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David Muhlbaum: Houses are scarce. Home prices are high, and the all-cash offer is king. We’ll talk about buying or selling a house in this market with contributing writer, Daniel Bortz. Also, why do high gas prices hurt so badly? All coming up on this episode of Your Money’s Worth, stick around.
Welcome to Your Money’s Worth. I’m Kiplinger.com senior editor David Muhlbaum, joined by my cohost Kiplinger senior editor Sandy Block. Sandy, how are you doing? Is the car still working?
Sandy Block: It’s hanging in there. I just doubled its book value today by filling up the tank.
David Muhlbaum: That’s an old Yugo joke. Is that a comment on the low value of your Subie or the high price of gas?
Sandy Block: I would say both.
David Muhlbaum: Huh. Okay. Well, I filled up my car today too, which I just discovered was a mistake because Maryland signed a gas tax holiday like today, I think.
Sandy Block: Yeah.
David Muhlbaum: So the price should come down fairly soon. Now the gas tax here is about 36 cents per gallon, but truth be told, I don’t know that I could have held out much longer. I was on vapors.
Sandy Block: Yeah. I was thinking that a car guy like you knows better than to run the car on low.
David Muhlbaum: I should know better. Look, people get weird about gas prices. They seem to have this outside effect on the psyche and politicians are responding like with these gas holidays. Now I would really like to do a full episode on fuel, right? Gas prices, fuel economy, where to buy it, how to save it, all that sort of stuff. We’re kind of still hunting for the guest. But I did have an email exchange with one of my gas sources, John Eichberger, at the Fuels Institute. So basically the question was what I mentioned in the intro, like why do gas prices matter so much? Like they matter beyond the actual percentages.
Sandy Block: Right. It’s not a linear relationship. You don’t get 20% more annoyed by a 20% increase. So what did he say?
David Muhlbaum: Well, yeah, he called gas prices, quote, “the most transparent and advertised consumer price point in the market and a bellwether for consumer sentiment. ” And then he cited what research the organization did. I’m going to quote it again. He said, “during a five-year period in which we, that’s the Fuel Institute, surveyed consumers every month, typically 70 to 80% of consumers said the price of gasoline had a significant effect on their feelings about the economy in general.”
Sandy Block: Right. So I mean, and it makes sense to me because I don’t remember from week to week how much eggs cost, but every time I step out the door, I see how much gas costs. So it’s the visibility, right?
David Muhlbaum: Yeah. Yeah. And the frequency. Like you buy gas probably more often than you buy eggs. I mean, it’s a transaction that people do often.
Sandy Block: Yep. Yeah. And oh, unless you buy an electric car, I guess.
David Muhlbaum: Oh God, Sandy, why do you have to yank my tail? Anyway, if we do come back to gas prices and I do want to get back to this and get on because we have a long segment coming up about housing prices, I promise to talk about whether electric cars actually save money. But yeah, we’re going to talk about another sector with high prices, housing, stick around.
The 2022 Real Estate Market with Daniel Bortz
David Muhlbaum: We’re welcoming you back to Your Money’s Worth. Daniel Bortz, a contributing writer who has covered real estate for Kiplinger for the last few years to talk about the housing market today and what it looks like for sellers and buyers, as well as homeowners with no intention of selling or buying. We’ll get into some of the “do this, don’t do that” specifics of what is probably still the most complex transactions people ever get into. Thank you for joining us, Dan.
Daniel Bortz: Thanks for having me, David.
David Muhlbaum: You know, housing is a big field to cover. I don’t envy your assignment here. I mean, I’m supposed to know something about cars and if my editor, who is your editor, said write an assessment of the car market today, I’d probably have a panic attack. So my congratulations for filing your piece, but Sandy and I, and people who were listening to us last year, well, they know, and we know, that you have a secret weapon, Dan, tell us again what it is.
Daniel Bortz: Well, I’m a licensed real estate agent.
Sandy Block: Okay. Very cool. But do you actually use it and how does that help you in your writing and reporting on this topic?
Daniel Bortz: So probably the other secret is that I’m not an active agent anymore. I sold real estate for five years, and then I changed my license to referral only. So now when I hear of someone looking to buy or sell a home, I refer them to a good buyer or seller agent in their area. But retaining my license does benefit me in the sense that I’ve built relationships over the years with a lot of real estate agents, mortgage lenders, and other industry professionals who I keep in touch with. They let me know what they’re seeing firsthand in their housing markets and what topics I should be covering as a reporter.
David Muhlbaum: Well, here in the journalist world, we think it’s pretty cool that you have a license. I dropped your name past someone here and they’re like, “oh, do you mean the guy who has his real estate license?” Anyway, now we’ve reestablished your bona fides, let’s get to some of the facts that you uncovered about real estate, still hot.
Daniel Bortz: Smoking hot. With record-low mortgage rates, saving accounts that are still plump with stimulus checks, and a healthy increase in wages, millions of home buyers flooded the housing market last year. And that surge in demand paired with the lowest home supply in more than two decades, and sent U.S. home prices to what I would describe as stratospheric highs.
David Muhlbaum: What are some of the numbers? For 2021, I guess?
Daniel Bortz: So median existing-home sale prices rose 14.6% in 2021. Sale prices reached an all-time high of $361,700 by the end of December. And that’s a $46,000 gain compared with the previous year.
David Muhlbaum: So, that’s like a national average price?
Daniel Bortz: Yes, exactly. And then if you look closer to specific metro areas, Austin, Phoenix and Las Vegas saw the biggest home price gains last year among the 50 largest U.S. metro areas.
David Muhlbaum: Yeah. In fact, that reminds me, we have a chart of that data exactly. And I’ll drop in a link to that so you can go check out what your metro did, which people might find interesting.
Daniel Bortz: Yeah. I think that would be really helpful for a lot of people.
Sandy Block: Obviously, seller’s market. How many years are we on this seller’s market? And let’s get to the most interesting thing, does this pressure continue for 2022?
Daniel Bortz: That’s a great question. It’s been an unequivocal sellers market since I would say mid-2020, which is when real estate inventory took a nose dive largely due to the pandemic, as I’m sure you can recall, a lot of people were kind of holed up in their homes and that affected home sellers, too, who were a little hesitant to put their houses on the market. Buyers were hesitant to go look at homes. So we saw a significant drop in inventory. But most real estate economists expect that these rapid home price increases that we saw in 2021 are going to slow down this year.
Danielle Hale, she is realtor.com’s chief economist. I spoke with her for the article and she is predicting that U.S. home prices are going to grow 2.9% this year. So slower than last year, and she attributes that to an expectation of mortgage rates going up this year and higher mortgage rates may change how aggressive buyers can be with their offers on houses.
David Muhlbaum: So, to do a little slicing on the numbers, if we’re looking at roughly 3% for home price increases in 2022, another way of saying is, oh, it’s about a quarter of the price gains of 2021, which – am I overplaying that? I mean, it’s still a gain, but it might be a gain that’s below inflation at large.
Daniel Bortz: That’s a good point. I think you always have to keep inflation in mind and especially right now when inflation recently hit what? A 40-year high.
David Muhlbaum: Yep.
Sandy Block: Yep.
David Muhlbaum: All right. So maybe there’s some hope for the buyers in 2022, but in this environment, it has not been good for first-time buyers, right? I mean, rents continue to soar and the prospect of home ownership, that vaunted smart investment that you’ve heard here and elsewhere, it remains kind of elusive.
Daniel Bortz: I completely agree. In many housing markets, especially where home prices have exploded during the pandemic, first-time buyers, they’re really having a tough time affording a home purchase. Let me give you an example. So Boise, Idaho, the median price for an existing home was about $474,000 in December. And that’s about 10 times higher than the city’s median income. In Phoenix, the median sale price for an existing home hit $446,000 in December. And that was a 26% increase from December 2020. And it’s a challenge there for first-time buyers who earn the city’s median income of $57,500.
Sandy Block: Yeah. That’s really striking. And it’s interesting to me because some people who live across the street from us just sold their house and moved to Boise because in this area $446,000 sounds like a deal, but you’re right, that’s way higher than the median price for people who actually live and work there. Is there a rule of thumb for what’s considered affordable because that could help us compare these cities? Like, where is it better?
Daniel Bortz: Right now, rust belt cities, Columbus, Ohio, Harrisburg, Pennsylvania, and Indianapolis. They offer buyers more affordable homes. The median home sale price in all three of those cities is still less than $275,000. But to answer your question about a rule of thumb, whether you can afford to buy a house largely depends on what’s called your debt to income or DTI ratio. And this is the percentage of your monthly gross income that goes towards paying down your debts. We’re talking credit card debts, student loan payments, and your future mortgage payments. And as a general rule, to qualify for a conventional mortgage, your DTI ratio cannot exceed 36%.
David Muhlbaum: Ah, got it. So that’s interesting. We have these two metrics. We have one, this ratio we’ve talked about of the median sale price and the median income. That’s kind of more for planners, economists, and that sort of thing. When you’re looking to buy the home, we’re looking at the DTI ratio, the debt to income. Got it. Because most purchases are financed. So for the home buyer, first-time or not, who’s looking at these prices and not deterred because they want a house, they need a house, what’s it going to take to get one, to win these bidding wars that we keep hearing about – besides spending a lot of money?
Daniel Bortz: They’re going to need to be flexible. Some things haven’t changed. You still need to get pre-approved for a mortgage, for example. And that’s a key move because it can really be a reality check on what you can afford. So you want to get pre-approved before you even go out and start looking at homes. That way you go in knowing how much house you can buy.
David Muhlbaum: Okay. I understand the preapproval thing, that’s always been a good rule, but there’s so many of these cash offers going around. It’s like up to a quarter of home sales. Actually, can you help us out here? Really, what does all-cash mean? It’s not like people roll up with their trunk full of benjamins. And help me out with why it holds appeal to buyers. I mean, a seller gets paid at closing unless they’re doing some kind of owner financing weirdness. So why exactly do they care about how the buyer raises the money?
Daniel Bortz: All-cash buyers have a big advantage over buyers who need a mortgage because there’s no guarantee that lenders are going to fork over the money. A lot can get in the way of someone qualifying for a mortgage, everything from a subpar credit score to a low home appraisal, there are a number of issues that mortgage borrowers can encounter before they actually get final approvals for their loan. So sellers prefer cash offers because if a mortgage buyer’s financing falls through, it’s back to square one, they have to go out and look for another buyer. Buyers also have to compete right now with investors, and investors are scooping up a ton of real estate these days. Looking at the numbers, investors made up 27% of all single-family home purchases in the first three quarters of 2021. And that’s up from just 17% at the end of 2019.
David Muhlbaum: Sandy, it’s the people who are trying to buy your house!
Sandy Block: Exactly. I got another letter this week and I’m not alone in this, but I keep getting these letters from people saying that… The first one we got was really intriguing because they offered to buy our house for what seemed like a really a large amount of money as-is — you can stay in it for six months; the only thing they didn’t throw in was a gift basket or something. And it was signed by an individual. But what you’re saying is, I’m wondering if that’s the kind of offers that people get from investors.
Daniel Bortz: So I’ve received those letters and offers in the mail as well. You probably received an offer from an iBuyer. An iBuyer is an online home buying company that goes out and purchases, fixes up and then resells properties to make a profit. Opendoor and Offerpad are two of the big players here. But what’s interesting is that for iBuyers, there are some signs that have emerged that this business model may have some major flaws. Let me give you an example. So Zillow was a big player in the iBuying field for about three years, but it pulled out last November.
Daniel Bortz: But they admitted that their iBuying arm lost more than $420 million dollars in the three months ending in September 2021. Now, for context, that’s roughly the same amount of money that the company had earned in total during the prior 12 months. So Zillow’s chief executive, he came out and said the company’s algorithm wasn’t as good at estimating home price values as they thought it was. And then when Zillow stopped its iBuying program, they were, unfortunately for them, left with thousands of houses that were worth less than what they had paid for them.
That’s a crazy story. In a weird way, it’s sort of like they tried putting their money where their mouth was, but then…. I mean, if the algorithm didn’t work for them, it maybe didn’t work for some other people. Anyway, that was quite a doozy. But let’s say if you have a house to sell, you might be listening to us and steepling your fingers and going mwahahaha, but Dan, in your article, you’re suggesting sellers shouldn’t be too cocky. You’ve got guidance for them too.
Daniel Bortz: Even though the market is super-heated right now, sellers have to be careful about how they price their homes. So one agent that I interviewed for the article told me that he’s seen sellers get too ambitious with their list price and then their home just sits on the market for weeks without receiving a single offer. So right now in this market, the best approach is to list your home at market value based on comparable properties. There are some other strategies that we recommend for sellers too.
Sandy Block: I get the sense sometimes that people actually price their home below market in hopes of sparking a bidding war. Does that work?
Daniel Bortz: It does work. There are some pros and cons of doing that. So you’re going to draw a lot of attention to your listing if you put it on the market lower than its market value. But this might seem counterintuitive, one of the challenges of being a home seller right now is getting flooded with a ton of offers. When you’re faced with 30, 40, 50 offers, comparing them side-by-side can be really difficult. I’ve talked to real estate agents, a lot of them use spreadsheets where they write down how much the offer is. But the thing that makes it difficult to compare is that there are also other factors you need to consider when you receive an offer, namely contingencies. Contingencies such as whether the buyer is going to require a home inspection, whether they’re going to require an appraisal. And these are all things that sellers are going to have to consider when they’re weighing tons of different offers.
David Muhlbaum: And yet, the contingencies, of course, matter to the buyers as well. And one of the things you mentioned there is home inspection and the guidance because we touched on this last year, your guidance is now is that a buyer should not waive that, right?
Daniel Bortz: Correct. So it’s a sticking point right now, but here’s the important thing. Buyers should not waive a home inspection. We are seeing some buyers waiving their right to home inspections to make their offers more attractive to sellers but that strategy is very risky. Instead, you should tell the sellers that you won’t make home repair requests unless they exceed a certain amount of money or unless they’ve posed a structural safety or environmental issue. That way you still have protection, but your offer is still attractive to home sellers.
David Muhlbaum: Yeah. It’s almost like you’re writing an insurance deal with a deductible cap. You’re like after this I won’t worry about it. But over that, I have an out.
Daniel Bortz: That’s a good comparison.
Sandy Block: One of the other things you hear a lot about in this very, very hot market. And I know people who have gotten these are love letters where a potential buyer will write to the seller and say you-
David Muhlbaum: You already got one.
Sandy Block: No, no, I need more love than that. Actually, I just want money. But I’ve heard a lot of stories about people writing letters saying we have a dog and two kids and we love your neighborhood and we would cherish your house and live in it forever and I know you’re getting a lot of offers, but please sell to us. What’s wrong with that?
Daniel Bortz: I’m so glad you asked about love letters because this is a topic that we frequently cover every year in the housing market feature. So love letters to sellers can tug on a seller’s heartstrings, but they can also potentially violate fair housing laws. Fair housing laws are the laws that govern discrimination based on race, religion, and other protected classes. And I should mention that Oregon actually banned real estate love letters this year for that very reason. So the advice right now is if you want to write a heartfelt note to a seller, have your agent look it over before you attach it to your offer to make sure that it doesn’t pose any fair housing concerns.
David Muhlbaum: How about as a seller? Should you consider not even opening the envelope?
Daniel Bortz: Depends. I have spoken to some agents who as a point of practice will not even present personal letters to their clients for fear that the client might make a decision that could potentially violate fair housing. I mean, it’s a tricky subject because this is a strategy that buyers have been using for years and a lot of sellers are accustomed to reading these letters. And some people do make emotional decisions when they sell their home and they decide, yeah, this house meant a lot to me, here’s where I raised my family. Let me give this to another couple that’s starting a family, but then of course, like you said, Sandy, some people are just laser-focused on how much money they can get.
David Muhlbaum: And so also if you’re a buyer and before you spend a long night working your prose to the shiniest, maybe you should check with the agents involved to make sure it’s not just going to end up in a burn pile. But you know, one thing that we’ve touched on and I want to come back to is well, is pricing and determining pricing. We touched on the Zillow issue, when they sort of stepped in it when they tried to become an iBuyer, but what are you looking to, and what are you recommending to people for determining that selling price and determining those offer prices? It’s really kind of the crux of the whole thing.
Daniel Bortz: So one thing that I like to track is the National Association of Realtors publishes every month sales data for existing homes. That’s something that you can use to keep your pulse on the market. Realtor.com-
David Muhlbaum: And that’s the one that the economists get into every month. That’s the sort of top number, right?
Daniel Bortz: Yes. That’s the one that tracks here’s what the median, it’s usually a single-family home, is sold for.
David Muhlbaum: And the prices that we’ve been throwing out in this podcast.
Daniel Bortz: Yes, exactly. There are a number of other websites that collect really good data that can be useful to both sellers and buyers. One site that I like is realtor.com. They do a good job of tracking what they consider to be the hot housing markets. They look at major metro areas and they’d see based on their records what homes are selling for, and they use that data to then present to users the average sales pricing in a particular zip code, in a particular city, and that’s all information that you can access just by going onto their website. And otherwise, they collect similar data, Zillow, Trulia, Redfin. These are all good resources.
But if we’re talking about, say, I wanted to sell my house, what I would do to price out my house? Setting aside the fact that I’m a real estate agent, I would lean on whoever I hire as my listing agent to compile the most accurate, most recent comparable properties for me. Those estimates that you get of your house value online Zillow’s estimate and all the other websites, those can be a little tricky because sometimes they’re not updated with the most recent data. They don’t take into consideration intangibles, like, was your kitchen remodeled in the last year? They’re basically using your property’s sales history and what it last sold for and what homes are selling nearby to determine your value. But there are a lot of things inside your home related to renovations and improvements that could significantly increase the value of your house and what you should be listing it for.
Sandy Block: Maybe this isn’t fair to ask you this, Dan, because you are a licensed real estate agent, but I could see some people in this hot market where houses are on the market for a day in some neighborhoods thinking, why do I need a real estate agent? Why not do, I believe the term of art is FSBO?
David Muhlbaum: FSBO. First tell us what FSBO stands for.
Sandy Block: FSBO stands for, for sale by owner, I believe.
David Muhlbaum: Right. Got it.
Sandy Block: What’s the downside of doing that?
Daniel Bortz: So like you said, I might be a little biased. A lot of people do try and a lot of people do successfully sell homes on their own without using a real estate agent. I think there are some potential problems with that. I mean, It depends on whether somebody’s sold a home like that in the past, maybe they’ve learned a thing or two about how to navigate the ins and outs of the home selling process, but selling a house isn’t as simple as slapping on a listing price and then accepting an offer from a home buyer and then you skate your way to the closing. There are a lot of nitty-gritty things that a real estate agent can help you navigate. Like I said, one thing earlier, they can help you compare offers. Offers are written using your state’s specific sales contract, and that has a lot of legalese in there that you as an average person probably aren’t familiar with, but this is something that agents are looking at day in and day out.
So they can help you interpret offers. They are there to help you pull the most accurate comps when listing your home. If your home doesn’t appraise for the value that you and the buyer agreed upon, your agent can go to bat for you and negotiate with the buyer. Ideally, the buyer’s going to make up the difference between the sales price and the price that your home appraised for. This is only if we’re talking about a buyer who had an appraisal contingency, which is usually for buyers who are getting a mortgage because those are the ones who… A lender’s not going to lend them more money than the appraised value.
David Muhlbaum: Yeah, we could probably do a podcast on appraisals themselves. I think that point is well taken of the value of an agent, but since everyone’s got an anecdote, I will say that we did once sell a house without an agent. It was a weird situation, which where we basically had an offer we couldn’t refuse thing. But what we did use was a lawyer and he was worth the money. The transaction went well, but the reassurance that the lawyer brought to it helped a lot.
Daniel Bortz: That’s a great point. I mean, you can hire your own real estate attorney and pay them by the hour to help you with all the contracts and make sure you’re doing this transaction 100% correctly, and you’re passing on the ownership of your property to the next buyer. So that is a good strategy, I think, or tip.
David Muhlbaum: We never did it again.
Sandy Block: And I have to say, my anecdote is, when we bought our house at the last minute, the sellers tried to back out because they realized that they were selling it for probably less than they could get and if we hadn’t had a real estate agent, I don’t think we would’ve bought our house because he was able to make it happen. But things come up and I think that it is a very complex transaction often. And I think that’s where either an attorney or experienced real estate agent really does earn the money.
Daniel Bortz: I agree. You also have to keep in mind, I mean, for the average person, this is the largest single asset that they own. So you want an expert, whether it’s a real estate agent or a real estate attorney, you want somebody there by your side to help you through this process.
David Muhlbaum: As I said at the start, real estate is a vast topic, and we are going to wrap up with that – the value of the agent. There are so many great things to talk about and thank you for your insights into all of them, Dan, we appreciate it very much.
Daniel Bortz: My pleasure.
David Muhlbaum: That will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. And if you’ve already subscribed, thanks. Please go back and add a rating or review if you haven’t already. To see the links we’ve mentioned in our show, along with other great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes, transcripts, and links are all in there by date. And if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram, or by emailing us directly at [email protected] Thanks for listening.
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