Friday, February 27, 2015

As Prices Continue their Upward March, Buyers may be Left Behind

I have been harping on the idea of buyers sitting on the fence till they no longer qualify for several years now. And over the last 18 months I have watched as the required qualifications to buy an entry level home have crept up higher and higher. In 2011, I had no problems getting a pair of minimum wage earners into an entry level house. Now this is an unlikely scenario. Houses that were solid first time home buyer residences were selling at prices between $115,000 and $140,000. Now those very same houses are pushing through the $200k barrier.

Wages are rising at best 3% annually, but housing is well above 7%. How long before a buyer watches their dream home become unattainable? Three months? Six? A year? Too many entry level buyers lose opportunity by being too picky about their first house. I certainly understand that buying a house is a BIG deal. People are generally spending the largest sum of money they ever have spent when they buy a house. Having some pushy agent leaning on them is no comfort. But the reality is that the first house is almost always just that, the first house. Once a buyer has their first home they now enjoy the benefits of owning versus renting. They enjoy that appreciation working for them instead of against them, the reduction of principle through monthly payments, equity, control, and often there are tax advantages as well.

Waiting for the ideal house may work out for a buyer, but the odds favor sellers in a recovering market. Buyers should be cautious that the house they are buying is in solid condition, safe, etc. but they also should be mindful that perfection rarely rears its beautiful head and compromise today will likely reward fantastic dividends later.

Most first time home buyers end up making a compromise between what they had hoped for and ultimately what they were able to find and afford. The longer a buyer waits for the "ideal" property, the bigger that inevitable compromise will be. Sadly, for many the compromise will end up being no home purchase at all and back to the landlord they shall go.

I have lost clients that did not like to hear that side of the real estate reality and so they find another broker that sings a different tune. In the end, they almost always end up with the compromise I told them they would face or they scurry back to a rental property. Far more often however, my clients heed the call of the mark and end up gloriously better off later. The house at the top of this article was a "compromise" back in 2011. My client needed a fair amount of space for his two kids but a detached home was out of reach. Three years later the market delivered his salvation. He paid $118,000 for that townhouse and sold it last summer for $152,000. Now he has the detached house he always wanted in a neighborhood that was out of reach before. Patience and a small compromise today can often bring amazing rewards a short distance down the road of life.

From 2010 through the early part of 2012 buyers could be picky and they could kick sellers in the teeth. But that was then and this is now. Sellers run the show and buyers need to work the market very hard. Buyer's agents have their hands full trying find homes for their clients.

For home owners thinking about selling, this could be a golden moment with bold rays of sunshine beaming down from the heavens and angels shall sing... Many sellers have found that their previously upside-down home is now in the clear and there are buyers lining up to make offers.

Real estate has always been an opportunistic endeavor. For buyers it is about beating the closing window of opportunity and for sellers it is about getting in while the buyers are frothing at the mouth for inventory. Is that a golden ray of sunlight I see? Hark! can you hear a hymn of fortuity singing down from the heavens?

Friday, February 20, 2015

I am away, but look at this...

I am out of town this week on business, but this post still resonates today. I'll be back next Friday.

Originally posted on August 29th, 2014. by Rod Sager

The trends in home building for middle income buyers has been larger homes on small lots. Builders have been stuffing 2200 square foot homes onto 4000 square foot lots. There is a wow factor when a prospective buyer walks into a brand new house with 2200 square feet of space and all the nice modern features.

The trade-off has been in the "real estate" portion of the deal. These gorgeous big houses had nearly no yard and a tiny so called two car garage. For the very same money a buyer could look at a 20 year old home with 1800 square feet sitting on a large 10,000 square foot lot. Sure, that house was a more dated design, but often the seller had done updates to improve the feel of the home.

So buyers that find themselves in the local market with a $250,000-$300,000 budget will face the same dilemma. 'new on small' or 'old on big'? That trend of new on small even pushed it's way into the bottom of the upper income homes. There are a great many 3500 square foot homes stuffed onto 5000 foot lots here in Clark County as well. Some of these are top quality builders cramming luxury homes onto postage stamp lots up on Camas' Prune Hill.

Buyers should consider that land is valuable. It is a major part of the real estate equation. Having a large, safe yard for children or grandchildren to play in can be most valuable. Summer parties in a real backyard are hard to beat as well. Buyers are well advised to look at a range of homes from new on small to old on big before making that final decision. There are strong merits to both concepts. personally I am at a point in my life where a big house on a small lot would be just dandy! One should just make sure they are choosing the property that will serve them best rather then the property that offers more bling.

Friday, February 13, 2015

March is Good for Listings!

Originally posted on this blog, Friday, February 28, 2014

Why Listing a Home in March Works
In most real estate markets there is a sales curve that peaks in the summer months and bottoms out in the dead dark of winter. I believe that this cycle is as mental as it is anything else. People tend to be less active in the winter, especially in northern latitudes with cold and miserable weather. It is no surprise that e-commerce performs well in the winter and bricks and mortar retail does not with the notable exception of December holidays.

Information data and chart sourced from RMLS

Our real estate market locally has a modest sales spike in the summer months of roughly 10% above the annual monthly average and about 10% under in the middle of winter. That represents a total swing of roughly 20%. In some markets where winter weather is truly brutal, I would imagine the spread is significantly greater and in sunny SoCal it is probably a flatter curve. The chart above shows this annual trend with a notable exception in 2010 where the fall off came early. The 2013 curve was a more dramatic seasonal curve than the statistical average I compiled since 2001.  The 2011 curve is very typical when compared to most of the years since 2001. The 2013 curve is more like one I would expect to see in severe winter climates like the upper Midwest.

I think the best way to wrap your arms around this is to break the home buyers into two very broad classes. Those highly motivated to buy with external pressure and those buying because they can. So the first group is motivated by things such as a job transfer, loss of job, a new baby on the way, divorce, etc. This is external pressure and that makes someone willing to trudge through a foot of snow in the cold misery of January to look at houses or deal with the inconvenience of listing at a time they would rather stay indoors and visit with family.

The latter category is someone with a new job with higher income and maybe they think, "Hey, we can finally afford that dream house on five acres". Or perhaps they are empty-nesters looking to downsize. These buyers and sellers are much more likely to list or start the buying process when it is convenient. They are less likely to brave the wild elements of January looking at houses.

Anther reason there is a spike in sales in the summer is that families with school age children prefer to move over summer vacation when the kids are out school. This is especially true if the children will be changing schools after the move.

In a real estate market like this one; the biggest driver has been lack of inventory in that under median price range. When inventory increases that will relieve some of the pressure and could stabilize prices. If a seller has a home that is a little less than ideal; this is the time to list. This market is driven right now by move in ready, clean condition, updated properties. If a listing is a little outside those ideal parameters, the best way to sell it is in a market with less competition. As more listings come on the market toward May, the house can lose value and or position against superior properties that become available. March is a great way to tap into the "spring fever" of home buying a little ahead of the market. This is the time to get that slightly out of favor listing in front of buyers before a wave of potentially more desirable properties arrive on the scene.

If a seller has that perfect updated, move in ready median priced listing, then sometimes waiting till April can be a smart move so as to tap the increase in buyers actively looking that occurs in mid to late spring. Of course one way to get it both ways is to list in March at a slightly high price, gauge activity, get feedback and either sell at a high price or build a strategy based on the feedback and activity in March and April to position the listing ideally for May and June.

March Madness is amazing for college basketball and can be equally so for real estate.

Monday, February 9, 2015

Why Interest Rate is more Important than Purchase Price

So many buyers get wrapped up in the notion of securing the lowest price on a house. This is part of the natural buying process. We all want a great deal right? The funny thing is that we are generally selective with that desperately seeking deals mentality. Houses, gasoline, electronics, and cars are items that Americans will shop to death until they find the golden deal. Other things like groceries, clothing, and shoes not so much. I see people buying Campbell's soup at whole foods. $2 for the same exact product Winco sells for 99 cents. Whole Foods offers many top grade products that are not available at discount markets, like Winco. So Whole Foods has its place. Funny thing that is. Oddly purchase price on items we pay cash for is paramount. It is the only thing that matters so long as the product is the same. Houses have many variables. The largest of these is interest rate. I think it is very important to recognize what the difference is between even subtle rate changes.

Two scenarios interesting results:

200,000 home 30 years fixed FHA at 4.5% with 3.5% down.

  • Down payment is $7,000
  • PITI payment is $1,371
  • Total of payments over 5 years is $82,260
  • Total interest paid over 5 years is $41,609
  • Balance on loan after 5 years is $175,935
210,000 home 30 years fixed FHA at 4.0% with 3.5% down.
  • Down payment is $7,350
  • PITI payment is $1,368
  • Total of payments after 5 years is $82,080
  • Total interest paid after 5 years is $38,960
  • Balance on loan after 5 years is $183,291
Using a fixed annual appreciation of 4% (actually lower than we are seeing now) we can calculate a future value for both houses. The first house would be valued at $243,331 and have an equity position of $67,396. The second would be valued at $255,497 with an equity position of $72,206. The lower interest rate on the loan allows for a more rapid pay down in principle and places the buyer in a stronger position to sell later. We always want the best price but not at the expense of a higher rate of interest. Right now rates remain very low, lower even than I used in these scenarios. Buyers may miss a golden opportunity if they wait to long to buy. Many buyers continue the effort to barter down prices in a seller's market. With each house they fail to buy due either to being out bid or flat out rejected by the seller, they run the risk of an interest rate hike. Even if they get the "deal" they are seeking, in the long run they may very well still end up paying more and they probably "settled" on a less than prime home. 

Let's look at two more scenarios with a larger down and long term implications added:

$200,000 home 30 years fixed at 5.0% with 20% down

  • Down payment is $40,000
  • Amount borrowed is $160,000
  • PITI payment is $1,116
  • Total of payments after 30 years is $309,209
  • Total interest paid after 30 years is $149,209
  • Total of payments after 5 years is $66,960
  • Total interest paid after 5 years is $38,461
  • Balance on loan after 5 years is $146,925

$210,000 home 30 years fixed at 4.5% with 20% down  

  • Down payment is $42,000
  • Amount borrowed is $168,000
  • PITI payment is $1,108
  • Total of payments after 30 years is $306,443
  • Total interest paid after 30 years is $138,443
  • Total of payments after 5 years is $66,480
  • Total interest paid after 5 years is $36,219
  • Balance on loan after 5 years is $153,145
Here I used twenty percent down so the difference is less dramatic. The striking fact here is the house that cost $10,000 more has a slightly lower payment since the interest rate is a half point lower. The fact is the half point better rate buys 5% more house. Too many buyers hold out for the best price only to find that rates go up or that prices go up and the deal they are seeking never materializes. Notice how much less interest is paid in the first five years on the more expensive house. The buyer of the $200,000 home will pay $2,200 MORE in interest over the first five years with the higher rate. 

Let's assume again the real estate market appreciates at an annual rate of 4% over the first five years in each of these transactions. This time lets handicap the more expensive house by suggesting it was slightly over price and the "cheaper" house was slightly under priced. Let's say the target value of the scenario one house is is $202,500. Scenario one represented a $2,500 "deal" and scenario two was $2,500 above market so its base value is $207,500. In general the market doesn't allow for much fluctuation. And buying a fixer and fixing it up versus buying a move in ready home is an unfair comparison. After five years the market value of the houses is $246,372 and $252,455. All else being equal, scenario one (less expensive house) has $99,447 in equity and scenario two has $99,310. The more expensive house did have a higher down payment of $2000 and a higher loan amount by $8,000 and yet after five years the equity position is about the same. If the scenarios were not handicapped the equity position in the less expensive house would be $96,405 versus $102,353. In my experience they are rarely any "deals" in real estate. There are too many buyers competing for the same houses. Some buyers find "deals" by looking at houses that need a little TLC. They don't show as well and thus don't generate as high an offer. Once the TLC is done the buyer reaps the benefit of the now higher value.    

The moral of the story is that the lower price is nowhere near as important as most buyers think and interest rates determine how much house you can buy or more importantly how quickly you reduce principle on your loan balance.