~~ Buying Real Estate in the Winter! + 2022 Loan Limits ~~

[Chris Mason]

In 2020, we didn't have a winter slowdown, at least here in California. Which was a first for me.

This year, we're having one. Everything has good and bad. 

During the spring and summer months, with so much market activity, the pattern is that everything gravitates towards the median. It's really hard for buyers to get a particularly good deal, because if you won't pay that price, then someone else will. It's also really hard for sellers to get a particularly bad deal, things just get bid up to market value. It's also hard for sellers to get a particularly good deal (relative to market) -- if the other owners of very similar properties are willing to let them go for X price, it's going to be hard for you to sell for 10% over that price. If you flip a coin 1000 times, it's going to be heads about 50% of the time, and tails about 50% of the time. If you roll a pair of dice 1000 times, it's going to come back snake eyes very close to 1/36th of the time.

November to February is always a bit interesting. There's less market activity overall. If you're only flipping a coin 10 times, it's very easy to envision it coming back heads 70% of the time. If you only roll the dice 36 times, you may not get a single occurrence of snake eyes, or you may get it 3x as often as you'd expect. What this tends to translate to is both unusually good, and unusually bad deals, for both buyers and sellers. On top of anomalies being more likely with fewer 'dice rolls,' particular buyer/seller motivations also seem to have more impact. Example from seller's side and buyer's side:

- The divorce or probate court judge says the property MUST be sold by the end of the year. So what do the bickering divorcing couples, or bickering heirs, do? They bicker, of course. And procrastinate. And then it's a panic listing that hits the market right after the big fight at Thanksgiving dinner. You may find that terms such as 'motivated sellers' appears more frequently in listing descriptions. In all their fighting and bickering, they might have established their checklist, and agreed to take the very first offer that ticks those boxes, trying to entice a bidding war isn't even on their agenda.

- The buyers who absolutely have to have a floor plan of this particular type, in this area, etc. Well, if they want that, and want it now, there may very well only be exactly one house that checks all their boxes. So if that's the reality they are facing, they have exactly ONE opportunity to check their boxes, it's not hard to see that they might be more inclined to over-bid.

Everything has a good, and a bad, though. 

Buyers with very specific criteria are less likely to have those criteria met. While it's easier to get a good deal (relative to market) on "a" house in the winter (flexible criteria on what the property looks like, etc), it's a lot harder to get "the" house (open floor plan, double oven, 2 blocks from the subway, bla bla bla). For a retail owner occupant buyer, this might mean it makes sense to hold off on the house hunt until spring (= less buyer competition for those in the market). If one's criteria are general, however, and the focus is on getting a good deal relative to market, the winter is actually the best time of the year. There are several people I know who, as a general rule, will ONLY buy in the "slow" winter months. I sold a property not long ago, and I was certain to get it in t here BEFORE those winter months. 

Something else that happens seasonally. Around Thanksgiving, the new conforming loan limits get published. In the hotter markets, prices gravitate a tick above those "if I have good income, but only 5% down and 'meh' credit, how much house can I buy?" limits, arriving there in the late summer (owner occupants that have >5% down are why it's above that limit, not right at it). That 2021 limit in Oakland and the rest of the Bay Area is $822k, for example ($548k is most of the US, 'normal' cost of living areas), and towards the end of summer and into fall I always do a lot of loans for exactly that number. Instead of 5% or 15% or 20% down, they're putting 12.38% down, or 18.44% down, or whatever it takes to get exactly at that number, to avoid taking out a 'jumbo loan' (which has significantly higher requirements across the board). Their budgets often just become [$822k + savings = max price] or [$548k + savings = max price] (depending on area cost of living).

The loan limit is based on appreciation in the year that's being closed out. 2021 was a crazy appreciation year. So that new limit is broadly expected to be around $625k for most of the United States, and somewhere in the low/mid $900s in high cost of living areas (Oakland as mentioned, New York City, DC, Los Angeles, etc). Some lenders are actually already anticipating the new limits and offering it now, planning to just hold those loans on their books until Jan 2022. So instead of [$822k + savings = budget], it may be [$950k + savings = budget]. But this means that the new year is going to open to people with 'meh' credit and 5% down (but solid income, triple verified, including during the week of closing escrow) being able to buy >$1,000,000 homes. That's an interesting 'momentum' mechanism that they've built into the rule books, we'll see how that plays out. People jokingly talk about a certain person's proposal to basically give everyone $15k in down payment assistance if they're a first time buyer and not rich, saying that all it's going to do is instantly inflate real estate by $15k across the board. I don't know if that's true or not, or that it's that simple, but what happens when everyone's gov't subsidized maximum 'meh credit + 5% down' loan amount is bumped $75k or $100k? 

Loan limits over time, for reference (multiply by 1.5 to arrive at high cost of living area loan limits):

A $75k year-over-year increase is unprecedented. It took 3 years to go from $417k to $484k, which was $67k. It's about to jump more than that, in 1 year.