Friday, November 27, 2020

No Black Friday Deals in Real Estate

The real estate market is pretty hot right now. I know I have been writing about this for some time. But I still run into buyers looking for a "deal." But the real estate market will not tolerate a "deal." For every listing under $450,000 in our local market, their are multiple buyers interested and willing to offer. This means a house valued at $475k but listed at $450k will get multiple offers and likely sell for well over asking.

Our local market set a record for October sales and year over year performance and trends are pushing values up at nearly 1% per month. Buyers hesitant to offer over asking today, will only find higher prices on the next house they find after being outbid now. This can be a hard pill to swallow but the house a buyer gets today will likely grow in value over the next several months.

The "fear" buyers have is the fear of a market correction. This is actually in some ways an irrational fear but yet also rational. It is rational to be leery of buying an investment at or near the "top" of the market. But too many buyers focus on the investment angle rather than the utilitarian use angle. 

Every single day thousands of people buy a brand new car. Some commit tens of thousands of dollars to the effort knowing full well the value of that car will be HALF in just a couple of years. Why do they make this HORRIBLE investment? It's simple: they don't view it as an investment. They get the reliability of the brand new car, a warranty from the factory, and most important, the practical utility of ownership. They get to drive that car where ever they need to go. There is VALUE in that premise that far exceeds the "loss" of resale value over a short amount of time. 

Buyers looking for a home to LIVE in should hold the investment potential as SECONDARY to the utility value. The home is a shelter that is required to live a happy and healthy life. Shelter is one of the primary needs to survive, along with food and water. Worrying about how much profit you might make on this is silly and highly irrational. You make no profit on food or water that you consume, the benefit is: you don't die. Shelter falls into this category. You make ZERO profit when you rent your shelter from a landlord. In fact you will not recover ANY of the rent money. Rent is a total loss from an investment perspective. If a renter pays $2000 a month for a house, they are "losing" $24,000 a year. That is likely more than the down payment on a house of similar value. The down payment is what represents the buyers actual "risk" in the purchase of a home.

Even if a buyer pays $400,000 for a house and the market crashes a year later, leaving the value of that house at $300,000 they still have the utility value of shelter and if they used a loan to purchase it, the bank is carrying most of the risk anyway. Therefore buyers need to decide if the house they intend to buy is property they are willing to live in for several years. Buyers looking for a short term living situation are advised to rent unless they intend to hold the house for an investment after they move out. It really is that simple and the people willing to bid up a house over asking are doing so not because they are foolish, but because they want the utility that property offers and they are willing to pay more to have it.

It can be further noted that the 'great crash' of 2009-2011 led to a high rate of rental increases as landlords capitalized on increased rental demand due to a lack of competition from otherwise would be home buyers. My house lost roughly one third of its value right after the crash and I was even upside down in my loan. But my monthly payment was still about the same as a two bedroom apartment. But I wasn't living in a two bedroom house, I had a 2500 SF 5 bedroom house. I didn't worry about the short term 'investment' loss, this is my home, my shelter and it continued to provide that essential value despite its temporary loss of market value. The only downside was that I really could not sell it until the market recovered, in that sense I was a bit "stuck." But I certainly could have rented it out for more than my payment if I had needed to move away for some reason.

Buyers that are worried about 'losing' money and not making strong enough offers today are, wait for it... 


Friday, November 20, 2020

Market Remains Rather Spicy

October set a sales record this year and that bodes well for out local market especially if you are selling. We have moved from a neutral market a year ago to a strong sellers market. This in spite of a pandemic that has left a sizable swath of the population claiming unemployment benefits.

Buyers are finding multiple offer scenarios on nearly any house they offer on under $450k. It has been a while since I've seen this kind of volume in the autumn. The real estate outlook for 2021 remains mostly positive from the experts that follow the trends. 

Buyers are bit vulnerable right now as prices are rising and rates are about as low as ever. So if rates creep up and prices creep up then buyers quickly become eliminated from qualifying. Typically this is what leads to the real estate a slow down, prices rise fast enough to eliminate demand. The one thing that has helped sustain the growth is the significant rise in incomes over the last few years.

Lately the trends have been rather amazing but 2020 saw a disproportionate spike in median home prices versus the income, however rates dipped enough to offset the housing spike bringing down the actual percentage of median household income required to make the payment on the median priced home. The chart below uses national data, not local data, our figures are similar but higher on housing and income. The yellow line represents the percentage of income required to make the payment which is a general measure of affordability.

Friday, November 13, 2020

Will a Presidential Change Effect the Real Estate Market?

All indicators are that Joe Biden will be elected President and take office on January 20th, 2021. regardless of whether one voted for the new President or not, people may wonder how the top down change will effect our real estate market, both locally and across the USA.  

In reality it won't likely have an immediate effect. It will take time for the new administration to get its agenda out to the public and ultimately passed through Congress. If that agenda results in an economic slowdown, of course that could have a derogatory effect on real estate.

I have found that real estate can do well even in a down economy because people still have to live somewhere and owning your home still appeals to a large number of people. In fact this very year is a testament to that as the pandemic swept through the economy but real estate ran counter to the decline. Sometimes if the stock market crashes or goes into a slide a large chunk of capital gets moved to real estate as a "safe haven." This can lead to lower rates on mortgages, large capital investment in multifamily properties and commercial real estate.

The most important thing to remember is that we should all pay close attention to the policy decisions the next President makes and if you like them vote for that party in the mid-terms, if you don't, then vote for the opposition party in 2022.

In the mean time we can still enjoy the low interest rates we have right now and a solid and healthy real estate market as we move into the final weeks of 2020.

Friday, November 6, 2020

A deal isn't done, till it funds!

It is never a happy time when a transaction falls apart at the finish line, but in roughly 5% of real estate deals that is exactly what happens. In the overwhelming majority of those late inning failed sales it was neither fault of the seller or buyer. The bulk of issues comes up with loans. There are a lot of moving parts in the loan and sometimes things can pop up as the loan works its way through multiple stages of the underwriting process. 

I hate it when this happens whether I am the listing agent or the buyer's agent. It just sucks. A few tips to minimize the pain in these scenarios. 

  • Buyers should not give up their current housing until the deal is done unless they have safe and reliable alternative living arrangements.
  • Both parties should allow enough time for potential delays and setbacks.
  • Sellers should also recognize the inherent risk of a sale fail. Although 5% is slim it is basically 1 in 20 so it isn't as rare as one might think.
  • A lender pre-approval even from the best lending institutions does not guarantee success as things can and do happen. Buyers can lose their job, become sick, death in the family, car wrecks, a crazy collections pops up on final title... all kinds of hidden and unforeseen issues are lurking in the ether.
The best rule of thumb is that neither party should try to thread the needle and time everything to a day, There are just too many moving parts for that.