Housing Market Too Hot? What to Do While You Wait for Competition to Cool

Though Olivia Dreizen Howell planned to buy a new place for her and her sons after their Long Island, New York home sold earlier this month, a few weeks of searching was enough to tell her it wasn’t the right time — at least for her budget.

“With the market being as tight as it is, there’s literally nothing in my price range and ideal location,” says Dreizen Howell.So, she says, she’s taking a step back — pausing her search and waiting for the right time to jump back in and find that dream home.

She’s not alone. With skyrocketing prices, rising mortgage rates and an extreme housing shortage (active listings were down 19% annually last month), many homebuyers are getting sidelined. In fact, according to a recent survey from TD Bank, almost a third of first-time homebuyers are planning to wait for prices to drop.

It’s frustrating, to be sure, but taking a step back can also be a good way for buyers to regroup and strategize for the next time they enter the market. Dreizen Howell, for example, is using the downtime to save up to put more money down, which could mean a lower mortgage rate and a smaller monthly payment down the line. It could also help her break into higher price points if necessary.

“I know the next time I purchase a house, it will be a place I will want to stay for a long time, so I don’t want to compromise on anything,” says Dreizen Howell, a mom of two and founder of Fresh Starts Registry, a registry website for people going through divorce. “I will use this time to save even more money so that when the perfect house comes on the market, I can jump on it.”

Are you taking a step back from the market due to high prices, rates or competition, too? Experts say there are several ways to use that time wisely and prep for success on the next go-around.

Improve your credit score

Your credit score is a major factor in your ability to not just buy a home but to do so affordably too. Lenders also look at your credit report to gauge how responsible you are in repaying your debts and to assess your overall risk as a borrower.

“Maintaining good credit is one of the most important things you can do as you decide the best time to enter a hot housing market,” says Steve Kaminski, head of residential lending at TD Bank.

Typically, better payment history and higher credit scores equate to lower interest rates.

Credit scores range from 300 to 850. According to data from Fannie Mae, a 740 score or higher qualifies you for the best mortgage rates. But a score 100 points below that threshold? That’d mean a rate up to 2.75 percentage points higher, depending on your loan amount. It’s the difference between a 5% rate and as high as a 7.75% one.

In a market where affordability is waning, qualifying for a lower rate can be key for many buyers waiting in the wings.

“Buyers will want to make sure their credit score is in tip-top shape,” says Lindsey Bell, chief markets and money strategist at Ally. “For most loan types, a credit score of at least 620 is required. The higher the score, the more mortgage options buyers will have — meaning various loan terms and potentially lower interest rates.”

If you don’t have much of a credit history yet, Kaminski says using a credit card to make small, affordable purchases and then paying them off quickly is a great way to build your credit up. “For more seasoned borrowers, try to keep credit card balances well below the limits, and stay current on any other outstanding debt,” he says.

Payment history accounts for 35% of your score, so late payments can do serious damage. To avoid missing a due date set your bill payments to autopay when possible.

You should also work on reducing your debts and avoid taking on new ones — like opening a new credit card or financing a new car. Both can help you gradually improve your credit score.

Save up

You can also take Dreizen Howell’s approach and use the time to save up — ideally for a larger down payment.

“The amount required for a down payment varies by loan type, but the more a buyer can put down, the better,” Bell says. “Larger down payments will result in lower monthly mortgage payments, better interest rates, fewer upfront fees and lower closing costs.”

That down payment doesn’t have to come straight out of your paycheck, either. In fact, Bell suggests “thinking outside the box.”

“In addition to slowly saving up, down payment assistance programs and tapping into retirement funds can be considered,” she says. “First-time homebuyers can also tap into a traditional IRA — up to $10,000 — without being subject to the additional early distribution tax.”

If you’re not a first-timer, you can also tap into a Roth IRA if you have one. Just make sure you avoid risky products like 401(k) loans and consult a financial advisor or accountant if you’re thinking about withdrawing from a retirement account, as this comes with added risk.

As for down payment assistance programs, a good example is Texas’ Homes for Heroes program. It offers teachers, police officers, first responders and other Texas public servants up to a 5% down payment grant. You can check with your state’s housing agency or a local mortgage professional to find similar options in your market.

On top of these programs, you can make an effort to reduce costs where possible. Dreizen Howell, for example, is living with her parents while her search is on hold, which she estimates will allow her to save about $2,000 per month.

As Compass broker Kimberly Jay puts it, “Don’t waste money on the perfect rental. Find a home that’s suitable for the least amount possible.”

Consider an extended mortgage rate lock

Mortgage rates have been on the rise in recent weeks. Since the start of the year, they’ve jumped from 3.11% to 5.11% — the difference between a $1,731 monthly payment and a $2,201 one on a median-priced listing right now.

Experts largely predict more rate increases on the horizon, too. With inflation rising, the Federal Reserve has begun to tighten monetary policy, which typically results in higher rates on loans and mortgages.

“It’s not likely interest rates will go back to historic lows in the near future,” says Dale Baker, president of home lending at KeyBank. “Any given day, rates can shift, but over the last few months that trend has been up and is expected to continue, hopefully at a slower overall pace. Nevertheless, cooling off likely still means going up — just not as fast.”

Unfortunately, that means most sidelined buyers will face higher rates when they jump back into the market. That is, unless they lock their rates now.

A rate lock allows you to reserve an interest rate for a designated amount of time. The typical rate lock is just 30 to 60 days, though some lenders offer 90-day ones. Mortgage company Homepoint even offers fee-free “TBD locks.” These allow buyers to lock in a rate — without a property in mind — and hold onto it for up to six months.

“We’re allowing borrowers to get pre-approved with us through a mortgage broker in their area and lock in a rate for up to six months without having a specific home in mind,” says Phil Shoemaker, president of originations at Homepoint. “That takes the pressure off and gives them more time to find a home that’s right for them without the fear of further rate increases.”

Know your trigger and be ready to act fast

If you decide to wait it out, understanding what exactly would spur you to reenter the market is critical.

If it’s having a certain amount in savings, know what that threshold is and be mindful of your bank balance. If it’s lower home prices or rates, set a percentage drop you’d need to see to feel comfortable buying.

“Ask yourself how long you’re willing to wait and ‘What if prices are still soaring?’” says Maggie Gomez, a certified financial planner and founder of wealth planning firm Money with Maggie. “Playing out these scenarios will help put guidelines in place so you can avoid emotionally buying.”

If you’re waiting for a specific type of property or a home in a certain community to hit the market, define what you’re looking for, set up detailed listing alerts and stay in touch with your agent. And when something does come up that fits the bill? Be ready to act fast. Schedule a showing or virtual tour ASAP and have your mortgage pre-approval ready to go.

“Preparedness is key,” Bell says. “The goal is to take the steps now that will help improve your chances at buying when you’re ready.”

Money Moves

Every Saturday, Money real estate editor Sam Sharf dives deep into the world of real estate, offering a fresh take on the latest housing news for homeowners, buyers and daydreamers alike.

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