At the Money: The Best Way to Buy a House

0:00I'm Hannah Fry, and as we rely more and more on artificial intelligence in every facet of our lives and businesses, I'm on a mission to find out how we can build the internet internet. AI needs. Learn more later in the podcast.

0:40on the edge of what we think we know. Wherever you get your podcasts. Has there ever been a worse time to buy a house in America? Inventory is at record lows. Competition has been intense. Home purchases are the most expensive they've been relative to renting in a couple of generations. In the face of this mess, what's a potential home buyer to do?

1:12As it turns out, there are some ways you can make the process of buying a home better or at least less bad. I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss how to buy a home in today's market. Let's bring in Jonathan Miller of real estate appraisal and data firm Miller Samuel. For the past 37 years, Jonathan Miller's monthly and quarterly housing sales data and rental reports are must read in the industry and have made him the most quoted man in real estate. Jonathan Miller, welcome to At The Money. Let's just jump in to the first question. How challenging is it to buy a house today?

1:59It's incredibly difficult. Homebuyers, not only prices haven't really come down given the spike in mortgage rates, because inventory is absent from the equation. Buyers don't have a lot of choices. So as a result, what we're seeing, bidding wars have been rising. Even as rates have gone up. Yes, because the number one thing to look at really as a metric is supply, inventory. And inventory, the rates began rising with the Fed pivot at one of the steepest climbs in four decades, that it's really challenging the consumer. So before we get into even more specific data and details, let's just talk a little bit about psychology.

2:48If you're a buyer, how should you approach the idea of purchasing a house from a psychological perspective? Where should your head be at? Well, I think the most important thing is to look at this as a long-term transaction. I always look at housing as a long-term asset. There have been various cycles where people were thinking of it as a stock, and it's just not that liquid. So you buy it, you hold it. The average person, you know, the numbers are kind of ranging. The average person stays in a home seven to ten years on average. So you're really looking at it from a much longer window. And within that window, you know markets trend up and down.

3:33It's, you know, there's various cycles, various reasons. I think that's one of the most important things to look at, to treat the asset as it actually is. So you and I have discussed what a buyer should pay for a home. and you say something that's kind of counterintuitive, and I'm guessing it's based on that, hey, we're going to be here for 10 years or longer. If you pay a couple of percent over what you think is a reasonable price, in the long run, it doesn't matter, does it? It really doesn't because you have to remember what the asset is. It is something that you're going to use and live in and occupy every day as an owner-occupied house.

4:12In my circumstance, a little over a year ago, I actually bought a house for 36 % above the list price. But when I do the details, I probably only paid 10 % to 15 % above. And who cares? I'm going to be there for a long time. It's exactly what we wanted. I don't look at it as that kind of investment that you would track closely. And we beat 30 people in a bidding war. That's unbelievable. So let's talk a little bit about bidding war. What sort of advice do you have if someone finds a house they really love? You don't want to pay double what it's worth. You'll never get your money out of it, at least not in a reasonable time.

4:53But what are the guidelines for when it's you against a couple of dozen people and everybody wants this house on this block in this neighborhood? Well, I think human beings need reinforcement. So you probably are going to have to lose two or three bidding wars before you realize the condition of the market. And the condition of the market is that there is a chronic inventory shortage in nearly every housing market in America. Let's talk about that for a second. And again, you and I have talked about we've underbuilt single family homes in the United States for 15 years following the financial crisis.

5:32Then you had this massive surge of second and third homebuyers during the lockdown of the pandemic. And now we have this, the number I'm familiar with, 60 percent of homeowners have a mortgage of 4 percent or less. 80 percent of homeowners with a mortgage have a mortgage of 5 percent or less. That creates massive lock-in. No one wants to go. How long can this inventory shortfall last? Well, I look at there's two solutions for inventory, and one's not realistic and one isn't good. The first idea is that rates fall back down. And when you're talking to many homeowners in our appraisal business, there is a broad expectation that rates after going from just below 3 % to almost 8 % that they're going to settle back down.

6:25And I don't disagree with that, except they're not going to settle back down to 3 % or 4%. Five or sixes, if we're lucky. If we're lucky, it's probably high fives, low sixes, given that unemployment is still very low. The economy is still vibrant. So I wouldn't expect a massive rate cut. It would be my just using logic. No, I have no inside understanding. So when you have rates drop, each time the rates sort of incrementally drop, homeowners become sellers. And that adds a little bit of inventory, but not enough. But every little bit helps. The other thing to look at would be some adverse negative event that would cause the Fed to cut rates more sharply.

7:12And that would be a recession. Of course, we've been talking about a recession coming in six months for the last two years. So, you know, that seems uncertain. The problem is then you get job loss. And we have job loss. That's less people that will buy homes. Right. Makes a lot of sense. So we've been talking about mortgages and mortgage rates. I've always been shocked whenever I looked at your reports at the rise of the cash purchase. This used to be a mostly high-end sort of thing, and now it seems to be working its way down the economic strata of homes. Tell us about what's going on with all cash purchases.

7:52So cash has been the method of purchase that's gotten a lot more popular in the last couple of years. I don't want to give the impression that, hey, everybody's just paying cash now who needs a mortgage. But the way to think of cash is the higher you go in price, the higher the probability the purchase is a cash transaction. So$10 million and up, those are all cash purchases. 80 % to 90 % cash. What about$5 million and up? $5 million and up is about the same. Really? Yeah. The people that are at the high end that are more susceptible to higher rates are generally the$2 to$5 million range because those people aren't paying cash.

8:40They're getting financing. And that market has been much more challenged. The lower you go in price, the more dependent you are on a mortgage. One quick example is in Manhattan, we had a situation this year where year-over-year sales fell about 30 percent, but sales for cash buyers fell 20 percent, and for finance buyers fell 40 or higher percent. So it has more of an impact, but cash doesn't bypass the challenge of high rates. So I used to think of$4 or$5 million as like a big spectacular house on the water, cash purchased by a very wealthy individual. You're implying that two to five is now no longer the very rich.

9:25That's the upper class, upper middle class. What is that range of homes? Yeah. So upper middle class or lower upper class is really two to five, and they tend to be dependent on financing. We have a market in the New York region known as the Hamptons, and we call it the Hamptons Middle. Two to five million, five or higher versus one million or two million or lower. The Hamptons Middle is the most challenged part of the market because those buyers are much more impacted by the spike in rates over the last year and a half than the five and over, which are more cash. What about working with the real estate?

10:06If you're a buyer, how useful are real estate agents? So I think one of the things they don't get credit for, and I know this from personal experience quite often, is they provide a buffer between the parties. Because many people, when confronted with the opposition, there's no buffer. They're intimidated. They may end up not doing well in the negotiation. That's not everybody, but at least in my experience, that's the service that is provided to have a third party to insulate you from direct negotiation. What about those negotiated offers? What do we need to know about the way to make an offer that's most likely to resonate with a seller?

10:55So, you know, I think a lot of people when asked this question, they think it's all about the price. Hey, you know, the higher the price you are, you know, you offer, but it really is the terms. So it's how much finance, what is your financial situation look like? How likely are you to be able to close at this price? You know, is there going to be a problem? And I'm not saying that that, you know, price isn't important, but it's probably parallel to the terms of the deal itself. You know, if someone comes in and makes an astronomical offer, you know, the seller's, you know, if that doesn't close, the momentum of the house on the market and it's all lost because the transaction starts over.

11:40So really your focus is presenting yourself as someone that can afford it. And that brings in whether you're approved for financing. So do that in advance and come with a clean offer with a lot of not a lot of contingencies. Right. In this market, it's pretty common now to have financing contingencies. A year and a half ago, that was nonexistent. There was no hair on the deal, so to speak. But less is more always when you're negotiating. I think in this market, buyers think that they have more leverage over the seller than they actually have. So, for example, in the market, the suburbs that surround Manhattan, the share of closings just in the third quarter that were bidding wars was 40 to 50 percent.

12:29Wow. So half the sales, nearly half the sales are selling above the asking price. So as a buyer, you don't have a lot of strength over the seller at this current time because nationally we're in this incredible like inventory situation where inventory is devoid of being present on the market. So we've been talking about existing homes. What about new construction, either buying a plot of land and building your own house or working with a spec builder who's in the midst of constructing a house? How do we navigate those circumstances as buyers? Well, it's interesting because existing inventory is so low that many markets have a disproportionately high share of new construction, even though it's still a small amount.

13:20But typically, you expect 10 % to 15 % of most markets are new construction. And one of the things that large national builders have been doing is buying down interest rates, which has been very well received. Define that. What do you mean buying down interest rates? So let's just say the prevailing 30-year fixed is 7.5%. They'll buy down the rate. So what that means is that the buyer, when they buy the house, the mortgage rate is 5.5%. That's not unreasonable. And that has been very successful, but not all builders can afford to do that. They need scale, the financial wherewithal. But when you do that, you're reducing the resistance to the purchase.

14:05Really, really fascinating stuff. So to sum up, it's still a seller's market. However, as a buyer, you have a lot of things you can do to improve your chance of successfully purchasing a house. Come in with all your ducks lined up. Make sure your cash and financing is in place. Try not to hang too many contingencies on your offer. Work with a good agent who knows the area. And don't be surprised if you're going to pay a little over the asking price for the house of your dreams.

14:44You can listen to At The Money every week. Find it in our Masters in Business feed at Apple Podcasts. Each week, we'll be here to discuss the issues that matter most to you as an investor. I'm Barry Ritholtz. You've been listening to At The Money on Bloomberg Radio.

15:17Ed Ludlow inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen.

15:53Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts.