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.