Friday, March 31, 2017

The Tax Refund Bump

Wanted : Houses like this. High Demand :)
Tax refunds are starting to arrive for many Americans and this can lead directly to a bump in buyers entering the market. With inventory extra tight, this will probably put additional pricing pressure on active inventory.

Tax returns often give buyers on the bubble that extra bit of "seasoned" cash they need to meet down payment requirements. Sellers can capitalize on the increased in buyers by holding out for the highest as new "bidders" intensify the seller's market conditions.

I have never been a fan of an overheated seller's market. So many real estate people like it, but I feel it is never really a good thing to have any consumer feeling pressure to buy especially something as illiquid as real estate. I like a nice neutral market where sellers have to actually present the home and buyers can be at least a tad choosy. Everyone wins in that scenario. In fact 2013-14 was fairly neutral except at the very entry level.

But if we cannot get more inventory in play, then this market will continue to produce ragged edge deals with multiple offers and multiple disappointed buyers. I still get buyers that cannot wrap their arms around the notion that they have to bid up over asking on many properties. For some people this just rubs against grain. Unfortunately they have to suck it up or stay put.

Listings are what this market needs right now, and sellers should not sit on the fence too long. For any potential seller that has a property they believe will be bought by a family with school age children, April and May are ideal months to list as that places move in day for the new owners during summer break.

I think it is safe to say that the "refund bump" is mostly entry level sub-median priced homes and these are already disproportionately priced relative to the mid to upper end. Homeowners sitting on a 1950s 3-2 in clean shape might fetch $250-$270k for that little house and then nearly double their living space in a step up house for $325-$350k. The demand for sub median priced homes is enormous right now and this bodes well for the step up buyer sitting on a small house that is really hot at the moment. Sellers can lose an opportunity if they wait too long as rates can rise and demand can fall off when buyers become frustrated and leave the market.

This market is so hungry for sub $300k property that anyone sitting on such a house has a great opportunity to sell the small house at a puffed up value and buy the step up house at a relatively and comparatively low price. Knock Knock, you here that... it's opportunity.

Friday, March 24, 2017

#200 How did that happen?

Well a few years ago I changed my monthly real estate newsletter that went out in email form to a weekly Real Estate Blog. Look at that! Issue 200 on this blog has already arrived. Yikes! I do thank all of you for reading this blog.

I do hope you have all found useful information regarding the state of our industry both locally and nationally. I do strive to bridge the gap between facts and conjecture. There is always going to be a great deal of speculation in an industry as influential and popular as real estate.

Speaking of speculation, interest rates are on the minds of many these days. There is a lot of chatter coming out of the financial world about where mortgage rates are heading on the news of a hike in the fed rate over the next few cycles. The Fed Rate doesn't have nearly as much direct influence on mortgages as many people think. It does have a significant indirect effect in that it signals to the markets at large the government's relative attitude regarding the state of the economy.

The Fed Rate (Federal Funds Rate) is a short term interest rate. In fact it is the rate at which banks charge each other for overnight loans. The reason banks make these overnight loans is due to Federal government regulations requiring them to have a certain amount of cash on hand at the end of every business day. Since banks are constantly moving money around, making loans and receiving deposits, they often find themselves short of the government regulated minimums and other banks are in excess of those minimums as billions of dollars move from bank to bank.

The reality is, it doesn't directly effect any long term lending. It does effect short term lending. The reason so many people in the industry point to it as if it were a direct influence is due to the reason the Fed Rate rises. The Fed's action is often due to a rise in inflation and is often raised in an attempt to slow the release of ready cash into the economy.

Generally when the stock market is hot, investors are less interested in collateralized long term debt as an investment. Making 3%-5% annually on mortgage debt is great in a bear market or in a less robust stock market. But when the wall street bull is running the big money starts to gravitate towards stocks and that means lenders need to "entice" the investors with more generous rates of return.

As far as long term mortgage rates are concerned, I have been warning that the 3% party was going to end. In all honesty, it lasted WAY longer than I ever expected. Frankly, it is a testament to the fact the the recovery from the 2008-09 crash was much slower than our slick politicians in Washington DC were willing to admit.

The bottom line on mortgage rates is this. Over the last 70 years rates on 30 year real estate notes has averaged around 6.5%. We had historic highs in the 1980s when mortgages were deep into the teens and historic lows just recently when 30 year money was available in the low threes.

Buyers need to recognize that over the long haul paying a higher mortgage rate will hurt them more than paying a higher price for a home. This market offers no favors to those sitting on the fence. Sellers likewise need to recognize that the robust seller's market will slow a bit as interest rates rise. This means they need to drop the attitude that leads them to believe they don't need to accommodate buyers, and follow best practices for selling a home.

Our real estate market locally in Clark County has a much different dynamic than the market in bordering, Portland, OR. Portland is built -out. They only have infill and re-development options. There is no "new dirt" in Portland. They will likely continue to see pressure on the resale market. Here in Clark County, we do have available, buildable land. The builders are here and the nails are being hammered in. This puts real limits on the resale growth potential as new homes will always carry more value than resales, all else being equal. Right now the median home price county-wide is just above $300k. New homes are widely available in the $325-400k range and that means it will be hard to push a similar 20 year old resale much above the current median mark.

Additionally wages have not kept up with home prices locally and that will begin to slow the rate of new buyers coming into the market. Sellers need to decide whether to sell now or hold tight, but the future is uncertain where the now is known. Right now, we have a modest number of buyers seeking homes from a severely restricted inventory. This is good for sellers now, but when other homeowners decide to sell before rates get too high, inventory will swell and the sellers market will become more neutral. Now is a great time to sell that house and get your new home while rates are still low.

Thanks for helping me reach 200 posts and here's to the march to a thousand!

Friday, March 17, 2017

New Homes are Bigger and More Expensive

For the first time in years the average size of a new home actually dropped last year. According to the National Association of Home Builders, NAHB last year's median home size was 2392 square feet down from a peak of just over 2465. This in stark contrast to the median of just over 2000 SF at the turn of the millennium and 1400 SF in the early 1970s.

The development costs have gotten so high that builders truly struggle to make a profit on floor plans that have less than 2000 square feet. Most people are unaware of the cost of developing a lot.

Let's say a developer buys a plot of say 20 acres and decides to make a residential subdivision. There are many fees and studies required to get approval for the subdivision. There are also substantial costs to get connected to services. There are essentially two broad classes of expenses, General development costs and individual lot costs.

The broad costs are things like, cost to divide, traffic impact studies, infrastructure, environmental studies and mitigation, etc. The individual expenses are electrical, water and sewer connections, other utilities, lot prep and excavation, etc.

These are costs that have skyrocketed over the last few decades as state and local entrenched un-elected bureaucrats wield a mighty pen. This has been a big part of the upward trend in home size. Builders are trying to recoup all of the development costs by building bigger and more expensive homes.

Most people are unaware of just how much money is sucked into the bureaucracy. Don't get me wrong, there are many legitimate concerns, 'we the people' should have about how land is developed, but it the heavy hand of government is a bit out of control at the moment. I am not a land developer so for the purpose of this article I am using broad strokes and general estimates based on my experiences and research. Different markets and conditions lead to a great many variables, but the following represents a good idea of how it works.

Let's say that 20 acre parcel sold for $1,250,000. The developer would spend somewhere around $750,000 to get the subdivision through the system. This includes the endless parade of traffic and environmental studies, water runoff studies and appropriate mitigation, etc. Now the builder could have small 100 lots or 50 large lots. But the large lot will only net the builder maybe at best $10,000 more on price and maybe he could build bigger more expensive homes on the larger lots. So why have a subdivision with 50, $500,000 homes when she can have 100 $350,000 homes? The difference is an extra $10,000 in gross revenue for the development. More lots helps to spread out the costs to reduce the overall impact of the broad development costs on each individual lot.

Next the developer will have to build the public infrastructure. Yes my friends the developer pays to put in infrastructure that is then deeded back to the local government agency. There's another $1,000,000. So now we have 100 lots at a cost of $2,000,000 or $30,000 per lot. The developer has to get the individual lot expenses in line as permits to build, are needed, utility connections and such. A city sewer connection alone is somewhere in the neighborhood of $7000-$15000 depending on the local area. By the time it is all said and done, that little postage stamp lot has a cost of around $70,000-$80,000. The developer will sell the lots to a builder at a 8-10% profit so now the lot is around say $85,000 To build a very basic style of house with modest grade materials, two story, 1800 squares will run about $100 per foot. That means the raw costs to build in this scenario are upwards of $265,000. The builder will  need to make a 8-10% profit so that modest home hits the market at $290,000. If the home is built with nicer amenities and materials such as slab granite counters, solid wood cabinets, high grade flooring, fiber cement siding, etc. the build costs jumps quickly into the $150 per foot range. Now that 1800 SF luxury home is coming in at $390,000.

Developers take on a great deal of risk for what ends up being a modest 8-9% profit. Done right real estate developers can succeed and prosper, but the landscape is littered with development failures. If we want to create a market for new homes that our future generations can afford, perhaps the first spot to look is the bureaucracy.

Friday, March 10, 2017

Cocky Sellers are Missing Opportunities

This local real estate market is pretty hot, but it is not as hot as many agents and sellers think. The tension is based almost entirely on a lack of supply rather than an abundance of buyers. A seller's market for resale homes, based on the latter is much stronger than one based on short supply. Real estate, like most markets, is largely driven by the supply and demand principles of basic economics. It is a dynamic and sophisticated market with many subtle variables and nuances, but it is at its core still a buyer and seller driven model. Let me give you an example. Let's say a local market with a total inventory of potential resale homes at 100,000 units and a current listed inventory of 1000 homes. This represents a tight active inventory of 1%. Looking purely at the supply side, one could come to the conclusion that it is a strong seller's market. But demand could also be low. If there are only 200 active buyers in that market, then it really isn't a seller's market. But say there are 2000 active buyers vying for that tight inventory of 1000 listings. How quickly could that seller's market shift to a buyer's market? A springtime rush of listings swelling the active inventory to 5% could quickly shift the dynamics in favor of buyers. Now there are many variables to consider and these are basic rough examples, but I believe we are sitting on an average buyer demand and a very tight supply of sellers.

This is my case in point. Right now, our high pressure seller's market locally is completely supply side based. There is simply very little active inventory. There really is about an average number of buyers in the market. If our inventory comes back to an average we will watch this seller's market swing neutral. Prices locally have gotten high enough that half the buyers from just two years ago are priced out. Wages are not growing fast enough to bring them back in the short term.

What this means for the "cocky" sellers is that they still need to follow best practice. The home should be made as available as possible, with as few restrictions as possible. Seller's seem to be perched on this pile of attitude and yet they are still in a far more precarious position than they realize. The more buyers exposed to the property the better chance for a top-dollar offer. That one guy that thinks Mr. Jones' house is the holy grail, may never see it because Mr. Jones has all kinds of stupid restrictions on showing the property. So the one guy willing to pay that extra 10% may never be exposed to the property and Mr. Jones could leave $10-20 large on the table, if you'll pardon the mobster money parlance. Real estate agents that don't explain this to their clients are doing them a gross disservice.

Back in 2005-07 the local market was driven by an excess of buyers. There were easily 60% more listings than today but the number of active buyers was much higher. It was still a strong seller's market. Our market now is more likely to see an increase in inventory than an increase in buyers. Why? Because wages are the stopping point for buyers. With the county median above $300k, the typical house is out of reach for the majority of households. This is keeping the supply of fresh buyers relatively low. The seller's are enjoying this favorable market because inventory is still tight and that is more likely to soften than a sudden swelling of buyers into the market. Case in point is the RMLS data showing year over year increases in new listings since 2012. There has been a steady increase. Buyers are starting to get price pinched and seller's are slowly coming into the market, neutrality is closer than most agents realize.

This is a great time to sell a house, but the party may be winding down for sellers and buyer's could soon be back in control as people start bringing property to market. All those folks I sold houses to in 2010-2012 are sitting on a pile of equity and soon may begin listing their homes. I am not forecasting any precipitous drop in market pricing, but a slow down in appreciation and a shift from a seller's advantage to a neutral market is more likely than not.

To paraphrase Han Solo, "Great seller's! Don't get cocky!"

Friday, March 3, 2017

Open House Season is Upon Us

Well my friends it is March! But I trust you already figured that out. March here in the Pacific Northwest is a very fickle month. It can be an extension of winter or an entrance for spring. Sometimes it's both. In real estate it tends to be the month that things begin to pick up in advance of the traditional summer home buying season.

For sellers it is time to start prepping for that spring curb appeal. My lawnmower has spent the last 4 months hibernating in the garage; but at some point this month, it will likely make its first appearance of the year. Springtime tends to get people in a good mood. Buyers that have been frustrated with the tight inventory and multiple offers on overprice listings may start to soften up and start looking again.

Who doesn't like taking a spring drive to look at houses on that first sunny and warm weekend? I love that first true Spring day. We had a tickle last month when 60° popped up in the thermometer. But March can and may bring us an extended stretch of nice weather. That will bring the buyers out of the dark-gloomy-funk they tend to fall into in Winter.

Sellers still need to exercise basic principles in real estate marketing even in this "seller's" market. The better that house shows, the more likely it will fetch the highest possible price. The buyers will come out of the cave, and sellers need to be ready. Get that mower ready for the first warm weekend and spruce up that bleak winter yard. Spring is coming and real estate waits for no one. Get ready we will sell some houses this year!