The housing market is filled with misconceptions, misunderstandings, and even intrigue. With a lot of money at stake, everyone has their own theories about where the market will move and what the best way is to take advantage of price drops and interest rate cuts.
Understanding these mistaken ideas puts both buyers and sellers in a better position to act on opportunities and avoid making costly mistakes.
What Buyers Misunderstand
Misconception 1: If I Wait, Prices Will Drop
Buyers often think that home prices will eventually come down, and if they’re patient, they’ll get a better deal. In reality, home prices trend upward over time. There may be brief corrections during recessions, but these are rarely lasting. Waiting for significant price drops rarely pays off.
Here’s what actually happens when buyers wait:
- Prices continue rising.
- Rent uses up money that the buyer could be using for equity.
- Buyers who delay miss out on years of appreciation.
- When prices dip, there’s more competition from other buyers.
One exception is if the market is in a housing bubble. In this situation, a downward correction in housing prices is possible.
Misconception 2: I Should Wait for Lower Interest Rates
Home buyers and sellers often believe that high rates make homes unaffordable. In reality, prices can rise or fall when rates change because many buyers return to the market at the same time. Instead of waiting for rate changes, since no one can predict them, it can be practical to buy now and refinance later. A note though, refinancing does require paying new closing costs. If you stay in the home for at least two years, you can usually recover those costs when the new rate is at least 1% lower.
Misconception 3: I Need 20% Down to Buy a Home
Many house buyers and sellers believe that it’s impossible to purchase a home with less than 20% down. However, there are many loan programs that require far less. These include:
- FHA loans, for which you may only need 3.5% down.
- VA loans, which don’t require a down payment at all.
- USDA loans, which you may be able to get with 0% down.
These programs, which provide loan guarantees, are targeted to specific groups or types of properties and are intended to make home ownership more accessible.
If you have less than 20% down, you will have to pay private mortgage insurance (PMI), which typically costs $100 to $300 per month. However, once you reach 20% equity in your home, you no longer have to pay PMI.
Aspiring buyers often think that it’s better to save until they reach 20% equity and avoid PMI, but there are costs to waiting. While they are saving, homes continue to appreciate, and prospective buyers pay rent instead of building equity. In most cases, it’s better to buy with 5% or 10% down and get into the market as soon as possible instead of waiting.
Misconception 4: The Listing Price Is the Price
Home sellers and buyers often think of the listing price as the price that the home will actually sell for. In reality, homes in competitive markets regularly sell for 5% to 10% over asking. In balanced markets, they sell near asking, and buyer’s markets, they sell below asking.
When buying, it’s important for shoppers to understand that homes are priced strategically. Underpriced listings are intended to trigger bidding wars and can sell for 10% to 20% over asking. Working closely with a real estate agent who is deeply familiar with the area is key to knowing when a house is incorrectly priced. A good agent will help a buyer identify a strategy that’s fair to both seller and buyer and has the best chance of being accepted.
What Sellers Misunderstand
Misconception 1: I’ll Price My Home High and Come Down
Sellers sometimes think it’s a good strategy to set a high price for their home and see what happens, thinking that they can reduce the price later if needed. However, overpricing can easily backfire. Buyers look at the listing, conclude that it’s overpriced, and move on to other listings. As the listing moves into weeks 3 and 4, interest in the property wanes, and any remaining buyers wonder if there’s something wrong with the property. Eventually, the listing grows stale, and the seller has to reduce the price out of desperation. By then, serious buyers have found other homes, and the seller winds up selling the property for less than they would have if they had priced it correctly.
Misconception 2: Renovations Add Value Dollar-for-Dollar
Many sellers, and some buyers, believe that a $50,000 kitchen renovation will increase the price of the home by $50,000. Renovations return 50% to 80% of their cost, but not 100%. The fixes that add the most value are relatively simple ones, including:
- Fresh paint in neutral colours.
- Updated flooring.
- Modern light fixtures.
- Good curb appeal.
- Clean, decluttered spaces.
If you’re selling, focus on these improvements, avoid luxury upgrades, especially if they don’t match the neighbourhood, and stay away from renovations that express your unique tastes.
Misconception 3: I Can Sell It Myself and Save on the Commission
Sellers sometimes think that they can do just as well if they act as their own agent. However, data shows that For Sale by Owner homes typically sell for 5 to 10% less than agent-listed homes. Without an agent, sellers also have to handle all the marketing, showings, negotiations, and paperwork themselves. Real estate agents take care of all these tasks for their clients. Agents also have a much broader reach through the MLS and time-tested marketing strategies, which expand the buyer pool considerably, ensuring more showings and more competitive offers.
Misconception 4: I Should Wait for the Market to Improve
Sellers believe that if the market is slow, they can wait 6 to 12 months and get a better price for their home. In reality, timing the market is nearly impossible. It’s much better to let life circumstances, such as job changes, family needs, and financial pressure, make the timing decision.
There are times when it does make sense to wait, including:
- The market is clearly in a temporary dip that will very likely end soon.
- The seller has no urgency to move.
- The seller can wait 2 years or more if necessary.
At other times, waiting is definitely a mistake:
- The seller needs to move for a job, family, or financial reasons
- Carrying costs for the property are high.
- The market is unlikely to improve, as it is in a stagnant area with declining jobs and a decreasing population.
- The home is deteriorating and could sell for less if the seller postpones.
What Most House Sellers and Buyers Misunderstand
There are some misconceptions that buyers and sellers have in common:
- The market doesn’t care about individual circumstances; it’s driven by supply and demand.
- Real estate decisions are emotional, but good decisions are rational; buyers and sellers should use emotions to identify what’s important to them rather than what they deserve to get or have a right to get.
- Timing the market is next to impossible; buyers should buy when they’re financially ready and plan to stay for at least five years. Sellers should sell when life circumstances require it.
Misconceptions and misunderstandings abound in the real estate market. The key to success in a real estate deal for both sellers and buyers is to learn how the market actually works, separate emotion from logic, and work with experienced professionals like a seasoned real estate agent, a reputable lender, and a reliable financial advisor.
