Friday, July 1, 2022

Market Softening is Healthy

I can't say enough about how a slightly softer market is healthy. The last two years have been so heavily weighted towards sellers that buyers often just left the market in frustration. Now as inventory builds back and buyers can actually make a fair offer with a reasonable expectation of acceptance the market should have a nice soft landing. If the fed can keep rates below the historical 6.5% average, the market should stay relatively flat as demand continues for real estate in Clark County, WA.

The reality is that this inflation could be eased a little by reopening the Keystone pipeline and easing restrictions on North American petroleum. That does not mean we stop using or investing in clean renewables, but it would soften the impact of high transportation costs which are at least 30% if not closer to half of the inflation problem. That and a little bit of care from the Fed and we can have a nice comfortable neutral real estate market with opportunity for the largest possible segment of population.

Here's to the second half of 2022 may we glide gently into neutrality for 2023.

Friday, June 24, 2022

Economic Conditions are Reducing Seller Expectations

Our current condition of uncertainty in the economy is seemingly making sellers a bit less confident in pricing and marketing time. Buyers have been in short supply for quite a few months but low inventory levels made the market seem more robust than it was. As more and more sellers sense the top of the market more listings are pouring into the system. It will take a fair while for inventory levels to return to a more "normal" level of 3-5 months supply, but in the mean time, buyers may feel some of that market pressure ease a bit as we move through the summer months. Hopefully the Fed will let the latest rate hikes percolate in the economy for at least 3-6 months before pulling the panic lever and raising them more.

I suspect we will have a decent summer of sales and as the autumn approaches later this year, we may see a genuine softening in prices as inventory levels likely continue to rise. I am finding more and more of my clients are calling me for listing appointments. If that admittedly anecdotal evidence is is true across the board and several of my colleagues are feeling it too, then market neutrality is nearby.

Keep in mind that historically a deathly real estate Markey is a neutral market and in our Clark County market, 700-800 monthly home sales is solid business we are well above that right now.

Friday, June 17, 2022

Inventory continues its gradual rise

Here in Clark County, inventory is still creeping up. We are a long way from a buyers market but we have more than month's work now and a traditional healthy inventory is 4-5 months. Things remain tight but buyers are starting to pass on overpriced listings and properly priced listings are getting a few offers hovering in the vicinity of asking. 

Overall we seem to be heading in a more healthy direction. Buyers are struggling with rising rates and sellers seem to be sensing the top of the market. Economic conditions still seem favorable for housing but a recession is almost inevitable at this point and that may slow the market a bit more, possibly leading to a modest dip in prices or at least a flat market for a few months to a year.

The median home price in Clark County is hovering around $560k with median household income at $78,000. The median household can purchase the median home but they will have to have strong credit and few or no other debts to pull it off. With a recession on the horizon, wages may flatten out and that alone will tug back on this crazy bull run in local real estate.

I would advise buyers to be prepared to stay in their home for at least a few years just in case we have to ride out a market downturn. Owning a home remains an excellent way to build wealth but there are times when patience is required to make that dream a reality. 

Friday, June 10, 2022

Inventory is now back to 1 Month

After a the tightest inventory levels in Clark County history earlier this year inventory has been increasing the last several; weeks and now stands at a still tight, one month. But we were at 12 days a few months ago. Although the market is showing signs of a mild slowdown, one month of inventory still puts us securely in a seller's market.

This is particularly true in the single level detached home market. Small homes with one level are getting hit by two large demographics, the starter home buyer and the aging step down buyer. The pressure in this segment is still red hot. other categories such as condos and large two story homes are softening up a bit. Young first time home buyers are well advised to consider two story homes rather than single level as the older buyers tend to shy away from stairs.

With inflation continuing to pressure interest rates, buyers in the entry level price range need to act soon. Even if prices start to level out or even dip a little the effects of higher interest rates will make the home more expensive. Once priced out of the market it can be very challenging to get back in.

Here is some more data from the latest market action report on our local MLS.

Friday, May 20, 2022

Is the market showing signs of slowdown?

Last week there were 171 new listings that came on the market in Clark County in a single day. This is great news for buyers as our market has had such a tight inventory for so long. If this trend continues we could see a bit of a softening int he tensions for buyers. I do not foresee prices tumbling at this point, but I do see prices flattening out and maybe even dropping just a tad. 

Sellers will not longer be able to expect multiple offers tens of thousands above asking if the inventory settles into a more healthy 3-6 months. A few months back inventory levels were measured in days! With our local median price hovering near $600,000 we could stand to see a a very modest slowing to help keep pace with incomes and the challenges with the high inflation currently infused into the economy.

It will also ease a little pressure in the "bubble" that can carry us through an minor recession that is likely to hit sometime in the next 18 months. Buyers using low downpayment products like VA and FHA should not be afraid to buy in this market, but always remember that low interest loans should be viewed as a longer term prospect. If the market softens you may have to stay in the house for 3-5 years to gain enough equity to get out. Of course if the recession does not come you may be able sell the very next year and come out ahead. It however is not wise to assume the recession will not come, but rather assume that it will.

Buying a house should be a long term investment and remember it is one of the few investments that provide a mandatory commodity of shelter, shelter that you otherwise have to pay rent and make someone else rich. 

Tuesday, April 26, 2022

Inflation is a wicked enemy for Retirees

The inflation problem is certainly not temporary as politicians and 'yes-men' economists suggested last year. For those retiring on fixed income benefits from savings or IRAs, this eats quickly into principal capital and can shorten the length at which funds will last. For pension earners the inflation is rising faster than COLA increases and that can feel even worse on the wallet.

Real estate remains a solid investment with double digit gains that will continue so long as the inflation does. But alas, the FED is trying to reign it in with rate increases. As this monetary squeeze developed over the next several months housing may finally slow down as buyers will struggle to qualify for loans.

Retirees selling a larger family home and downsizing still hold an advantage as often they are paying all cash or have an enormous downpayment which always makes sellers smile. 

Those nearing retirement should absolutely reach out to your CPA or Financial Planner to see if working and extra year or two can offset this horrendous inflation. It is wise to consider these things as once you retire it can be very difficult to un-retire.

Washington State has no income tax and that allows you to keep more of your money so bear that in mind before moving to some tax heavy state just because they have a little more sunshine ;)


Friday, April 22, 2022

Tight Inventory Remains, No Spring Surge Yet.

The usual April surge in listings has not happened and home builders are unable to build houses quickly due to supply chain and labor shortages. This is the tightest real estate market ever recorded in Clark County. This same scenario seems to be playing out all over the country, with little exception. 

In a normal healthy real estate market there would be about 4-6 months supply of houses. This simply means for example a 4 month inventory level: that if no new listings entered the market and the rate of closed sales remains the same, it would take 4 months to sell every listed home. Our current inventory levels are measured in DAYS right now!

Higher interest rates have eliminated many buyers from the market and that would typically slow the market down. But lack of inventory keeps the pressure on the market. If inventory doesn't start improving we may be in for yet another 15-20% price gain in housing.  

The best thing for the real estate market right now is a steady increase in inventory levels. This coupled with a lack of buyers due to higher loan costs would help us to a nice soft landing rather than something more abrupt. The bumpy landings are much harder economically and can lead to other sectors feeling the impacts.

People thinking about selling but worried about where they might go is probably the biggest inhibitor to fresh listings. People moving out of the area are fine as they have a 90% chance of moving to a less expensive market. Yes we are definitely in the top 10% of expensive markets.

As is true in any hyper inflated market, sellers can wait too long to sell. I do not see a huge correction like we had in 2008 but I do see a significant correction if inventory continues to be tight and prices continue to rise. Rate are now back in the 5s which is still a low rate, but after several years of 3's and 4s many buyers that were able to buy, simply cannot at the higher rate. As these buyer leave the market the pressure will start to wane and if inventory starts to rise too late the market could see a fast slide down perhaps in 2023.

Right now thousands of households in Clark County are sitting on a massive amount of home equity, but that can be eroded if prices start to fall. Owning a home for several years makes it easier to buy the next house because you have your downpayment and perhaps more in the current home equity. First time buyers have to scrounge for that downpayment. 

Hopefully sellers will slowly emerge this summer to take the edge of the market and help us ease into this inflationary cycle we are in right now.

Friday, April 8, 2022

Study Shows Washington Still an inbound move state

United Van Lines has the oft cited annual study of who's moving where and why. Washington spent a number of years near the top of the inbound list. Inbound meaning more people are moving in than out. Washington remains a destination but the margins are thinning. According to the study last year Washington had a tad over 51% of moves inbound against a touch under 49% leaving. The high cost of housing is likely a major barrier for those inbound residents. 20 years ago Washington was much cheaper for housing than California, but now many areas west of the Cascades are nearing parity with the Golden State. Speaking of California, they have a 59% leaving stat that is among the most moved out of states.

So Washington remains more popular to stay than leave and that is good. The housing market is surely a testament to the hot desire to live here. Pressure on housing can come from many areas, but it is not buyers driving the market it is sellers. Actually it's a lack of sellers. New home construction cannot keep up due mostly to supply and labor shortages and that makes homes seem more in demand than they actually are.   

Locally Clark County seems like a bargain when contrasted with King County in the Seattle area. Our local inbound residents seem to be coming from Portland and Greater Seattle. This coming from King County often are seeking a better house for the buck where as Portlanders seem to be fleeing all of Portlands recent self inflicted woes.

Vancouver seems poised for some solid gains in value as these external pressures continue in market severely short of listings. 

Friday, April 1, 2022

Rates are often more Important than Price

This post dates back more than 7 years, so the house prices are low but the sentiment is still as true as ever.

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, March 25, 2022

Housing is in undersupply, not over demand

Vancouver and Clark County are definitely experiencing a solid and reasonable level of demand for housing, but that demand is not high enough to warrant the highly accelerated pricing growth. It is definitely a supply issue and sellers that want to move are holding off in many cases because they are concerned about finding a place to move after they sell.

Most of the listings I take are people moving out of the area or people already in contract to buy a house and they don't need to sell the current house to buy the new one. There are just not that many people in those situations to provide enough listings for even a moderate number of buyers. As if that alone were not enough. the new home market is bottlenecked with the same supply chain issues other industries are facing and they are running nearly a year out on construction.

A large part of resale home pricing is either tempered or bolstered by new home pricing. In an inflationary cycle the price pressure on new homes can be intense and sellers often get a coattails boost in resale value. We are certainly seeing that scenario play out right here at home. 

We may see a softening in demand at least in the lower half of the market as interest rates rise and start eliminating buyers from qualifying. Right now the rising rates are effecting boosting demand a little as 'fence sitters' are jumping in to try and lock in a respectable rate. That will trail off dramatically over the next few months if rates continue the upward trend.

As I have mentioned over the years ad nauseam, rates are still low and any rate under 6% is a historically good rate. However the booming real estate market over the last five years has been largely boosted by historically low interest rates. People in lower middle income brackets that could not buy a home in the mid 2000's could buy one from 2011-2017 due largely to the after effects of the Great Recession. Home prices were super low and interest rates were in the basement as well. That combination produced record setting home sales for years. Now many of those who bought that $130,000 house in 2012 are sitting on a mountain of equity and that drives some to use it to upgrade.

I am mildly bullish on 2022 real estate but trending with the bear for 2023. We will see how it all plays out. Keep your eyes on the lending rates. I feel like the target rate for a slowdown in pricing is near 6% which will wipe out a lot of people with a household income under $100k.  

Friday, March 18, 2022

Housing Market Holding up Against Rising Rates

Rising interest rates continue to plague buyers, particularly those in the entry level price ranges. Higher rates erode buying power for those using a loan to purchase. As rates approach five percent I like to remind everyone that these are still quite a bit lower than the fifty year average so we are not into a "high interest" market just yet. It seems to show as prices on new listings are still strong and homes are still selling in a matter of days. Inventory levels locally are at all time lows. This means fewer properties are available and even as buyers are priced out in the rising rate economy, there are still too few listings to choose from.

Buyers still need to be ready to compete with other buyers in a multi-offer environment. At this point waiting for a market slowdown could end up costing buyers more money. I have written a great deal about the effects of interest versus the effects of price. Even if the local prices were to drop 5-10% over the next year, the people that bought last year at 3% are in better shape than those that buy at 10% less price a year later at 5.5%. More importantly is the timeframe of ownership. Most people will stay in that house for 5 years and if pricing does enter a decline then that might be extended longer. The higher interest rate chews away at your equity position faster than the lower rate.

Barring a total collapse in housing like we had back in 2009-2011 it is better to buy now with rates low then to wait until rates are actually high. A high interest rate market would have rates well above 6% but I don't think we should see the double digit rates we had back in the 1970s and early 80s. The Fed has adopted a much better model for managing inflation money squeezes than we had 40 years ago.

If you are on the financing bubble, find a house fast, write an offer, and get situated before you are locked into another decade of making your landlord rich.

Friday, March 11, 2022

Market Forces are Colliding

I have been on about the interest rates, inventory, prices, and economic factors all converging on our red hot real estate market here in Clark County and around the Metro Area. Generally real estate trends are not that hard to follow and short term predictions have been reasonably easy to make. But the last several years we have seen several wildly different flies in the ointment of the market.

We just came out of a serious pandemic that had millions of people out of work, we had a government infuse trillions of dollars into economic aid during the pandemic, and people have been slow to return to the workforce. On top of that we have pressures coming from inflation and the climbing interest rates associated with hyper-inflation.

What many see as a flood of buyers to the market is in reality a lack of sellers in the market. We are sitting on a great time to be a seller and yet sellers are not selling. So despite the fact that higher rates are eliminating buyers from the marketplace, prices are still rising as even fewer properties are listed for sale. This is one of the most bizarre real estate market scenarios I have seen in more than 20 years in the business.

Higher rates would typically price out buyers thus lowering demand and potentially lowering prices. But inventory levels are at historic lows right now and that is pulling harder on the market right now than the higher interest rates. Valuations may not have the same 18% year over year growth like 2021 but we are still on pace for double digit growth even as rising interest rates begin eliminating the buyer pool.

One of the issues in favor of higher home prices is the absolute shortage of labor in the workplace. Wages are rising as desperate employers seek employees to fill millions of open jobs nationwide. Skilled labor is commanding the highest wages we have seen in decades even when adjusted for inflation. It is rare to have wages keep up with inflation but so far it has been close enough to keep enough buyers in the pool to maintain a seller's market.

Market forces are colliding and this is not sustainable, something has to give. I think interest rates will be the levee breach the brings the flood. Interest rates under 6% are still historically lower than average, but after years of sub-4% rates even low rate sin the 5s will cause buyers to fall out of the market. I think 5% rates will be the point where we see a softening in demand to get prices back into to a healthy growth cycle. If rates pop up over 6% we may see actual prices come down a bit.

No one knows when a flattening or drop in valuations will come, but we are definitely getting close to the top of the market and sellers thinking about maximizing the value in their home ought to list now or very soon.

For buyers buying right now, you should be prepared to stay in the new home for several years. Unless you are paying cash or putting more than 20% down it is a good idea to plan on five years in a home you buy under these market conditions.  

Friday, March 4, 2022

Real Estate Market Still Ultra Tight

Despite the uptick in rates and turbulent economy, the market remains very tight on inventory. This extreme constriction of inventory is leading to upward price pressure that is out of whack with general economic conditions. Let's be clear, this market suffers from a lack of listings rather than an abundance of buyers. 

The chart below from the local MLS shows clearly that pending sales are only slightly higher than new listings last month. That is a very healthy ratio. Year over year median price was a robust 17.6%n and that one stat alone is why the severe price growth will be difficult to match again in 2022. Incomes are rising but at a lethargic 3-5% so tens of thousands of potential buyers have been priced out of our market. 

© RMLS 2022

The only way this market can continue to see this kind of price appreciation is from external influence. New residents moving into the area from higher priced areas such as Washington County, OR, King County, WA or Coastal California. This is the scenario that results in some residents have bitterness that their children or grandchildren cannot afford to stay local.

It is one thing to be a victim of your own success, to an extent Clark County is in fact that very thing, but it is another to be flooded with 'refugees' from failed places like California, Portland, and Seattle. The supply chain problems and lack of willing workers has led to higher building costs and thus more expensive new homes. The high cost of a new construction home definitely opens up the resale market to upward price pressure. 

This of course will inevitably lead to concerns about a "bubble" in the market. The last several years have seen a conjunction of conditions rarely seen in real estate and that is: cheap money, high wages, and a solid economy. Now we are adding inflation and supply chain problems to the mix. The latter two need to be dealt with because if they are not, then we can count of a rapid rise in lending rates and that could pull the rug out from under the market. Cheap money has been driving the real estate market for nearly a decade now including single family, multi-family, and commercial real estate. When the interest rates rise the ability to continue the pace of development could dry up which then leads to loss of high paying jobs and an economic decline either locally or nationally.

Buying a home right now is still a solid investment because of the low interest rates, but buyers should be willing to sit tight in the home for several years in case a price decline arises in the next year or two. Use a fixed rate loan and you can ride out a market retraction pretty easily.  

Weichert Regional Awards Honors 2021 Top Performers

2021 was a very strong year for many local agents as homes remain in tight supply and prices soared. Here in Clark County, several agents were honored at the annual Pac NW Council event this year held at Snoqualamie Falls.

Local designated broker for Weichert Realtors® - Equity NW Gene Thompson was named as the Council President. Local brokers received many awards among them the following:

  • Rod Sager earned a spot in the Executive Club or higher for the 4th straight year.
  • Katie Hertenstein earned her first spot in the Ambassador Club 
  • Eric Pelky earned his first spot in the Ambassador Club
  • Michelle Coffing earned her first spot in the Ambassador Club
  • Rod Sager received the first Spirit Award for Weichert Realtors®-Equity NW
Congratulations to all the award winners and let's all work to help as many people find their dream homes in 2022 as possible.

Interest rates have been a bit on the rise lately and buyers are diving into the market at a fairly rapid pace. Sellers however remain a bit slow to the party and that makes things challenging for buyers. But have no fear the spring listing season is upon us and hopefully buyers will find some relief as the next several weeks unfold.

Friday, February 25, 2022

What difference does 1% higher interest make?

Rates are on the move again and they are not going in the direction we prefer. Rates were solidly in the mid threes for the better part of last year and now we are seeing rate in the low to mid 4s. Now rates can vary widely based on the specifics of the loan and the borrowers financials but these are pretty typical.

The median priced home in Clark County is just a bit above $500,000. Let's say you are planning to purchase a home at $500k. Three months ago you might have qualified for a 3.5% 30 year rate. With 20% down you would borrow $400,000. I am deliberately keeping it simple excluding things like points, buy downs, fees, etc. The payment without taxes or insurance just the principle and interest (PI) would be $1796 per month. Now the same house at 4.5% will have a PI payment of $2027 per month. That's $230 per month MORE for the same amount borrowed. 

Buyers need to act now. Not only are they facing interest rate risk but housing prices last year went up more than 18% year over year. This year has not yet shown a slowdown. At that pace the $500,000 dollar home goes up at a rate of $7500 per month! Keep in mind that any rate under 6% is still below the fifty year average rate. But interest rates can also lead to qualifying issues. Your lender approves a monthly payment for you. When the letter says you qualify for $500,000 it is based on the rates available at the time of the letter. Most good loan officers build in a little cushion for minor rate variances. 1% is not minor. If you qualified for a max purchase price of of $500,000 at 3.5% with 20% down, then 4.5% will lower the amount of house you qualify for. That means you now only qualify for $443,750 with 20% down. Or you can buy the $500,000 dollar house but have to put more more than 20% down. The loan amount difference is $45,000 so that's how much more you have to put down to compensate for the rate difference.

This can be brutal when both rates and prices are rising. But once a buyer makes the purchase, they have their payment locked in and they begin to enjoy the market appreciation for themselves. Sitting on the fence is rarely a good idea, sometimes but rarely. 

Friday, February 18, 2022

Buyers have new hurdle to leap.

Our real estate market has been ever so challenging for buyers with inventory levels at near all time lows. In fact the MLS reported the tightest levels ever in some local market areas in January. I am still amazed that buyers expect to kick sellers in the face with lowball offers, but they still do it. 

There is a time for that because sometimes a seller is is asking for the moon and stars with their pricing and buyers may be able to negotiate a lower price in those specific cases. If a seller however is priced close to market they don't need to even ponder a lower than asking price. We only have a 2 week supply of resale homes and the new home market is dogged by increasing materials cost and supply chain jam-ups. 

It is a seller's market for sure. But this has been an issue for quite some time. Now we have the added issue of a rising interest rate market. Buyers looking to borrow money from a bank are seeing rates move back up towards the normal range. It has to be noted here; interest rates have been heavily suppressed for several years. The fifty year average is still around 6%. So any rate under that is historically a good rate. But buyers have been spoiled with 2.5-3.5% rates for so long the payment shock at 4.5-5% will be tough to handle. 

Many buyers will simply be payment priced out of the market. Meanwhile pricing will continue to feel upward pressure until the inventory levels return to a more neutral 4-6 months. When inventory levels push beyond 6 months, price softening becomes likely. We are a long way away from that.

Buyers need to pay very close attention to interest rates. Rate pressure is intense right now with economic conditions producing 40 year high inflation levels. The last time we faced this kind of inflation mortgage rates were deep into double figures in fact in 1982 rates were around 18%.

This is not the time for buyers to sit on the fence. Any significant market correction is likely more than year away unless some other catastrophic event occurs like the 2008-11 super recession. I don't see that happening, but I do see inventory levels stabilizing by the end of this year or early next. Buyers that wait till then could be facing 30 year fixed mortgage rates in the 6-7% range. Low mortgage rates are much better than low prices if you intend to stay in the house for more than 5 years and frankly, if you buy a house you should stay in it for at least five years.

Buyers, it's time to make an offer.

Friday, February 4, 2022

Strange Market Conditions and Tight Inventory

Yes it seems that the inventory in Clark County is once again tightening. There was the usual squeeze at the holidays, but it seems January remains tight as well and not just seasonally. Sellers are still in command in this market but as rates stat to rise as they have been since the first of the year, buyers will be forced out of the market and seller's may not be in as strong a position as they think.

The rate uptick will get a lot of buyers off the proverbial fence, but it may also eliminate them completely from the local market. We have been walking that tight rope since the interest rates started moving south over the last six weeks.

2022 may end up seeing a return to neutral conditions. We had a slow down about two years ago that put us in near neutral conditions for about six months after several years of a strong seller advantage. Then supply chain issues and other economic factors put us right back into the seller's market. Inflation is the classic double edged sword. It puts upward pricing pressure on new homes and that can lead to upward pricing on resale homes. But the other edge can cut into the buyer pool as incomes can't keep up.

Clark County is nearing its capacity to produce incomes high enough to buy a typical house. This is what happens with rapid price appreciation. The oddity about our current situation is that employment remains tight and that is putting some pressure on employers to pay more money. Although incomes are not rising faster than inflation right now, they are rising to fill some 9 million vacant jobs nation-wide. If the economy stops producing jobs we have a bit of a cushion now, but eventually we could see job losses as employers give up and either automate or downsize. We are seeing that trend emerge now. This could have dire consequences on the broad economy and certainly the housing market.

Potential sellers should look at the now and decide whether or not to take the REAL risk of waiting. No one knows what the market will actually do, we only have past models and current trends to guide us, but these are unprecedented times with the lowest labor participation rates in 40 years. Analysts are struggling to wrap their heads around this bizarre scenario we find ourselves in. 

If you have grand plans and the current market allows you to capitalize on them, don't get greedy. Waiting might be better but it is possible and maybe even likely, it will be worse later, not better. This current market is tailor made for the old adage; "a bird in the hand is better than two in the bush."

Friday, January 28, 2022

Economic Pressure is Mounting

The wild stock market last week was one of several indicators that money is moving into different channels. The feds have definitely over inflated the money supply in the name of "COVID aid" and we are seeing the realities of that now. Inflation is reaching the levels we saw in the late 1970s and early 1980s. Volatility in the investment market is obvious.

What this means to housing is unclear as these conditions have sometime aided real estate and sometime harmed it. Harm can come if interest rates were to spike hard. This long period of below average rate has led a whole generation of homebuyers to presume that 4% is "normal." It is not, in fact the average over the last 50 years is around 6% and that has come down from 6.8% ten years ago. This long period has eroded the average. A healthy range for mortgage interest is 5-6% that provide ample access to the market and generates yields that are attractive to investors. But from the vantage point of anyone under the age of 40, 6% is high.

The real question is how will the real estate market react when rates start to rise to "normal" levels. It is safe to say that many people that qualify now will no longer qualify. Taking buyers out of the market will effect the positional strength of current sellers. Tat will lead to less offers, less competition and more room for buyers to negotiate. That alone is valuable, but it could remove enough buyers to create a glut in the market that could lead to a pricing downturn. Right now we have tight inventory. It is so tight I believe it is unhealthy, so perhaps some upward movement on rates with bring balance to the market. That sounded so Jedi, didn't it?

Buyers that are qualified now at less than $500,000 purchase price need to act soon. Even a 1/2% increase in rate will likely knock you out of the local market. The idea of sitting on the fence hasn't made sense for several years. Pull the trigger before the market unloads your weapon. "Weapon?" Yes the weapon is easy and inexpensive access to capital, ie. mortgages. The market may end up "unloading" the cheap money 'weapon'. 

This past month has been a train wreck to interest rates. That may settle down, but there is a great deal of uncertainty in the global financial markets and that generally doesn't bode well for lending. When things settle down, perhaps a retreat to cheaper rates is possible, but I am bearish on low rates. We should be closer to 'normal' and I believe we are headed back to 5.5% to 6.5% as a fluctuating range for mortgages. 

Friday, January 14, 2022

2022 Real Estate Outlook

I often get asked about what the new year looks like for real estate. That is always a challenging question because the robust market we enjoyed the last several years has been mostly driven by low interest rates that has made home ownership available to a wider range of buyers.

The Fed has been buying up loans and helping to keep the 30 year mortgage rates between 2.5% and 4.5% for nearly a decade now. The government has also spent record amounts of cash to battle the COVID pandemic and that is placing a huge pressure on the economy as inflation has gotten out of hand. Inflation can become a relentless and destructive monster if not handled appropriately. Typically making money a little more expensive will help. Interest rates will have to rise a bit and as that happens those at the lower end of the economic ladder will no longer be a bale to afford a house. As buyers leave the market place, pricing on homes could contract a little. 

Inflation can also make it much more expensive to fix up a fixer house and that can lead to lower prices as well for homes that are not in the best shape. New homes will likely face upward price pressure from inflations as the cost of materials rises. Furthering the problem is the supply chain issues that seem to have the Federal Government baffled. That is adding even more inflationary pressure. 

I believe that 2022 will see significant increases in the cost of new construction but a serious softening in the price of a fixer house. Now more than ever in the last 20 years, fixing up your house before selling is a very good idea. Well maintained homes in excellent condition should be a great opportunity for following the new home market upwards but older and run down homes may see the bottom fall out from under them as buyers get priced out with higher rates and repair costs sky rocket. The return of investor buyers or the so called "flippers" could happen later in the year if rates rise, inflation contuse, and supply chain issues are not dealt with.

Overall the local market has already seen a slight shift towards the buyers. It remain mostly a sellers market, but much closer to neutral than it has been for the last few years. I have always said I prefer a neutral market as that tends to keep both parties in a transaction reasonable and willing to work with each other. I would imagine that we will see modest growth through the first half of the year with single digit annualize price growth on resale homes and a possible slow down in the second half with very slow price growth and possibly depending on rates some price relaxation.

I would expect to see more modest increases in home values this year than last, but if you remember I said that last January as well. I was dead wrong last January as 2021 saw 18% price growth. But this year is definitely different, we are seeing runaway inflation and continue to have supply chain issues. This is not a sustainable condition for rising real estate particularly older and poor condition properties. New housing could slow down significantly as materials and expensive borrowing cuts into profits. There is only so much a local market can support in price and we are dangerously close right now with new 1500 foot ranch style homes running in the low 500s.