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."