Friday, March 30, 2018

How will Rising Rates Tug on our Market?

Since the beginning of the year mortgage rates have been on a rather steady upswing. It's not like they have launched into space, but rather just a slow and steady rise. The 4th quarter of last year more than 3% GDP growth and that was the best quarter since the economic crash in 2009. This is putting upward pressure on rates. A strong economy is nearly always met with higher interest rates.

For the real estate market, higher mortgage rates are a real braking device. A buyer looking at a $300,000 mortgage can expect to pay a principle and interest payment of $1347 at 3.5%. This of course doesn't include taxes and insurance but those are not readily affected by rates. At 4.5% that same $300,000 loan has a PI payment of $1520. At 5.5% it rises to $1703. A $356 increase in payment generally will require an additional $700 to $1000 in monthly income to qualify. Even if housing prices stay flat and do not change, buyers will lose buying power as rates continue upward.

Most analysts are expected the price appreciation to soften in 2018 to around 3% - 5%. Even at the low end of that scale a $315,000 house will be $324,450 in a year. If a buyer can get 4.25% today that house with 15K down will have a PI payment of $1476 plus a few hundred more in taxes and insurance. Next year at the low end of analysts projections the same house will have a PI payment of  $1657. That is more than $200 a month more expensive. That means at least $500 a month in additional income to qualify.

I still find buyers that are resistant to this concept and often they find themselves priced out of the market or settling for way less house than they would have been able to afford had they acted earlier. The worst part is that over time the interest rate does much more financial damage than paying a higher price. The rate of principle reduction is slower, the total amount of interest paid is much higher. In fact, a $300,000 mortgage at 4.5% will have a total of 360 payments of $1520 for $547,200. At 5.25% it's 360 payments of $1657 for $596,520. So just three quarters of one percent leads to $50,000 more in payments over time.

Rates are on the rise, so it's time to buy or die. So to speak.

Friday, March 23, 2018

Real Estate Drama, It's Real and it's Usually Avoidable

Yes my friends drama loves to make an appearance in nearly every real estate transaction. But most of the time it can be avoided with a few simple rules. First of all expect the best but plan for the worst. All parties need to build in a cushion for the potential hiccups that can slow a transaction down. Don't be in such a hurry, things seem to take forever but then that last week and it's all, "Holy crap I'm outta time!"

Don't be "that guy." I have noticed that lenders are getting a bit faster at closing loans. The lack of inventory creates a slow down in sales and the interest rates are creeping up and that slows down the refinance business. This is a welcome condition having the loan done on time. There are however a great many hands stirring the pot of a real estate transaction. Any one of these many entities, the appraiser, the inspection, the moving company, title and escrow, etc. can have something come up that causes a delay in closing.

Try to build in a cushion, keep that rental unit for two weeks after closing. Now if there is a delay you still have a nice cushy 10 days to get moved. Seller's, negotiate a short 3-5 day rent back as a just in case, scenario. You may not have to utilize it but if there is a problem, you are covered on time. Remember that some transactions are like a set of dominoes each one falling and hitting the other in a chain reaction. One buyer is selling their house to buy another and that seller is buying another and so on and so forth. Just one of those transactions has a hiccup and all the others fall too.

It is always best to be safe!

Friday, March 16, 2018

Thousands of Condos and Apartments Coming...

Vancouver and Portland are both bringing thousands of new condo and apartment units online over the next few years. The local rental market has been as tight as the local housing market and these units should help to ease the puffed up rents, particularly over in Portland.

These new units coming online locally in Vancouver are by no means limited to the massive waterfront project that has phase one under construction. The first series of units should be available sometime this summer at the waterfront.

A great deal of new units has come online in greater downtown very recently including a sizable project called 15 West apartments on Mill Plain between Esther and Columbia, another project at 13th and Columbia, Senior apartments at Mill Plain and Esther near VanVista, and the Uptown building recently complete at 17th and Main. Also under construction is Our Heroes Place at Mill Plain and E Street.

Apartments are under construction all over Vancouver in an effort to keep up with an increasing demand. The waterfront apartments and condos are not likely to be in the "affordable" range. The city will have a certain number of units for "affordable housing" as part of development package, but most of these units will be more expensive as this is a desirable location with Columbia River waterfront exposure.

These waterfront and downtown mid-rise and high-rise apartments and condos will be a little more expensive but they will take the pressure off of the rents in more modest apartment complexes that have been pushing the boundaries ever higher on rent. A 2 bedroom 1 bath apartment in a suburban east Vancouver complex was easily had for $600-700 in 2007 at the peak of the market before the big "crash". While housing values plummeted, apartments suddenly became scarce as owners became renters in large numbers. Those same $600 units are now nearly double that amount. I would love to see a little rental pressure release to soften prices in older and less well maintained complexes and put a proper spread between the values of a more luxury complex against a more modest development.

Now that the city has opened up this floodgate of apartments, it is time to open up the floodgates for employers to come in with good stable, high paying jobs. Vancouver USA needs to aggressively go after employers from all over the nation looking to move to the Pacific Northwest. Our area is currently very popular all around the nation, we are a bit of a "hot spot" and this is the time to capitalize on it by getting medium and large employers to locate here.

Having rents moderate a bit will also take a little pressure off the purchase market and that might be a good thing. Inventory has been so tight that buyers are being squeezed to the last drop. A little less buyers would moderate the market and help keep a sustainable appreciation rather than marching towards a "bubble."

Things are looking good in America's Vancouver.

Friday, March 9, 2018

Infill is the Future

Infill Development
More and more municipal governments are reigning in the excessive sprawl of suburbia. The notion of 10,000 square foot lots with 2000 foot ranch style homes gobbling up endless acres is starting to wane in popularity.

There are many reasons for this and among them is the rising cost of land and the development of that land. State and federal requirements for environmental controls as well as local planning are leading to an inflated price for build able lots. This gives developers an incentive to place the largest house possible on the smallest lot possible. They have to maximize the land use to maximize profitability. This means that buyers seeking the classic big ranch on a huge lot will either have to dig ridiculously deep into the bank account or seek out an older resale home. Even the latter however will be expensive.

Young people however are more likely to feel forced to accept the notion of a townhouse, condo, or a smallish house on a really tight lot. Millennial buyers are among this group and they a by far the largest buying block in the country today.

Vancouver, Washington is among the many US cities that is actively promoting the infill style. It is good for cities as they can concentrate public services and associated private commercial development to create a more manageable land use program with less infrastructure and better traffic. In the picture at top left, a snapshot from Google Earth shows a typical infill development of large homes stuffed onto small lots in and older established neighborhood. There are 16 homes with sizes of around 2500-3200 SF on about 2 acres of land. Adjacent is the old 1970s neighborhood
with 8 houses on roughly 2.5 acres.

Vancouver, WA has a large urban growth boundary that wraps around the existing city and totals roughly 85-90 square miles of area. Within that area are approximately 300,000 people already. With infill the area could easily support another 50-100,000 more over the next few decades.

Although this style of land use has many benefits to community planning and urban living, it has a major side effect. It tends to drive land values and development costs higher. This has certainly been the case in the Portland Metro Area over that last few decades. Restrictive lands use policies have lead this area to go from having homes price at roughly the national average in the 1980s to nearly double the national average today. Some may argue that land use planning has only been part of the issue, and they may be right, but there is no doubt a direct correlation.

So this trend is likely going to continue and in likely to get even worse as the side effects of sprawl are measure against the side effects of infill. Infill will almost certainly win the war.

Friday, March 2, 2018

Time to Revisit Interest Rates

I have been warning of rising rates for several years and the Fed tried to keep a lid on rates to help the economy. The economy is now moving very well. Strong enough that inflation worries have now replaced economic worries. This has led to actual treasury bill increases and a strong tug on rates is underway. There has been a slow but steady increase in mortgage rates since late last fall and this is expected to continue.

 Many buyers are still trying to find a house they can afford. I can't help but notice that some buyers remain hesitant to buy a house and often over a trivial matter. That is all fine and well but the train is leaving the station, and some will be left standing on the platform.

Here is the deal. The rise in rates has been slow and steady. It isn't enough to turn the market around and cause prices to fall. It is however enough to slow the rate of price growth. Most analysts are predicting a much more modest gain in pricing in 2018 than we had in both 2016 and 17. But prices are still expected to rise and more importantly the cost of borrowing money will go up. Borrowing is a much larger burden than price.

Let's look at a scenario. Sally and Bob get approved for a loan in February for $300,000. The loan officer has qualified them based on their income and debt load. Let's say that they have an income of $5,000 per month. So they qualify for $1450 a month plus taxes and insurance at 4%. Now let's say rates continue to rise at their current pace. By May they will no longer be able to get 4%. Now rates are at 4.5% Now the PI payment is $1520. They will have to come in with extra cash to "buy down" the rate or settle for less house. But the homes are a little more money now. So prices have risen by 1% and their borrowing power has dropped to $282,500. So the house went up $3000 and the loan went down $17,500. They have literally lost $20,000 in buying power in couple of months.

This is the scenario that is building into the market now. Buyers are not the only ones that need to be concerned. Sellers looking to sell the current house and buy another one may find themselves in a pickle if they keep waiting to sell their house. Inventory is squeaky tight right now and buyers are ready to snatch up seller's listings, yet sellers are sitting on the hands. Meanwhile, what ever house the seller plans to buy after finally selling their current house, will end up costing them more in the form of higher rates.

Cash buyers are of course somewhat immune to the interest rate issue. In fact rising rates help the cash buyer as it tend to slow down the rate of growth in pricing. Steep increases in mortgage rates can lead to lower housing prices.

Interest rates are far more destructive to buyers than price. Keep that in mind as we watch rates start to move up towards the more typical 5-6%. Rates have been at or near historic lows for the last 8 years and things are beginning to return to normal.