How 4.5 million people managed to buy a home this year amid the toughest market in a generation

Washington, DC (CNN) — This has been a year of superlatives in residential real estate — and not in a good way.

Mortgage rates reached 23-year highs, sales sank to a 13-year low and prices hit their highest levels ever. That all combined to push affordability to its lowest point since 1984.

And yet, somehow, about 4.5 million people bought a home this year — just under four million purchased an existing home, according to the National Association of Realtors, and just over half a million people bought new construction homes, according to the US Census Bureau.

To be sure, a lot fewer homes were sold this year than in prior years. Only a few years ago, in 2021, when mortgage rates were at rock bottom levels existing home sales alone topped 6.12 million, hitting their highest level since 2006, according to NAR.

But millions of buyers still managed to find homes this year. How did they do it?

The buyers who were successful this year didn’t jump in and out of of the market, said Jen Davis, an agent with and co-owner of Holt Homes Group at Keller Williams in Springfield, Missouri, who specializes in working with buyers. Rather, they had a strategy and stuck with it.

“The ones who were successful in buying a home this year weren’t just the ones who bought in all cash or the ones who bought down their rates,” said Davis. Those things happened, she said, but the common theme for successful buyers was that they had one guiding principle that they stuck with to get the purchase over the finish line: They prioritized what they wanted in a home.

It is important for buyers to be clear about whether their very top priority is location, affordability or condition of the home, she said, and develop a strategy based on their priority.

Affordability

Most buyers this year had to make a compromise on some dimension of the home they bought.

“Maybe they went outside the area or neighborhood they thought they wanted to be in,” said Davis. “But the terms were something they were comfortable with. And it got them in the house at the end of the day.”

For many buyers facing soaring mortgage rates and rising home prices, affordability was the driving priority. The average rate for a 30-year, fixed-rate mortgage was at its lowest point in February at 6.09%, according to Freddie Mac. By October rates hit a 23-year high at 7.79%, adding hundreds of dollars to the monthly payment of a median-priced home.

In February, when the median home price was also at $363,000, the typical principal and mortgage payment was $1,211 a month, assuming a 20% down payment. By October, when the median price for a home was $391,800 and mortgage rates were 7.79%, the typical monthly payment was $2,254, an increase of more than $1,000 a month.

“When affordability was the factor we looked at — what is a deal for them? At what monthly payment would they feel comfortable purchasing?” said Davis.

Often a seller would provide the buyer concessions to help them buy down their mortgage rate. When a borrower buys down the rate with discount points, it is akin to prepaying your interest. Buyers can request a concession from sellers to cover the cost of lowering the rate.

Typically, each point is equal to 1% of the borrower’s mortgage cost. Paying 1 point brings the rate down by about 0.25%. A borrower with a $400,000 loan can buy down a 7.5% mortgage rate to 7.25% for $4,000.

By reducing the mortgage rate upfront, the monthly costs will be smaller for the life of the loan.

At other times, she said, the strategy was to look at aged inventory that sat on the market longer.

“Sellers at that point are more willing to negotiate than someone who is day-one on the market,” Davis said.

Home condition

But for a buyer whose primary interest is condition of the home — they want a move-in-ready, HGTV-condition home — Davis said buyers often had to get much more creative about financing, since those homes could command full price and often had several other interested buyers.

“If they are not handy and they want it beautiful from the get go, the question becomes where can we pull money from to make this the strongest offer?” Davis said.

In that situation, she said, she suggests buyers look at things like gift funds from friends or family, down payment assistance programs and flexibility with how they can make the offer as close as possible to a clean cash offer with no contingencies.

“Maybe they can take out a bridge loan, or use equity from the sale of their home,” she said. “Sellers are looking for the cleanest offer.”

Buyers could take a little more time

There is no timing this market, agents say, but sometimes buyers needed time to adjust to shifts in the market, whether it was rising prices or soaring interest rates. And unlike the frenzied market during the peak pandemic years, in which homes were selling in a matter of days and buyers had only 10 minutes to make a decision and were writing offers on the hood of the car outside, fewer buyers this year meant there was a bit more time to breathe and make a deliberate decision.

Parisa Afkhami, an agent with Coldwell Banker Warburg in New York City, said she worked with a buyer for more than a year before they were successful in purchasing a home this year.

“As our search continued, interest rates climbed steadily,” she said. “This naturally presented challenges in our search in terms of affordability. At times, climbing rates and low inventory seemed like insurmountable bumps in the road. I kept taking them out to look at properties, and we looked and looked, which helped create a realistic picture.”

Afkhami said the buyer finally closed this past summer on an apartment in New York City.

“In this case, the adjustments and steps needed were to shuffle assets, increase the amount of cash they had for a down payment, create a plan to refinance when rates do come down and look at buildings with less stringent financial requirements, such as post-closing assets and liquidity,” Afkhami said.

It was a challenging year for everyone involved said Erin Sykes, chief economist at Nest Seekers International, who is also a sales agent in Florida, New York and New Jersey.

“It wasn’t great for buyers,” she said. “But it wasn’t great for sellers, either. And it wasn’t great for agents. Everyone was struggling. The question was who is going to give in a bit? We’ve seen sellers start to make those changes, accept lower prices. That’s what buyers needed, coupled with a pullback in mortgage rates, to reignite the market.”

Tumbling mortgage rates and new construction

The average weekly rate for a 30-year, fixed-rate mortgage reached a 23-year high at 7.79% at the end of October and has been tumbling since. That brings the cost of borrowing down for would-be buyers.

New construction homes continued to be attractive, with homebuilders adding inventory and offering to buy down mortgage rates for buyers to make purchasing more palatable.

“Huge builders have been able to offer incentives like mortgage buy-downs of a point and a half, sometimes two points,” said Sykes. “You’re getting a new homes, but you’re paying a premium and in some cases you’re buying in a less developed area.”

The average new construction home costs just under $500,000 nationally, according to the Census Bureau. Sykes said buyers might have overpaid a bit but at least got a buy-down on the mortgage rate.

Alternatively other buyers found a home that may be in worse condition with an eye to the future.

“They may pay less for the house and get a more expensive rate,” she said, “But they can refinance in the future. That risk will pay off for people who took it on.”

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