estate. Jonathan Miller, Welcome to
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  Speaker 1: At the Money. Let's just jump in to the first question.
• 1:15
  Speaker 1: How challenging is it to buy a house today? In
• 1:20
  Speaker 1: twenty twenty three.
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  Speaker 2: It's incredibly difficult home buyers. Not only prices haven't really
• 1:27
  Speaker 2: come down given the spike and mortgage rates, because inventory
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  Speaker 2: is absent from the equation, buyers don't have a lot
• 1:37
  Speaker 2: of choices. So as a result, what we're seeing just
• 1:40
  Speaker 2: over the last year, as rates have been rising, bidding
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  Speaker 2: wars have been rising.
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  Speaker 1: Even as rates have gone up.
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  Speaker 2: Yes, because the number one thing to look at really
• 1:50
  Speaker 2: as a metric is this supply inventory and inventory. The
• 1:56
  Speaker 2: rates began rising with the FED pivot a year and
• 2:00
  Speaker 2: a half ago, at one of the steepest climbs in
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  Speaker 2: four decades. That it's really challenging the consumer.
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  Speaker 1: So before we get into even more specific data and details,
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  Speaker 1: let's just talk a little bit about psychology. If you're
• 2:16
  Speaker 1: a buyer, how should you approach the idea of purchasing
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  Speaker 1: a house from a psychological perspective? Where should your head
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  Speaker 1: be at? Well?
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  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
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  Speaker 2: housing as a long term asset. There have been various
• 2:35
  Speaker 2: cycles where people were thinking of it as a stock
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  Speaker 2: and it's just not that liquid. So you know, you
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  Speaker 2: buy it, you hold it. The average person, you know,
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  Speaker 2: the numbers are kind of ranging. The average person stays
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  Speaker 2: in a home seven to ten years on average, so
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  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.
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  Speaker 2: You know, there's various cycles, various reasons. I think that's
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  Speaker 2: one of the most important things to look at to
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  Speaker 2: treat the asset as it actually is.
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  Speaker 1: So you and I have discussed what a buyer should
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  Speaker 1: pay for a home, and you say something that's kind
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  Speaker 1: of counterintuitive, and I'm guessing it's based on that, Hey,
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  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
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  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
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  Speaker 2: and live in and occupy every day as an owner
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  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
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  Speaker 2: the list price, but when I do the details, I
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  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 war.
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  Speaker 1: What sort of advice do you have if someone finds
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  Speaker 1: a house they really love, you don't want to pay
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  Speaker 1: double what it's worth. You'll never get your money out
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  Speaker 1: of it, at least not in a reasonable time. But
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  Speaker 1: what are the guidelines for when it's you against a
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  Speaker 1: couple of dozen people and everybody wants this house on
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  Speaker 1: this block, in this neighborhood.
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  Speaker 2: Well, I think human beings need reinforcement. So you probably
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  Speaker 2: are going to have to lose two or three bidding
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  Speaker 2: wars 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
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  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 ma massive surge of second and
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  Speaker 1: third home buyers during the lockdown of the pandemic, and
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  Speaker 1: now we have this the number I'm familiar with, sixty
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  Speaker 1: percent 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 shortfall 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
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  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.
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  Speaker 1: Percent, five or six kondom be lucky.
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  Speaker 2: If for lucky, it's probably high fives, low sixes. Given
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  Speaker 2: that unemployment is still very low, the economy is still vibrant,
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  Speaker 2: so I wouldn't expect a massive rate cut. It would
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  Speaker 2: be 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
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  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
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  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
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  Speaker 1: the cash purchase. This used to be a mostly high
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  Speaker 1: end sort of thing, and now it seems to be
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  Speaker 1: working its way down the economic strata of homes tell
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  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
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  Speaker 2: just paying cash that need some mortgage, But what the
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  Speaker 2: way to think of cash is the higher you go
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  Speaker 2: in price, the higher the probability the purchase is a
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  Speaker 2: 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 way Yeah.
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  Speaker 2: When the people that are at the high end, that
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  Speaker 2: are more susceptible to higher rates are generally the two
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  Speaker 2: to five million range because those people aren't paying cash,
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  Speaker 2: they're getting financing, and that market has been much more challenged.
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  Speaker 2: The lower you go in price, the more dependent you
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  Speaker 2: are on a mortgage. One quick example is in Manhattan,
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  Speaker 2: we had a situation this year where year every year
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  Speaker 2: sales fell about thirty percent, but sales for cash buyers
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  Speaker 2: fell twenty percent and for finance buyers fell forty or
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  Speaker 2: higher percent. So it has more of an impact, but
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  Speaker 2: cash doesn't bypass the challenge of 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 are 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
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  Speaker 2: it the Hampton's Middle two to five million, five are
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  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
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  Speaker 1: to resonate with the seller.
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  Speaker 2: So, you know, I think a lot of people would
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  Speaker 2: ask this question. They think it's all about the price. Hey,
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  Speaker 2: you know, the higher the price you are, you know,
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  Speaker 2: you offer, But it really is the terms. So it's
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  Speaker 2: how much finance? What does your financial situation look like?
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  Speaker 2: How likely are you to be able to close at
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  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
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  Speaker 2: all lost because the transaction starts over. So really your
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  Speaker 2: focus is presenting yourself as someone that can afford it,
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  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
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  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
• 11:35
  Speaker 2: this market, buyers think that they have more leverage over
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  Speaker 2: the seller than they actually have. So for example, in
• 11:45
  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 we're bidding wars
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  Speaker 2: was forty to fifty percent. Wow, So half the sales,
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  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
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  Speaker 2: strength over the seller at this current time because nationally,
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  Speaker 2: we're in this incredible inventory situation where inventory is devoid
• 12:18
  Speaker 2: of being president on the market.
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  Speaker 1: So we've been talking about existing homes, what about new construction,
• 12:25
  Speaker 1: either buying a plot of land and building your own
• 12:27
  Speaker 1: house or working with a spec builder who's in the
• 12:31
  Speaker 1: midst of constructing a house. How do we navigate those
• 12:34
  Speaker 1: circumstances as buyers.
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  Speaker 2: Well, it's interesting because existing inventory is so low that
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  Speaker 2: many markets have a disproportionately high share of new construction,
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  Speaker 2: even though it's still a small amount, but more typically
• 12:48
  Speaker 2: you expect ten to fifteen percent of most markets are
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  Speaker 2: new construction. And one of the things that large national
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  Speaker 2: builders have been doing is buying down and interest rates,
• 13:01
  Speaker 2: which has been very well received.
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  Speaker 1: To find that what do you mean buying down interest rates?
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  Speaker 2: So let's just say that prevailing thirty year fixed is
• 13:09
  Speaker 2: seven and a half percent. They'll buy down the rate.
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  Speaker 2: So what that means is that the buyer, when they
• 13:15
  Speaker 2: buy the house, the mortgage rate is five and a
• 13:17
  Speaker 2: half percent. That's not amazing and that has been very successful.
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  Speaker 2: But not all builders can afford to do that. They
• 13:24
  Speaker 2: need scale the financial wherewithal. But when you do that,
• 13:28
  Speaker 2: you're reducing the resistance to the purchase.
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  Speaker 1: Huh. Really really fascinating stuff. So to sum up, it's
• 13:36
  Speaker 1: still a seller's market. However, as a buyer, you have
• 13:40
  Speaker 1: a lot of things you can do to improve your
• 13:44
  Speaker 1: chance of successfully purchasing a house. Come in with all
• 13:48
  Speaker 1: your ducks lined up, make sure your cash and financing
• 13:51
  Speaker 1: is in place, Try not to hang too many contingencies
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  Speaker 1: on your offer, work with a good agent who knows
• 13:58
  Speaker 1: the area, and don't be surprised if you're going to
• 14:02
  Speaker 1: pay a little over the asking price for the house
• 14:06
  Speaker 1: of your dreams. You can listen to at the Money
• 14:12
  Speaker 1: every week, finding in our master's and business feed at
• 14:16
  Speaker 1: Apple Podcasts. Each week we'll be here to discuss the
• 14:19
  Speaker 1: issues that matter most to you as an investor. I'm
• 14:22
  Speaker 1: Barry Ritolts. You've been listening to At the Money on
• 14:26
  Speaker 1: Bloomberg Radio.