Friday, January 26, 2018

Inventory continues to be tight

It seems that the market remains very tight on inventory anywhere near the median price. It looks like one has to get to 150% of median before inventory starts to push beyond 2 months. With rates creeping up and buyers scrambling it is still a tough go for the under $400k buyers.

I seem to be unusually busy for the dark and wet season. There is also some indication that we may see some inventory levels swell a bit as spring approaches. I welcome a little bit of moderation in the market.

Right now rates have been slow to move, but they are definitely headed north on the chart. This is just a year to date chart so it is only four weeks, but this could be an ongoing trend. For buyers this means time is of the essence. Even if inventory doesn't open up in the spring, rising rates will thin the herd of buyers and that will result in a softening of appreciation. Most analysts are still counting on modest home price gains for 2018.

I have said it many times before on this blog, rate is a much bigger killer of deals than price. For conventional loans the benchmark for house payment to income is 28%. Of course there are things in a buyer's profile that can create a variance. To push that number higher the borrower might have exceptional credit, extra large cash down payment, large savings, or any combination thereof. Government loans often have a housing ratio that can approach 40%. But if we use the standby rule of housing payment at 33% or 1/3 of income that means every dollar the payment increases the income must be $3 higher.

A borrower approved for a $300,000 loan at 4% will have a payment of roughly $1800 a month including taxes and insurance and this assumes no mortgage insurance. That typically requires a gross income of $5400 per month. Of course I have seen lenders under the right circumstance allow much more than 1/3 housing ratio, but a third is a solid baseline. If rates increase to 4.5% then the buyer is looking at an $80 per month increase in payment and thus will need $5640 per month in income. Don't forget that over a five year period the home owner will pay $4800 more in house payments at 4.5% than at 4%. Over the full thirty years... are you sure you want to hear this? You need to! $28,800 That is all interest for the bank and its investors that could have been in YOUR pocket.

Interest rates will need to rise all the way up to 6% just to get to the 50 year average so don't fret higher rates, just understand that if this trend continues, you will pay more even if prices were to drop in say 2019 or 2020.

Home ownership is mostly about equity investment. You own the property and you gain equity as you pay down the loan and prices rise. Rates and prices and all the drama, isn't worth diddly squat if you don't take advantage and buy your own home while you still can.

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