Thinking of Buying a Home? Here's Why You Should Offer Less Than Asking

Try to make buying a house less expensive, if you can.

2022 has been a bad year to be an aspiring homeowner (and until fairly recently, it was a pretty good year to be a home seller). And it's not clear whether it will get easier in 2023, either. That said, the housing market tide may be starting to turn, and if you're considering buying, it might be a good time to offer a lower price than a seller is asking for their home. Why is that?

The housing market is showing signs of softening

It's been an interesting time to watch the housing market (and be happy that my own plans to buy are targeting 2024 at the earliest). Redfin's November 2022 research found that prices are finally starting to stabilize at a lower level; during the four-week period ending Nov. 6, sale prices only rose 3.2% year over year, which is the smallest increase since June 2020. The median home price has fallen by 8.4% since its all-time high in June 2022. These are encouraging signs.

Redfin also noted that fewer people are searching "homes for sale" (per Google Trends) at the time of this writing, versus a year previously (November 2021). In fact, the search term was down 28% year over year. This suggests demand for homes is easing, and prospective buyers are no longer willing to fall all over themselves to offer higher prices than sellers are asking just to be assured of getting an offer accepted. There's another big reason to moderate your offer on a home: mortgage rates.

Mortgage rates are higher, so payments will be too

Inflation may now be starting to ease, due to repeated interest rate hikes by the Federal Reserve in 2022. But this relief has come at a high price. When the Federal Reserve raises the federal funds rate, it translates to banks and other lending institutions raising their interest rates for consumer borrowing. As of this writing, the average rate for a 30-year fixed-rate mortgage is 7.08%. After rates as low as 2.98% at this time last year, this is a hard pill to swallow indeed.

But this spike in rates is further reason to consider offering less than asking for a home you're interested in purchasing. A higher mortgage rate will make your payments correspondingly more expensive, and since homeownership is already costly, you're going to want to get the best price possible for your new home. This means working with an experienced real estate agent who can help you craft a fair offer that works with your finances and has a chance of being accepted by a seller.

Factors to consider when making an offer

Think you've found the right home for you? Here's what to think about before you sit down with your real estate agent to run the numbers and do the paperwork to make an offer.

How long has it been listed?

If the home you're interested in has been sitting on the market for a while, it could mean a few different things. Maybe it's overpriced, and if the seller is getting desperate, your lower offer could be accepted. Or maybe the home has serious (and expensive) issues that have turned off other potential buyers, in which case, you might be able to get a deal -- if you're willing and able to fix those problems (or get the seller to do so). I don't recommend buying any home without getting a thorough inspection, however. It's one thing to buy a home with known problems, and something else entirely to get a nasty surprise after the home becomes yours.

How strong are you as a buyer?

I have been a renter for most of my adult life (save for my disastrous experience of briefly owning a home in my 20s), and I am familiar with the aching yearn that you might be experiencing if you too are a renter and would love to buy a place of your own. But it's worth seriously considering your own qualifications and limitations as a buyer. If you have a high debt-to-income ratio and somewhat shaky credit, tread carefully. You may be able to buy with an FHA loan, but the more stringent requirements of these (as opposed to conventional mortgages) may have sellers turning down your offers.

How much can you actually afford?

Now we get to the heart of the matter. How much home can you actually afford? Homeownership is expensive, and there are many costs to consider beyond just how much a mortgage payment will be. Don't make an offer (below asking or otherwise) without doing your best to crunch the numbers and see how much owning could cost you. There's no way to predict when your air conditioner will break, but having a solid emergency fund can help you maintain your home without going into debt.

If you're hoping to buy a home soon, you may well be tearing your hair out watching the market and trying to decide how best to approach the task at hand. But we might be coming to a point where buyers find themselves in a position of power again, at least to some small degree.