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FARGO — Keith Lehman just wants a piece of the American Dream
The Fargo North math teacher and track coach is a hard-working 26-year-old who would like to buy his own home. Nothing too elaborate. Just a little house with a yard and a main-floor bedroom and bath, in case his grandfather, an independent farmer in his 90s, ever wants to move in with him.
“I honestly don’t care about square footage,” Lehman says. “And I suppose I’d like a garage to keep my 22-year-old car in.”
For years, Lehman has done everything right to set himself up for home ownership. He’s kept a shrewd eye on the housing market, hired a highly motivated real-estate agent and taken on a side hustle as his north Fargo apartment building’s resident manager so he can save extra money.
Yet, a year and a half after starting his home search, Lehman has watched one dream home after another slip through his fingers.
“It’s kind of demoralizing to keep trying and trying,” Lehman says.
In the current housing market, in which interest rates hover at 3% and even a $500,000 house may sell within days after listing, the home-buying experience can test one’s patience and tenacity. But this is especially true in the tight $250,000-and-below market, as housing stock is more limited in this category and buyers don’t have the unlimited budget to offer $20,000 above listing price.
“Supply and demand is what it is. There’s just a lack of inventory,” says Nick Olson, president of the Fargo-Moorhead Area Realtors’ Association and a real estate agent for 19 years.
Olson points out that the Fargo-Moorhead MLS shows just 54 metro-area homes in the $200,000 to $250,000 range.
“We have 985 Realtors in our market, so if every Realtor had one buyer, it would be really difficult in that range to find anything,” he adds.
Another factor in the housing shortage is a post-COVID, millennial-led drive to get a bigger house, with office space, out in the ‘burbs.
“When people were working at home, they realized they needed extra space to dedicate toward an office and maybe they were maxed out on the number of bedrooms,” Olson says. “Now, with their employer allowing them to work from home long term, they need more space.”
Travis Lang of Guaranteed Rate is based out of Bismarck, but works with clients throughout the Fargo area and was recognized as the state’s top-producing mortgage officer in total closings last year. Lang offers yet another twist to the housing conundrum: an influx of out-of-state buyers. “We’re seeing a lot of people from other states moving to North Dakota,” he says. “A lot of people are leaving crazy states they don’t want to live in anymore … and, because we don’t have a lot of people and homes, that makes the market crazy.”
So why can't builders simply start building to meet demand?
It's not for lack of trying. Permits for all new housing starts in the metro area and surrounding communities have jumped from 294 in May of 2020 to 545 in May of this year, according to the Home Builders Association of Fargo-Moorhead.
While homebuilders are working furiously to construct houses, the industry has been hobbled by a stingy building-materials pipeline and a serious shortage of skilled workers, says Bryce Johnson, CEO of the Homebuilders Association of Fargo-Moorhead.
Starter homes can be especially challenging to build because they tend to have narrower profit margins, Johnson says. That’s especially pertinent right now when so many factors are driving up building costs.
When building costs increase, it impacts many more people than we realize. “That lower price range is the most challenging because every $1,000 increase will affect that particular homebuyer dramatically. It can really knock them out of buying power,” Johnson says.
Competition strains homebuyers’ budgets
Based on numbers from the FMAAR, Olson says home prices have climbed about 8% in the last year. So a home that sold for $250,000 last year could sell for $270,000.
Indeed, many aspiring first-time homebuyers have found their budget can’t keep pace with price increases, much less the bidding wars.
Tessa and Tyler Kava are raising their two sons, Jaxon, 9, and Oakley, 5, in a rented West Fargo townhome. They’ve been looking for a place to call their own for several years.
The Kavas have set a house budget of $250,000 and created one firm caveat: The house must be in the same West Fargo school district. But they’ve been frustrated to find houses that either aren’t suitable for raising kids or need a lot of work.
“For first-time homebuyers, we feel hopeless almost,” Tessa says. “Are we ever going to be able to buy a house? We don’t have amazing jobs, but we both have really good paying jobs … so how can we not afford a house for our family to live in?”
Lehman can relate. His quest for a home started a year and a half ago, when he heard of a neat, little two-bedroom, two-bath bungalow in north Fargo.
Lehman knew the neighbors, who were selling the house and really wanted him to move there. The sellers had initially predicted it would sell for somewhere between $140,000 and $160,000. This was perfect for Lehman, who had set a budget of $180,000 to $185,000 for himself. But when the house finally came up for sale, it joined a furiously bullish market. It was listed at $205,000.
“I just could not find the money or justify spending that much over my budget for an 800-square-foot house with an unfinished basement,” Lehman says today. “That’s when the heartbreak began.”
Both Lehman and Kava say they would consider making offers at the top end of their budget, but only if the prospective houses were move-in ready.
“We’ve spent hours and hours getting off work early or cancelling plans to look at houses,” Kava says. “Many have never been updated. We’ve run into foundation problems with them and bad roofs, or they need new siding and windows. I can't buy a house for $250,000 and put all this money into it, too.”
Olson advises against getting so caught up in the competitive spirit of a bidding war that an individual gets in over their head. If a client is pre-approved for a $250,000 loan, he advises them to set the top end of their budget at least $10,000 lower, which gives them some room to negotiate. This also can safeguard against offering to pay more for a house than what its appraisal value is.
Yet another issue with this fast-and-furious market is that existing homeowners may find their current home selling from beneath them before they find a new place to live. "I know I can sell my house but where am I going to live?" Olson says. "We hear that all the time."
If we don’t build it, will they come?
Bryce Johnson of the HBA is well-aware that the metro area needs more diversity in local housing options. “We have young families trying to get out of rental units, so it’s very important to have that diverse housing stock,” Johnson told a crowd of businesspeople during a recent Chamber-hosted presentation on the state of the metro area’s housing market. "As far as the challenges we face, there are obstacles across the board in attainable and affordable housing.”
During her presentation, she outlined three major roadblocks that builders face:
1. Regulatory hurdles: Building regulations are important, Johnson says, but have become increasingly more inconsistent and difficult to follow. In a 2011 survey by the National Association of Home Builders, the total effect of building codes, land use and environmental codes had added $65,224 to the cost of the average new home. Ten years later, those codes and regulations have grown to add about $94,000 in costs to the average new build.
As an example, the frost-depth code requirement in North Dakota is 54 inches, but the frost-depth code requirement in Minnesota is 60 inches. “So if you’re crossing the river on Main Avenue, going from Fargo to Moorhead, is it really that different that the frost depth requirements should be that different?” Johnson asks.
This single difference in frost-depth requirements alone can add $3,000 to a home built in Minnesota versus North Dakota, she adds.
2. Building supply shortage: Again, courtesy of COVID, the supply pipeline for building materials has slowed considerably. It started with lumber costs, which soared 200%, adding a cost of $36,000 to the average price of a home, Johnson says.
Although lumber costs are starting to fall, almost any material needed to build a house is harder to source right now. “There’s either a serious shortage or some shortage. There’s nothing in between,” Johnson says.
3. Skilled-workforce shortage: The National Home Builders Association reports that the number of open residential construction positions grew by 87,900 in the last year, creating 266,000 open construction positions by February of this year.
According to North Dakota Job Service, there were 157 open construction-related jobs in Cass County in June, along with 100 active resumes. This is actually down from June of 2020, when there were 261 open construction positions and 41 submitted resumes.
Residential builders have also had to compete for workers with two big local projects, including the Amazon Distribution Center in Fargo and the FM Area Flood Diversion Project, Johnson says.
“If we cannot get the framers to the job site to complete the home, those dates for completing the project are delayed, which will impact the funding or financing and the closing dates of homebuyers,” Johnson says.
Due to these various shortages, a residence that once took four to six months to complete now takes six to eight months, says Lang.
The lack of a skilled labor pool has an even greater impact beyond construction hold-ups, Johnson says, as it can make it difficult to attract new businesses when those employers see the lack of a skilled labor pool along with the shortage of affordable housing for a prospective workforce.
Johnson says the HBA is working with community partners like The Chamber to find innovative ways to introduce more young people to skilled trades.
“For us, students aren’t getting introduced to the industry — partly because parents have a psychological roadblock that says you aren’t successful if you don’t have a four-year degree,” Johnson says.
How long can this last?
Although several local mortgage and real estate experts say the pace has slowed down a bit in the last month or so, lenders and Realtors are still busier than average.
Shawn Carlson, executive mortgage officer of Town & Country Credit Union’s 25th Street branch in Fargo, says loans doubled from 10 million in June 2019 to 20 million in June 2020. This year, they totaled about 13 million.
Lang of Guaranteed Rate doesn’t believe the pace has slowed down at all, and estimates he’s handled “triple to quadruple” the usual number of home and refinancing mortgages.
But several experts mentioned that they’ve started to see homes languish on listings until the owner is forced to reduce the price. “Sellers are trying to take advantage of a hot market, so they’re pricing their homes even higher than they’ve been comped out to sell, so we’re seeing more appraisal issues as well,” Olson says.
As for the future, well, experts can try to predict, but there's no crystal ball.
As long as interest rates stay relatively low, people are apt to continue buying homes. Before COVID, Carlson says, financial experts relied on a battery of different indexes to predict interest rates. But since the viral outbreak changed everything, the pandemic seems to be the most powerful indicator of all, he adds. When unemployment soared, rates plunged. When America seemed to be on the rebound, rates climbed. Now, as people talk about the delta variant, rates are again dropping. “COVID has changed the rules,” he says.
Economists at Fannie Mae, Freddie Mac, the Mortgage Bankers Association, and the National Association of Realtors forecast median prices will rise between 3 to 8% in 2021, a significant drop from 2020 but nothing like the crash in prices seen in the last housing crash.
In fact, experts point out that this latest dash for housing is significantly different from the housing bubble of 2008. While the housing grab that led to the Great Recession of 2008-9 was caused by a subprime mortgage crisis — namely, a flood of home loans granted to borrowers with poor credit histories — regulations are now in place to guard against this, says Jeremiah Kossen, president/CEO of Town & Country Credit Union. That includes rigorous underwriting steps to ensure the creditworthiness of prospective home buyers.
Kossen also says this housing boom is fueled chiefly by demand exceeding supply, as well as factors like very low interest rates, people seeking larger spaces so they can work from home, stimulus funds that have boosted buying power and a bullish stock market.
"I wouldn’t worry about a 2009 scenario," Kossen says, "but there is some downside risk related to a decrease in buying power or the stock market going down."
Even if mortgage rates rise a few points, Johnson reminds prospective homebuyers that they will still be incredibly low — especially when looking at the 18% mortgages of the early ‘80s. “Today’s homebuyers really probably have no idea how interest rates were such a barrier to home ownership,” she says.
And, despite the price increases locally, Johnson points out that Fargo is still one of the most affordable cities in the country to buy a home. In May, Forbes listed Fargo's median home price as $244,000, which is 26% below the national median.
In the meantime, the experts advise homebuyers to resist getting caught up in the madness and to trust that when it's time, they'll find their home. "Don't buy something just to buy something," Olson says. "The right one will come along."
Tips for landing your dream home
Here's the house hunter's formula for frustration:
Low interest rates + low supply of housing stock = high stress.
But don't give up. We talked to several real-estate pros to get the low-down on how to successfully reel in your dream home, even in a highly competitive market.
Get paperwork out of the way. It's a given that you should get the pre-approval process out of the way before you start looking, but Travis Lang of Guaranteed Rate takes it a step farther. He actually advises people to bring the completed underwriter's paperwork to this initial meeting. It's extra work upfront, but it sends a strong message about how serious the buyer is about buying a property. "This isn't just a maybe person. This is a 100-percent approved person," Lang says.
Check your credit. Even if you're not in home-buying mode yet, it's never too early to work on your credit. Pay your bills on time, watch your debt ratio and keep an eye on your credit rating. There can be detrimental information on your credit report without you even realizing it, says Shawn Carlson, executive mortgage officer with Town & Country Credit Union, Fargo. And it might not even be your fault. More than a third of Americans found at least one error on their credit report, according to a new Consumer Reports investigation.
Looking to fix bad credit? Consult with your agent on how to improve it.
Consider this old house. Kipp Harris of Kipp Harris Real Estate says first-time homebuyers sometimes steer away from older homes, because they worry they could be a money pit.
Plenty of older homes out there may have a new roof or upgraded plumbing and require less upkeep than a 30-year-old home in which all infrastructure is original, Harris says. They also tend to be in established neighborhoods with few to no special assessments.
What if more expensive repairs are needed? Many potential homebuyers aren’t aware there are certain programs, such as FHA's 203(k) mortgage, which allows qualifying borrowers to borrow money for home improvements as part of their loan agreement. For instance, after the buyer pays closing costs, the loan agreement might stipulate that the buyer hire a licensed contractor to replace the furnace within a certain time frame. The work is completed, the contractor is paid by the lender and the cost of that project is then rolled into the home loan. Just make sure you have a real estate agent and lender who know about these programs, Harris says.
Always be closing: In this seller's market, prospective buyers need to be prepared to pay closing costs. A seller who doesn’t want to pay closing costs likely has three other offers on the table, and can just turn to the next one who's willing to pay closing fees, Harris says.
Put more money down: Money talks: Sellers will often take the offer with the most money down. So start saving money now so you can show up at the table with a bigger down payment, advises Nick Olson, president of the Fargo-Moorhead Area Realtors’ Association. Many states have programs that offer down-payment assistance. North Dakota's is especially good: It offers 3% of purchase price for down payment to the seller and that portion is forgiven after eight years of living in the home.
Be a first-time homebuyer - again. Harris says many people don't realize they qualify as first-time homebuyers — even if they've owned a home before. If it's been three years since you owned your last home, you could qualify again. Potential buyers also shouldn't automatically disqualify themselves from this program because they think they make too much money. "The income limits are actually quite high," Harris says.
Don’t skip the inspection: In efforts to get your offer moved to the front of the queue, some prospective buyers will forgo a professional home inspection. Resist the urge to skip that step, Harris says. “Home inspectors do a service that people can’t even begin to understand and appreciate. They see things that your Uncle Joe, even if he is a qualified contractor, will not think to look at.”
Compare and contrast: You might also be tempted to speed up the process by passing on market evaluations. This isn't advisable, Harris says, as it's important to know how your prospective property stacks us against other properties in the neighborhood. In such a fast-paced, competitive market, you might act more impulsively. "Make sure the house is worth what the seller is asking," Harris says.
Trust the process. It's frustrating when you don't get the house — especially if it's the house of your dreams. In his 14 years in real estate, Harris has seen it happen all the time: A buyer is heartbroken over losing THE house, only to find another house later that is even better for them and their lifestyle.