Friday, March 18, 2016

Entry Level is Getting Tight

Our local market has become quite tight for entry level detached housing. The pressure is overwhelming in the sub $230k market. With a median household income of 50k annually, a healthy market supports a median home price of about $200k. Our median is much higher than that. In fact the Clark County median is rapidly approaching $300k. We stand at roughly $275k with a year over year appreciation at 11%. If 2016 matches that growth rate $300k will be the mark by this time next year. I do not think we will, but the point is already made. A median earner cannot buy the median priced home or even anything remotely close.

Rents are also very high right now. A renter will pay $1500 for a 3 bed 2 bath 1500 foot ranch house in this area. That same renter can own a similar house with a mortgage payment very near the rent. Unless that renter is planning on leaving the area, why would he not want to own the home? The payment is fixed, it is harder to get evicted when you own, and the landlord won't throw him out because he IS the landlord!

The primary difference is that a landlord will rent a $1500 house to a 50k earner. A bank may not. This is what creates market pressure on the entry level. Buyers get locked into a $220-$230k price range and there is less and less available. Slightly higher earners bid the properties up in a desperate attempt to get as much house as they can before the market passes them by.

The middle and top of the market are starting to feel some of the pressure as well. Sellers of these $250ish homes are moving up to bigger and better things. They are starting to bid up homes a bit. The pressure will never be as bad at the top as it is at the bottom because there are ALWAYS buyers at the bottom but the top is a more exclusive market with far fewer qualified buyers. Inventory is the primary driver of the high end market where as demand pushes the bottom. Demand for upper end real estate tends to remain relatively flat but the entry level sees wild fluctuations based on economic conditions. Add a tight inventory in the entry to mid level market and things get dicey for buyers. We are dicey right now to be sure.

Many buyers qualified to buy a home a few years ago, but they allowed market fear to get in the way and they hesitated. Now the market has passed them by. When considering an owner occupied property, the time to buy is nearly always now. Yes exceptions are true, buying in late 2007 was not ideal, but one always needs a place to live and even those who bought at the peak before the great crash, still had a home to live in and those folks are now seeing all their equity return. While the home was financially "underwater" it still served its purpose as a shelter. In the grand scheme of things the only bad thing about the value decline was that it limited the ability to sell.

Too many people put too much into the "investment angle" of the home they buy to live in. Yes, we always want to make a sound investment. But unless you are renting out every extra inch of that house, you are not maximizing your investment. I did not buy the house I live in as an investment, I bought it to provide shelter for my family and to use it for my own needs. Its value is not important until I decide to sell it or leverage it. As a real estate professional I do tend to look at the investment side of buying a house even when I intend to live in it, but I never let the investment potential or lack there of, be the overriding factor in the purchase. The primary concern is its use value. Investment potential is supplemental at best. When I look at property for investment, then investment potential is the overriding factor and it dominates the decision to buy or not to buy. Everyone that sat on the fence while the market was down has now lost all the investment opportunity as prices have risen. They all should have bought at the bottom and failed to act out of fear. Now many of them have to rent instead of own. My clients that bought in 2010-2012 have seen the value of their homes increase 50-75%. Again it really doesn't matter unless they want to sell and move into a bigger house or leave the area. But they are enjoying a mortgage payment that is 30-50% LESS than current rents. That DOES matter. Right now rent vs own is about par on payment for a basic 3 bed 2 bath home. Why again are qualified buyers not buying?    

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