Friday, December 26, 2014

2015 Could be the Last Chance for Deals

That headline should have got your attention. We have seen modest to robust appreciation across the USA over the last two years in the real estate market. The mortgage rates have been ranging from really low to ridiculously low and the economy has been slowly moving towards full recovery.

This has kept real estate as a value. Prices have run from the basement in 2010-11 rising to the point now that they are about where they were in 2007-08. Rates are the real story however. They unprecedented long run of sub 6% rates has kept housing active despite and overall economy that has run from dismal to fair.

2015 could represent a turning point however. If this economy gets into full swing, we very well could see the Fed back off the loan guarantees and rates could end up where they really should be in the 6% range. Coupled with the last two years of appreciation that would move the home affordability index much higher and lock out many buyers that can buy today but couldn't with 6% mortgage rate.

As an FYI 6% is still a very good rate and well below the 50 year historical average of 6.8%

Buyers should take care of their finances and get ready to buy in 2015 if they want to secure a housing "deal". The deal may not be so much a price deal but a rate deal. I have said it many times before and I will say it again here, rates kill buyers much more than price.

2014 has shown us that the entry level clean house was king. These little 1400 square foot 3 bedroom 2 bath homes have pushed up towards the $200,000 in the local market while just 10-15% percent more money buys a house nearly twice as large. These low rates have brought out the entry level buyers in force. Any upward movement in rates will "thin the herd" at the bottom and that could mean a serious appreciation slowdown at the entry level. I have seen the starter houses already showing signs that the economic ceiling has been reached. The middle however should continue to move up in appreciation with a modest but healthy rate of growth.

The real estate market doesn't just move in broad based motions. There are subtle differences for neighborhoods, price ranges, style, etc. Prices can be moving up in mid size house while remaining flat at entry level. That is my prediction for 2015 if we see interest rates move up into the 6% range. The market a few years ago allowed two minimum wage earners to buy the median priced home in our local market (Washington minimum wage at $9.32/hour). That is off the table now and that means a lot of buyers can no longer afford a house. This is why the bottom of the market has seen a leveling on appreciation. As the economy ramps up, middle income earners are getting back on the job, better wages, etc. that will help push the gap between entry level and mid-level back into proper proportion.

I believe the value proposition for 2015 will be in the upper middle and lower high end homes. Locally that means $350-500k. That is probably where the "deals" will be found. I am no Nostradamus, but that is where things appear to be headed. 2015, it's time to jump in. 

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