The U.S. housing market has gone from scorching to cooling within months as the momentum is also slowly shifting from a seller’s market to one more favorable to buyers.
But some might be unfamiliar with the most commonly used terms in the industry.
“The more you know before you jump into either buying or selling a house, the easier it will be,” said Kristina O’Donnell, a longtime realtor in the Philadelphia area.
Here’s what to know:
What is a housing bubble?
A housing bubble is a market condition in which prices rise beyond what most believe is reasonable or sustainable, according to Bankrate.com. A housing bubble, or a “real estate bubble” happens when housing prices spike rapidly, usually driven by an increase in demand, limited supply and some emotional buying, Bankrate said.
“While even two months ago rates above 7% may have seemed unthinkable, at the current pace, we can expect rates to surpass that level in the next three months,” George Ratiu, manager of economic research for Realtor.com, recently wrote.
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What does contingency mean?
A contingency is a clause in a purchase agreement that a specific action or requirement must be met for the contract to become legally binding, according to Bankrate.com.
Both the buyer and seller must agree to the terms of each contingency and sign the contract before it becomes binding, the site said.
In other words, an offer has been made and accepted on a home, but before the sale is a done deal, some conditions, or contingencies, still need to be met, O’Donnell said.
“It gives the parties an opt-out or a way to back out of the deal,” O’Donnell said.
Some common contingencies include mortgage contingency, appraisal contingency, and inspection contingency.
A mortgage contingency gives the buyer a specific period of time to secure financing. If the buyer doesn’t secure a loan by the deadline, the buyer can back out, sometimes without forfeiting the deposit , and the seller can put the home back on the market.
An appraisal contingency can protect a buyer by stipulating that the property must appraise at the suggested sales price, at minimum, or the contract can be voided. This contingency can also let the seller opt to reduce the price to the appraised value or less, O’Donnell said.
An inspection contingency allows the buyers to have the property inspected by a professional and request certain repairs or a lower sales price.
These fix-its can either stall, complete, or end a sale.
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What are closing costs?
Closing costs are fees home buyers pay for items including an appraisal, title and other fees charged by lenders for creating the loan, called home ‘origination’ fees. Sellers also pay closing costs, though usually a lower amount.
The specific closing costs a buyer will have to pay will depend on the type of loan they have and also where they live, O’Donnell said.
Closing costs can be between 3 to 6% of the loan amount, Rocket Mortgage said.
A buyer, however, can negotiate with a seller to either help cover or pay the entire closing costs. These are called seller concessions, O’Donnell said.
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What is a housing foreclosure?
A foreclosure is the reclaiming of a property by the lender when a homeowner cannot make the required mortgage payments.
The lender can to sell the home to another buyer , experts say.
“You want to avoid foreclosure, period,” O’Donnell said. “If a homeowner, for whatever reason, is having problems paying their mortgage, they need to contact their lender immediately to try to work something out.”
Do you know your FICO score?
A FICO score is a three-digit number that indicates creditworthiness based on the information contained in someone’s credit reports.
The higher the score, the better, said Anthony Graziano, CEO of Florida-based Integra Realty Resources. “Having a strong FICO score can help you get the best rates and terms,” Graziano said.
A good FICO score ranges from 670 and above, according to the online site myFICO.com
The score helps lenders determine how likely a person is to repay a loan, myFico.com said. The score also determines how much someone can borrow, the length of months they have to repay the loan, and how much their interest rate will be.
What’s a fixed-rate mortgage?
A fixed-rate mortgage is a home loan option with a specific interest rate for the entire term of the loan, according to Rocket Mortgage.
This means that the interest rate on the mortgage will not change over the duration of the loan. Also, the borrower’s interest and principal payments remain the same each month.
A 30-year fixed-rate mortgage is America’s most popular mortgage option, Rocket Mortgage said.
What is an adjustable-rate mortgage?
An adjustable-rate mortgage is a home loan with an interest rate that adjusts based on the market, according to Rocket Mortgage.
Adjustable-rate mortgages typically offer a lower introductory interest rate than fixed-rate mortgages but after the initial period, your monthly payment can change.
“If interest rates go down, (adjustable-rate mortgages) can become less expensive,” Rocket Mortgage said. “However, (adjustable-rate mortgages) can also become more expensive if rates go up.”
Housing market predictions
Investment bank Morgan Stanley expects U.S. home prices to end 2022 down 11% compared to 2021 and to fall by another 7% by the end of 2023. The declines are in part due to the surging mortgage rates and that unforeseen home price growth.
“We do think that sales are going to fall steeper than we thought,” Jim Egan, Morgan Stanley’s co-head of U.S. Securitized Products Research, said on the bank’s “Thoughts on the Market” podcast. “We think that starts are going to fall steeper than we thought, and that next year single unit starts are going to be lower in 2023 than they were in 2022.”
