Friday, July 29, 2016

Portland Transplants will continue to Drive Local Market

The City of Portland is more of less built out already. In fact a case can be made that Portland has been effectively built out for decades. When a City reaches build out and has no more room to expand, then real estate becomes tight. Portland is surrounded by other cities and protected space so as to have no more room to grow. There is no new land in Portland, only reclaimed land. This makes building in Portland more expensive and thus pushes prices on resale homes ever higher. It is a dilemma faced by many cities in America.

The rising housing prices in our next door neighbor has put pressure on the markets in surrounding areas such as Beaverton, Hillsboro, Gresham, and of course America's Vancouver. These surrounding areas have room to grow and room to build new homes and that keeps the relative price of housing a little lower compared to Portland.

For many years now, Vancouver Washington and Clark County at large has been a primary destination for Portland transplants. We are close to Portland, we have excellent schools, great highways, and a wide variety of housing types from urban high rise condos with stellar views, to Southern California style suburban neighborhoods with 4 beds in a culdesac.

Portlanders continue their exodus into the promised land of Clark County. These buyers flooding our market have pushed the entry level real estate to the brink. They have created a dynamic of puffed up low end houses but the middle market still enjoys some flex in pricing. $275,000 for a dated 1950s rambler but 25k more buys a brand new house the same size. It is an interesting scenario that there is little jump in price from a 1200 SF 3 bed 2 bath and a 5 bed 2.5 bath home in some neighborhoods.

There will always be those who want to live in the "city" regardless of housing costs. They who would live in a one room studio for $2000.00 a month before moving to the 'burbs'. Portland will always be that "city". No matter how big Vancouver USA gets, Portland is the core city for this region. So it (Portland) will continue to produce higher density housing on reclaimed land to keep the real estate market from stagnating and will continue to produce buyers for the adjacent cities like Vancouver, WA. that offer more traditional detached housing at prices that working class people can afford.

I suppose this synergenic relationship can benefit both cities. Portland continues its rise among major US cities as it become more urbanized and cosmopolitan, while Vancouver continues its mixed use approach with a rising downtown "city" core and a continuance of some of the urban sprawl.

Here in the 'Couv' we can enjoy the fact that as tight as inventory is it's not as bad as it is south of the river.

Friday, July 22, 2016

Country Properties Have their Own Set of Concerns

Many people have always dreamed of having a country estate on a nice big 'spread' of land. This is all fine and well but often these types of properties can have their own issues before and after purchase.

Buyers using FHA financing have to be acutely aware that larger than 5 acres is something FHA gets 'nervous' about. I just closed on a manufactured home sitting on 17 acres and that was a tall order to get done. But we got it done, none-the-less.

Both buyers and sellers need to understand that these types of properties are often more challenging to close. This is not the type of transaction to try out on that brand new loan officer. A seasoned pro is needed to navigate the treacherous waters of government backed loans.

Buyers absolutely should get an inspection on any property, but a rural place on large land is even more critical. Out in the country natural animal pests are a larger concern and often these types of properties have the additional concerns of a well and septic. These can be expensive to fix or replace and buyers need to be certain they understand what they are getting into with a particular property.

After purchase, buyers need to be very pro-active in sealing up any possible entry points for rodents and other wild critters. If the parcel is large enough or covered in forest, vegetation and such, as to not be all visible in one take, walking the property on a regular basis is important. You don't want people dumping on your land, nor do you want to let encroachments or squatting go on as this can lead to expensive and time consuming legal problems.

The bottom line is that the dream of a country estate is very accessible and following good practices can make that dream a lifelong reality.

Friday, July 15, 2016

Rate usually beats price.

Low rates persist and low rates are often better than low price...

originally posted February 9th, 2015 by Rod Sager

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. 

Friday, July 8, 2016

60 Day Close, The New Norm?

As I mentioned in last week's post, appraisals are taking more than a month to complete and now with an uptick in closings banks are getting backed up in underwriting as well. Buyers utilizing a government backed loan product ought to be prepared for a 60 day closing cycle. Even conventional loans could find themselves tickling the two month mark.

One of the issues is that sellers and their agents need to recognize that two offers identical other than one with a 30 day closing and the other with a 60 day could effectively be the same offer. Taking the 30 day close deal very likely will result in a 60 day closing anyway as the Realtor on the other side will almost certainly be asking for an extension when the deadline arrives and the appraiser hasn't been out to the property yet. The longer closing cycle could show the seller that the agent is realistic about timelines and it should always be noted that asking for 60 days does not mean it can't close before. Unless the buyer specifically needs that much time an offer can come in as on or before such and such a date.

Realtors need to also submit their offers to the seller with a solid explanation of the buyers position. The buyer doesn't want to lose a opportunity in this tight might over confusion about their ability to close as quickly as anyone else. These kinds of exaggerated seller's markets lead many buyer's agents to try tactics to make the offer look better. There is nothing inherently wrong with that, but putting a thirty day close on a VA or FHA offer in this market under the current conditions is not exactly forthright either.

Until the issue with appraisals is settled, and I believe it will be adjusted in the next several months, 60 days could be the new "normal". Sellers simply need to be aware of these conditions in the marketplace.

Friday, July 1, 2016

Appraisal Companies Have Ruined The Process

During the run up in real estate from 2000-2008 there were a small percentage of appraisers that engaged in unethical and even illegal behavior. Padding appraisals to get higher values for greedy loan officers that were pushing cash out refinances. This practice contributed to the heavy losses and burden on the taxpayers during the "bailout" in 2009.

It stands to reason that the Congress would take action to limit this bad behavior in the future. And so they did with sweeping regulations and changes to the whole process of borrowing money for real estate. Senator Christopher Dodd and Congressman Barney Frank chaired to effort to create legislation to severely curb these and other bad practises.

Part of the legislation mandated that appraisals all be handled through a regulated appraisal company and that appraisers are to be randomly assigned to files with no interaction between the loan officer and the appraiser. This part makes sense as the shady dealings were often between the loan officer and the appraiser. The solution to one problem has created another problem, which has become multi-faceted.

Appraisers have begun to take on the government employee attitude of "I don't care". There is no accountability, there is no reason to put forth any genuine effort to do any kind of service. Appraisers are slow, they ignore common real estate time lines with impunity. They are now akin to employees in the department of redundancy department ;)

Furthermore the cost of appraisals which is now 100% borne by the buyer, has nearly doubled. I just had a client pay $925 for an appraisal with which has taken more than a month to complete. This was a $250,000 house. The appraisal company had all kinds of extra adds for location (which was not at all very far from town) mobile home, land size, etc. That same appraisal 9 years ago when the market was much busier than it is now would have taken half the time and cost at least 40% less money.

The appraisal is mandated by the bank to protect them from lending too much money on a home relative to its value. The buyer is paying for a report that is specifically for the benefit of the bank and is now being exploited and to put it curtly, extorted. With this new layer of shielding between the bank and the appraiser, I think it is safe to mandate the bank pay for their own appraisals.

Appraisals locally has become an extortion racket the likes of which you might find in a Sopranos episode. The buyer must pay what amounts to extortion and they have NO CHOICE in whom they "hire". There is no free market influence as the appraisers are randomly assigned. The free market is what keeps people in business working hard to provide good service at a fair price.

I believe that if banks were paying these outrageous fees, there would be a holy terror of change, and this cavalier attitude, slow work pace, and puffed up pricing would be under control faster than a downtown parking space is filled.

Dodd-Frank was designed to fix some genuinely gaping holes in the regulation of mortgages and for the most part it has been successful. The appraisal process however has become a Soviet style mess and needs immediate repair.

All of this ranting aside, for buyers and sellers it is important to note that the appraisal needs to be ordered very early in the process. Buyer's agents need to make sure the lender orders it immediately upon mutual acceptance of the purchase and sale agreement. Even with that, closing in 45 days has become a challenge.

I believe that this situation with the appraisals is a genuine consumer protection issue and perhaps our state and federal representatives should get a mailbox load of complaints from 'we the people'.