Buying or selling a home can be a daunting experience at any time. Throw in high mortgage rates and recession fears, and the process can feel downright overwhelming.
Yet, there's no need to set aside your real-estate ambitions. Even in the most complex markets, you can take steps to reduce risk and improve your chances of striking a favorable deal. Here's how to set yourself up for success.
For buyers: 6 ways to help you make the right moves
1. Make peace with the fact that you can't time the market.
It's perfectly fine to postpone buying if the triple whammy of high mortgage rates, high home prices, and recession fears feels like too much to handle. But keep in mind that waiting for the "perfect" time to buy could leave you waiting a long time. "No one knows exactly what will happen with the housing market 3 months from now or 3 years from now," says Meredith Stoddard, vice president of life events planning at Fidelity, and a former real estate agent. Perhaps home prices and interest rates will soften from here—or perhaps they won't. In addition, real estate is highly local, and the direction of the market in one local area could be very different from the direction in another area, or even nationally.
If you see your dream home, have the financial means to afford it, and plan on being in the same place for a while, then feel free to pounce. And if it doesn't feel like the right time given your personal and financial situation, then it's OK to pass until the time is right for you.
2. Understand short- and long-term ownership risks.
If you plan to stay in your new home long term, you'll have time to ride out any downturns and could one day refinance your mortgage to a more favorable rate, should rates fall. (However, don't count on refinancing as a certainty, and make sure to only take on a mortgage you can truly afford.)
In contrast, "if you're flipping houses and hoping to buy low, throw some money into it, and sell high in a short period of time, then that's a heck of a lot more risk in an uncertain market," says Stoddard.
3. Make sure you have money for immediate and future expenses.
There's much more to buying a home than your mortgage payments. You'll also have expenses such as property taxes, insurance, home maintenance, and utility bills. Make sure you have the means to cover these expenses—and then some. It's always important to have an emergency savings, but during these unpredictable economic times, you may want to pad that account further. This way, you'll have extra cash set aside if you're laid off or have another unexpected setback. If your finances feel stretched too thin, consider smaller homes or condos in the same area or a similarly sized place in a more affordable neighborhood.
4. Get your credit in tip-top shape.
The higher your credit score, the greater your chance of getting a lower mortgage rate, which is crucial when interest rates are high. It can even potentially help you qualify for lower rates on private mortgage insurance (which you are likely to need if you have a less than 20% down payment). Both of these can make your monthly payments more affordable.
To boost your number, pay your credit cards on time, cover the full balance each month, and consider keeping open any credit cards you don't use (the length of your credit history is one factor that contributes to your credit score). To make sure there aren't any surprises or errors holding your credit back, you can request a free credit report, review it, and dispute any errors.
Try to be strategic when you're ready to start shopping around for a mortgage by putting all your mortgage applications in around the same time, like a 1- to 2-week period. While credit-scoring models generally ding you when you apply for new credit, the impact may be lower if it's clear you were rate-shopping, rather than applying for multiple lines of credit. (Consider more ways to help improve your credit score.)
5. Shop for the best mortgage rates.
Start by inquiring at your bank and checking out online sites that aggregate rates. Also, ask the financial professionals in your life, such as an accountant or financial planner, for their insights. As rates have risen, some buyers have started reconsidering adjustable-rate mortgages (ARMs) as an alternative to traditional fixed-rate mortgages. While ARMs are often issued with a starting interest rate that's lower than a fixed-rate mortgage, it's important to understand that after a period of time (often 3, 5, or 10 years) the mortgage rate will adjust periodically, and could increase.
If you do go with an ARM, prepare for future adjustments by socking away money for future payments and having an action plan for when those rates kick in. (Learn more about how to pick a mortgage.)
6. Be creative—and open-minded—during your search.
Most people have a list of "must-haves" for their new home. In a tight housing market, it's good to try to stay flexible, and consider multiple ways to meet your needs. For instance, if you're looking for a 3-bedroom house, add in a search for a 2-bedroom with a den. If a garage is on your nonnegotiable list, consider less-expensive homes where you could add one on, says Stoddard. "You might save tens of thousands of dollars on a place that doesn't have a garage and is a better fit for you overall," she says. "Then, down the road you can build a garage."
For sellers: 6 ways to help find selling success
1. Tap into local intel.
If you're on the fence about selling, do some local real estate reconnaissance. "There are markets where the houses are sitting, and nobody's biting," and other areas where sales are still robust, says Stoddard. To get a feel for your locale, check out what similar homes on listing sites have recently sold for, and compare those sale prices to each home's original listing price. A local real estate agent should be able to help you understand your local list-to-sell ratio (which is the sale price divided by listing price). A ratio of less than 1 can be a sign that homes are generally selling for less than asking price. A ratio of greater than 1 could signify your area is still a hot market.
Focus on comparable homes—a.k.a. "comps," or properties with comparable features to yours and in the same area—that have sold in the last 3 months. Scrutinize listing details to ensure you're making a proper comparison. If a neighboring house has professional landscaping and a recently renovated kitchen, but yours doesn't, your price may need to be lower.
2. Get honest feedback about your home.
Sure, you love your shabby-chic décor, but prospects may think it's just shabby. And while you may not pay attention to the light fixtures you bought 20 years ago or those old bathroom tiles, they may stand out to buyers. "When you've been in a home for a long time, you tend to look past things that other people are going to notice," says Stoddard. "Ask your real estate agent, a friend, a neighbor, or anyone else who can look at your home with a fresh set of eyes to be brutally honest with you about what you need to do," she says.
3. Research the payoff of any prospective improvements.
That said, before you rip out your kitchen or reseed your lawn, ask a realtor what updates will truly pay off. If the kitchen is an eyesore, then perhaps you do need to address it to make sure it doesn't repel buyers. But consider whether lower-cost solutions could do the trick. After all, properly painting cabinets is typically far cheaper than replacing them.
Often, inexpensive or even free tweaks can improve your home's value. Remove family photographs so the buyer can envision their kin settling in. Clear clutter, and enhance curb appeal by trimming hedges or repainting the front door. "Little things, like some flowers in a window box, can make a world of difference," says Stoddard.
4. Be strategic about staging your home.
You want prospective buyers to step into your home and say "wow." Staging can be a great way to elevate your home's appeal and help buyers picture the bright future life they might live in it. That said, it can easily cost thousands of dollars to stage a home, and it may not be necessary to spruce up absolutely every corner. Use your money wisely by focusing on key rooms. The most common areas to stage are a living room, kitchen, and primary bedroom.1 In some cases, you can save money by paying your real estate agent to stage, if they offer it, instead of hiring an outside person or company.
5. Consider professional listing photos.
Even if you've perfected the art of selfies, shooting a home takes a special set of skills. With the rise of home-listing websites, more and more buyers are starting their searches online, so chances are your listing photos will be your home's first impression for many buyers. You'll need well-shot, high-quality interior and exterior images to stand out and attract online searchers.
Real estate website Zillow suggests aiming for 22 to 27 photos.2 Nationally, homes with fewer than 9 photos are more likely to sit on the market than homes with that sweet-spot number of photos.3
6. Be prepared for contingency clauses.
When properties were in high demand, sellers could say "no" to buyers who had contingency requirements. In turn, many buyers were willing to skip these clauses to nab a new home in a frenzied overheated market.
But as the market has cooled, buyers may be less willing to skip these clauses, which can allow them to renegotiate or entirely back out in certain situations. So be prepared that offers you receive may come with inspection, financing, or other contingencies.
Don't be scared of a complex market
Market dynamics are always in flux in real estate. But with a bit of research and a close look at your budget and priorities, it's still possible to make savvy moves, and navigate the market with confidence.
Get more tips on buying or selling a home.