Housing News

Home Prices Are Easing: How Homebuyers Can Stretch Their Purchasing Power

Homebuyers may be able to get more for their money as asking prices soften in many housing markets.

The national median home listing price fell 2.5% year-over-year to $430,000 in June, according to Realtor.com. It was the eighth consecutive month that asking prices declined from the previous year.

Nearly 19% of homes for sale also received a price cut during the month. Meanwhile, the number of active listings rose 1.9% annually, giving homebuyers more properties to consider.

“Home price growth in general has continued its long, drawn-out, grinding adjustment,” wrote New American Funding Principal Analyst Ryan Schoen in a new NAF Insights report.

For homebuyers, that adjustment may create opportunities.

What is homebuying power?

Homebuying power is the amount a homebuyer may be able to spend while keeping the monthly mortgage payment within their budget.

Buyers’ income, debts, credit history, down payment, property taxes, homeowners insurance, and homeowners association fees can all affect that amount.

The purchase price plays a major role. A lower purchase price generally means a smaller mortgage, a lower down payment, or both.

Homebuyers near the upper end of their budgets may be especially sensitive to even small changes in the numbers. A modest reduction in the purchase price could help someone remain within a lender’s debt requirements or preserve more cash for closing costs.

Lower home prices can improve affordability

A lower asking price can reduce the amount a homebuyer needs to borrow and the principal-and-interest portion of the monthly mortgage payment.

It may also reduce the cash needed for a percentage-based down payment.

For example, a 5% down payment on a $400,000 home would be $20,000. If the price fell to $380,000, the same percentage would require $19,000 upfront.

The $20,000 difference would also reduce the mortgage principal. That would lower the monthly payment and the amount of interest paid over the life of the loan.

The affordability calculation helps explain why some sellers are adjusting their expectations to reflect what today’s homebuyers can comfortably spend.

Schoen described the mismatch between home prices and purchasing power as “the crux of the mathematical argument for why home prices should come down.”

Homebuyers should ask their loan officer to calculate payments at several price points. Working backwards from a comfortable monthly payment can reveal an appropriate home price before the home search even begins.

Home price cuts may signal room to negotiate

A reduced list price may reveal more than a lower number. It can also suggest that the home seller is motivated to make a deal.

Homes that have spent longer on the market or received multiple price cuts may offer stronger negotiating opportunities.

A homebuyer may be able to offer less than the current asking price, depending on the local housing market and interest in the property. The seller may also be willing to address repairs or contribute toward eligible closing costs.

Home seller concessions can preserve cash

A seller concession is a contribution from the seller toward certain homebuying expenses.

Depending on the mortgage program and transaction, concessions may help cover eligible closing costs. Keeping more cash after closing can give a new homeowner money for moving expenses, repairs, furniture, or an emergency fund.

The lowest possible sale price is not always the most valuable deal. In some situations, a homebuyer may benefit more from help with closing costs than from another small reduction in the sale price.

For example, a homebuyer purchasing a $400,000 home may value a $10,000 contribution toward eligible closing costs more than a $10,000 reduction by the purchase price. The concession could substantially reduce the amount of cash needed at closing.

More homes for sale gives homebuyers choices

More homes for sale can give homebuyers additional time to compare properties, neighborhoods, prices, and monthly expenses.

The number of active listings nationally rose to more than 1.1 million in June, according to Realtor.com.

Housing market conditions vary significantly by location. Some areas remain highly competitive. Others have more price cuts, longer selling timelines, and sellers who may be willing to negotiate.

Homebuyers with flexibility may want to expand their search to nearby ZIP Codes, consider a different home style, or look at properties that need cosmetic improvements.

A home that lacks trendy finishes may provide better value than a recently renovated property with a higher price. Paint, lighting, and flooring can be changed later. The location, lot, and basic layout generally cannot be changed.

The housing affordability gap may be starting to narrow

The difference between the price of a typical home and the amount many first-time homebuyers can comfortably spend remains an important challenge.

“That gap is a legitimate concern for first-time buyers and market activity, all else being equal,” wrote Schoen.

Falling asking prices may help bring the two numbers closer together. Price cuts, seller concessions, down payment assistance, and a wider selection of mortgage programs may also help qualified homebuyers find a workable path forward.

The opportunity will vary by local housing market. Homebuyers may find more negotiating room in areas where homes are taking longer to sell or where sellers have already reduced their prices.