An Economist’s 3 Tips for Spring Home Buying in a Sellers’ Market

In many parts of the country (OK, not Boston), the busy spring home-buying season is already underway—March typically ushers in a significant increase in home searches online. This year, even more people than last year are jumping into the search process as a result of improving financial circumstances, like a new job, or life events, like a new baby.

That said, many users of this website report that it’s still difficult to find a home that fits their needs and budget. That means this process may take longer than you expect. So, like the Fed keeps telling us, be patient. And be prepared.

1. Consider your alternatives

Mortgage rates are low for now, but they’ll be moving up, and likely remain volatile, in the months ahead. In any case, the average interest rate you see in the news is not necessarily the rate that will apply to you.

The specific rate you get is a product of several factors, including the lender, the loan type, when you applied, the home and its location, the nature of the purchase, and, of course, your credit history and financial circumstances.

What you can afford to buy is significantly affected by the specific mortgage options available to you. A 10-basis-point difference on a mortgage rate has a 1.2% impact on your monthly payment, so what seems like a minor difference from one rate to another can really add up. Plus, if you can’t afford a 20% down payment, you’ll also face mortgage insurance premiums that get added to the monthly payment.

Due to recent changes by housing agencies, you now have more options for low-down-payment programs and even lower mortgage insurance premiums than were available just a few months ago. But that also means you need to think through what is best for you and your circumstances. Our Mortgage 101 crash course is an excellent way to quickly learn the basics about mortgages.

2. Consider new construction

If you are shopping in an area where new homes are being built, don’t assume a brand-new home is out of your price range. While new-home prices have indeed increased at a faster rate than existing-home prices in recent years, that’s partly because low demand from first-time buyers encouraged builders to feature bigger and more expensive homes. In some parts of the country, we are seeing builders open up more affordable communities.

For example, in markets like the greater Cincinnati; Chicago; Washington, DC; andRaleigh, NC, areas, substantial portions of new homes for sale are within budget for households earning the median income for the area.

Having a new home built for you is one way to solve the problem of not being able to find a home on the market that fits your needs. That’s exactly what I did 20 years ago when I bought my first home.

3. Consider an expert local Realtor

The single best piece of advice I can give anyone looking to buy a home is simple: Find anexpert local Realtor® to help you through the home-buying journey. All three of those words are important.

When I say “expert,” I mean a professional with substantial experience and insight. This is critical to helping you find the right neighborhood and home, negotiating the best deal for you, and completing the process as smoothly as possible.

“Local” means someone who knows your real estate market, neighborhood, and streets intimately.

And finally, “Realtor” should not be taken for granted as just another name for a real estate agent. A Realtor is a real estate professional who is a member of the National Association of Realtors® and subscribes to its strict code of ethics. That standard of professionalism is important.

Congratulations on making it to this point! You may have weathered an economic storm, but now you’re able to consider buying a home. Buying a home is a journey, but if you follow these tips, you’ll be well on your way.

As chief economist of realtor.com®, Jonathan Smoke leads its efforts to develop and translate real estate data and trends into accurate and relevant consumer and industry insights on housing.

Sweet and Low: Why Aren’t More Buyers Putting Down 3%?

Where you put down roots says a lot about you. Suburb vs. city; condo vs. single-family house—these are all decisions that home buyers tackle, and what they decide speaks to who they are. Also telling is how much they can afford to put down on that house.

It seems that as the housing market corrects, buyers are increasingly opting to put down more money despite programs touting the opposite.

RealtyTrac, a real-estate industry data provider, analyzed down payments of nearly 20 million home purchase loans from 2004 to 2014 and found that today’s postrecession buyers have cash reserves and don’t really need low-down-payment loans to buy.

In fact, just 25% of buyers in 2014 put down 3% or less using an FHA or conventional loan combined with down payment assistance, according to the report. That may seem like a significant percentage—a full quarter of buyers!—but it’s the lowest rate in a decade. Low-down-payment loans peaked in 2009, taking 46% of market share, according to the report. Since then, they have been steadily losing favor—and for good reason.

Low-down-payment loans tend to be more expensive. FHA loans have upfront fees, as well as monthly mortgage insurance premiums. And in a climate of consistently low interest rates, low-down-payment loans tend to carry a higher-than-average rate. As the credit market tightened, banks turned their favor to only the most highly qualified applicants.

Last year, the average repeat home buyer was a married couple with a median household income of $95,000, according to the National Association of Realtors®’ annual profile of home buyers and sellers. These move-up buyers can sell their homes and use the profit to make a larger down payment.

While this might sound like the perfect home-buying cycle, it tends to leave out single people and first-time buyers—groups that traditionally have lower incomes and less savings. To be sure, the level of first-time buyers has shrunk to 30% in 2014 from 40% before the housing market collapse, according to NAR.

That may also have something to do with tighter lending restrictions. Only the most highly qualified buyers are being approved for loans. Last month, for instance, the average home buyer had a 731 FICO credit score, according to Jonathan Smoke, chief economist atrealtor.com. For conventional loans, the average home buyer had a 751 FICO, while for FHA loans it was 682.

Translation: The mortgage market has basically been skimming from the top.

Even though Fannie Mae and Freddie Mac provide guidelines for consumer loans, banks have created overlays that further restrict access to credit. While FHA might allow low-FICO loans, good luck finding a bank that’ll write that loan.

These days, buyers with less than stellar credit fear applying for a mortgage given today’s tight credit restrictions. While buyer pessimism may contribute, there might be another reason down payments are getting higher.

“If you’re a seller and you have to chose between two offers, one with a low down payment and the other with 20%, you’re going to take the stronger offer,” said Adam McLain, a mortgage broker at Wintrust Mortgage in Chicago. “That larger down payment sways sellers.”

The average down payment in 2014 was 15.4%, according to RealtyTrac, down slightly from 15.6% in 2013. Down payments hit an 11-year low in 2009 when they averaged 12.9%, according to the report, which comes on the heels of Fannie Mae announcing that it would start allowing 3% down loans. Freddie Mac will start accepting 3% down loans next month.

Take the average purchase price of $291,428, and in 2014, the average buyer brought $58,496 to the closing table, according to RealtyTrac.

The lower the price of the home, the lower the down payment tends to be, according to the report. The average sales price for a house with a 3% down payment was $154,214. On the other end of the spectrum, borrowers who purchased $500,000 houses tended to put down 50%.

To industry experts, the down payment’s relationship to home price is not surprising.

“Nonconventional loans like jumbos often require more than 20% down,” said Smoke. “So if the market has shifted to higher price points, which it has, and higher income, more qualified buyers, which it has, then of course the down payments would be going up.”

Still, in order for the housing market to fully recover, all qualified buyers have to participate—and that means lenders will have to embrace a wider pool of applicants.