Friday, May 26, 2023

Inslee signs legislation effectively ending SFR zoning

This post has large portion excerpted from a May 23 post on Retiring to Washington State by Rod Sager.

Washington is not the first state to effectively end the Single Family Residence (SFR) zoning but they are the latest. As a real estate professional I have mixed feelings about this legislation. Although it is designed to help increase available housing and decrease suburban sprawl, it could have negative consequences for the very people it claim to help. Only time will tell of course. This new law could have serious side effect on propriety values and how the law is applied and what the courts say about its authority over existing CCRs will be paramount to its success or failure.

The idea is that SFR neighborhoods consume allot of space and tends to be more expensive housing that excludes allot lower income people from affording. Allowing multifamily projects in these neighborhoods helps to increase housing that is traditionally more affordable. 

So what does the law really do? Well it states that cities with 25,000 to 75,000 people can not zone SFR and must allow at least duplex style (2 units) MFR (Multi Family Residential). In cities with more than 75,000 people which in Clark County means Vancouver only, four flexes are the minimum threshold. So in effect neighbors living in SFR neighborhoods could apply to convert their single family home into a duplex or four-plex depending on the size of their city. Having a bunch of four-flex units would definitely change the character of a neighborhood; generally for the worse. Quiet neighborhoods could become crowded, and obviously filled with renters that often do not take pride in the upkeep and presentation of the home. The upside is that more affordable housing becomes available and that could take pressure off rental prices.

There is another downside that I am 99% certain our legislators and governor are not smart enough to see. Politicians are usually not the brightest bulbs on the tree. That is that the dream of living in a quiet single family home neighborhood will likely evaporate for the people at the lower end of the middle class. A piece of the American Dream will be taken away from the very people the law is designed to help. Why is that, you ask? Because neighborhoods lacking duplexes and four flexes will slowly become more rare and thus more expensive pushing pricing even higher. Neighborhoods with a mix of SFR and MFR will become more affordable, but the true single family home experience will be missing.

So what does this have to do with retirees? Ah that is the question and the answer could be rather favorable. If this law survives the inevitable legal challenges, retirees living in a large house will legally have an option previously unavailable. Rather than sell the house and downsize, they could convert the house to multi-family and stay put utilizing one of the units as their own and renting the other(s) out to subsidize their income at a time when extra income is most appreciated. 

This will not be the solution for everyone and I am not sure whether this legislation will supercede deed restrictions (CCRs). It is worth watching for retirees that would like to stay in their current home but either cannot justify the expense of a large home or is unwilling to keep the larger space clean and tidy. This could provide income from an asset that very well may be paid off already. Not a bad way to go. 

As I understand the law, and let's be really clear here: I am a Realtor® not a lawyer, The laws does NOT prevent developers from building single family homes, it simply strips local government of the right to zone exclusively for single family homes. 

Locally, Vancouver is the only city in Clark County and in fact all of Southwest Washington that will be subject to the four-flex requirement. Battle Ground and Camas are large enough to fall into the duplex category as is Longview in Cowlitz County. Everywhere else in Clark County and Southwest Washington will be exempt from the restrictions this law places on zoning. So people living in Vancouver's unincorporated areas, which is nearly half of Vancouver's residents, should also be exempt from this law. Again I am not a lawyer so if you have genuine concerns consult an attorney or your local governing agency for clarification.  

The bottom line is that CCRs authority against the authority of this legislation will be a critical factor in determining whether this law will have more negatives than positive or more positives than negatives. If deed restrictions prevail then the law should be mostly favorable. Property rights are a big part of out constitutional rights and I take them very seriously. If you own property you should too.

Friday, May 19, 2023

National Median Creeps up to $375k

Yes you read that right. According to recent reports from the NAR the national median sales price was at $375k and change. There are still many parts of the USA where the median home price is well under $200,000 in fact even one county in the notoriously expensive California is under $200k. Here in Clark County we sit well above that with a mark around $500k. Prices are holding steady in most markets but some are falling and others rising. 

As real estate prices climb higher the more expensive markets can sometimes experience a more dramatic correction. People start to look elsewhere for work and sometimes an exodus begins. Looking at you California. But good jobs are an important factor and Washington State tends to have a great job market. Employers for the most part are staying in Washington rather than relocating and that bodes well for the local economy and real estate market. 

Washington State remains a fast growing state. Last census it was tied for 5th nationwide for growth with Florida at 1.37% year over year population growth. So long as demand remains high in the Evergreen State, real estate values should hold steady and strong.

For people retiring some are looking to the sun belt, others looking for tax breaks and cheaper houses. Washington is actually decent on taxes for retirees but obviously housing costs are high. But it seems that national median may be growing at a faster clip than the median here in Washington State. As that happens our affordability handicap is reduced. The lack of a state income tax tends to be a real draw for retirees. Washington has a strong economy with good jobs attracting the younger crowd, and good senior tax setups attract the older folks.

Friday, May 12, 2023

Will the lovely mid-spring weather bring out new listings?

I do hope so, inventory has been real tight for over a year now. Pleasant weather tends to stir up real estate. Buyers start thinking about looking in good weather as it is always nice to be out in fine conditions. Sellers often start thinking about moving in the nice weather which is definitely preferred over bad weather. There has always been a bit of a perk in the market place during the mid to late spring.

I have mentioned a lot about our local market and the conditions we face. Very tight inventory is keeping prices steady and a lack of buyers is keeping prices from skyrocketing. Overall I would bet that we see a seasonal uptick in both buyers and sellers but not likely a change in the balance. It should remain a sellers market though the summer and fall seasons. 

Homeowners will continue to cling to their 2.5-3% mortgages until such time that they are compelled to move for a job change or new family members, etc. One thing I am seeing for the first time in decades frankly is the use of the assumption clause in VA and FHA loans. There is an advantage in that a qualified borrower can assume the loan at the original low rate. However if the house has seen sizable equity gain over the last few years, which it almost certainly has, the borrower has to come up with a large downpayment to take advantage of the assumption. 

I will write an article about assuming loans in the next week or so as I feel this is going to pick up steam in the marketplace over the next few years.

Meanwhile the market remains a bit rough for buyers but not as hectic and crazy as a few years ago. Many listings are seeing multiple offers but some are staying on the market over a month before seeing an offer. So buyers can at least take a breath for now.

Friday, May 5, 2023

Market Update for Q2, 2023

The local MLS, Regional Multiple Listing Service has improved their reporting this year with an excellent display of data. I have been mentioning for quite some time that our market is red hot in the 110% of median and lower, and has cooled off considerably in the upper price ranges. There are some notable exceptions with Downtown Vancouver high end condos which seem to be doing just fine.

Year over year the median price is down 2.9% but based on the full set of data the MLS provides, the upper end market is lacking sales and thus the median is coming down. Remember that the median is simply the "middle" so when fewer expensive homes are sold the middle becomes a lower number. The actual asking price of a standard 3 bed 2 bath house is about the same as it was last year but this year the house is getting 1-2 offers whereas last year it was getting 3-6 offers and way over asking. That is also leading to the median drop. 

This data does not suggest the market is dropping as much as it suggests its rate of growth is slowing. There is a difference and it matters. People become nervous about buying a home if they think its value is a bout to drop. So far indicators support mild real estate appreciation over the next 12 months. Of course anything can happen in the economic cycle and projections are just that. But there is no alarm bells going off here. The slowdown is two-fold: first the abrupt rise in interest rates eliminated at least half of the buyers in the local market. Under different circumstances that would have crashed our local market. But the market was so tight on inventory that it just took some needed pressure off and it was actually a healthy adjustment. The second factor which is keeping inventory lower than it would normally be is that fact the homeowners are reluctant to give up their low interest loan to buy another home elsewhere. Many homeowners that might be ready to move up to a bigger home, or a place with some land, etc, are sitting on a 30 year note with 25 to go at 3% sometimes less. The move up will put them in a new loan at 6.5% or more. This is stifling inventory. Unfortunately the government acted too quickly and created a scenario where rates rose almost instantly rather than a gradual rise over the course of several months. A gradual rise would have been a much smoother transition from hot market to normal market. The quick rise basically slammed on the brakes.

So when looking at the data you see that sales are down, but new listings are down about the same amount, marketing time is up a little and median price is down slightly. With just 1.5 months of inventory this is still a sellers market and we won't see a neutral market until inventory gets up around 3-5 months. Once the inventory moves to six months or longer the market transitions to a buyers market.

It's easy for doomsayers to persist with sales numbers so much lower than last year but the real truth is that the only people really feeling a big difference in the market this year over last year are the people at the very entry level from last year who no longer qualify and real estate agents who are all fighting for a slice of a shrinking pie. Some agents may sing the songs of doom, but the market is actually still doing well despite the governments best efforts to crash it.

Looking forward to Q3 I'd say the chances of an increase in buyers is slim, but the chances of increased listings is 50/50. An increase in listings with no change in buyers will soften the Markey up a bit and make things a little easier on buyers without too much downward price pressure. Buyers should keep in mind that interest rates are not high right now they are average, we just came off a 10 year period with below average rates. It may feel like they are high but we are finally back to "normal" and I believe the nation will adjust to mortgage rates in the 6s.

Friday, April 28, 2023

The weather is nice, are more listings on the way?

This spring took a fair while to develop locally as winter like weather persisted well into April. But now it is sunny and warm and with that turn of season often comes a bunch of fresh new listings. We could use a hit to inventory to help buyers out who still face multiple offers on homes in and around the local median price. That is running just under $500,000 right now. 

Buyers are facing pretty typical interest rates when compared to the 50 year average. That long run of years and years at below average rates has no doubt spoiled things a bit now that we have settled into a more "normal" mortgage market. 

Buyers can also take advantage of some new mortgage products aimed at helping first time buyers get into the market with low to zero downpayment and sometimes a little government assistance. These programs can really help buyers get an opportunity in this still tight market.

Despite losing a huge portion of eligible buyers the stingy inventory has kept things favoring sellers a bit. A rush of new spring listings will likely level the field offer buyers some negotiating room. Buyers haven't had that in quite a while.

Be sure to contact me if you are interested in these new programs.

Friday, April 14, 2023

Spring Outlook

Spring is here, at least by the calendar if perhaps not by the weather. Traditionally there is an uptick in new listings this time of year. The local MLS showed just that last month. The real question is whether an uptick in buyers will follow. That is also a typical scenario. But we just came out of a long red-hot period in real estate that was driven by artificially low interest rates. These crazy low rates made it possible for lower income people to buy a house. Many of them jumped at the opportunity. 

It also made it downright easy for people who purchased starter homes a few years earlier to sell and move up to a larger home, sometimes without having a higher mortgage payment. Bigger house lower payment? Where do I sign? 

As rates began to creep up two things happened and it is a good thing that they both happened. The higher rates eliminated a number of buyers at the lower end of the income spectrum. Where they qualified to buy at 3% they no longer qualified at 6%. This took buyers out of the marketplace, which normally would lead to flat or declining prices. There was however, an additional effect of stifling the move up market. People are sitting on huge equity reserves but they are reluctant to give up the sub 3% loans they have. So as the buyers dried up the inventory also flattened out and that was a bit of a stalemate. 

The worst thing that could happen now is a massive rush of new inventory. People feel like there is a lot of buyers because there is so few homes in inventory, in reality there are very few buyers right now, it just so happens there is even less inventory. I would compare the market in 2018 to today as follows. In 2018 there was 10,000 buyers vying for 1,000 houses. Today there is 1,000 buyers vying for 100 houses. From the buyers perspective it feels the same, but for the market at large there are very few homes actually being sold. 

Hopefully we will see a slight uptick in inventory to ease the pressure off buyers, but not too much so as to cause a drop in prices. Only time will tell but this extra cool spring is not helping to get sellers off the fence. Usually it is the warm spring days that get the market awake and eager. We haven't had any warm spring days yet. Stay tuned.

Friday, March 31, 2023

Do's and Don'ts for Mortgage Borrowers

As rates have crept up, buyers are finding themselves in a position to borrow very close to the maximum amount the bank will qualify them. When rates were in the 2's and 3's I found many buyers were borrowing substantially less than the bank offered them. Now, not so much. When the buyer is at or near the maximum borrowing limit the underwriters in charge of approving the loan can get really picky and tight on any discrepancies or variances from the guidelines. Borrowers should not assume they qualify, nor should they assume they do not. Loans are complicated instruments and it is always worth sitting with a professional loan officer to find out if you qualify and what to do the get qualified.

Generally the base guidelines for conventional mortgage borrowing are as follows:

  • PITI (Principle, Interest, Taxes, Insurance) is <36% of gross income 
  • Total debt service is <43% of total gross income
  • Credit report is clean, no derogatory entries in 24 months
  • Stable provable income for two years without gaps
  • Minimum 6 months on the current job 
These are guidelines and routinely borrowers are granted exceptions based on superior credit, low LTV (Loan to Value), or excellent reserve cash in the bank. Exceptions are often made for job time as well. For example a college engineering grad that takes a brand new job as an engineer can get a waiver on the time on job due credit for time in college so long as employment is verifiable as permanent. 

It is important to check with you mortgage professional who will look at your specific financial situation and give you far better advice than I can. I have seen 50% debt to income ratios approved. I have seen 50% PITI as well. It happens but it almost always happens when the borrower has other strong financial attributes. A low credit score will always make it difficult to get any exception from these guidelines. Being right up against the wall on multiple guidelines will also make it difficult to get an exception even if your credit score is sky high.

Buyers should avoid the following activity when buying a house:
  • Opening new lines of credit
  • Allowing credit balances to get larger
  • Applying for credit lines of any kind
  • Moving money around in bank accounts
  • Making large cash deposits into personal accounts
  • Closing credits lines unless advised to do so by lender
  • Changing banks during the process
  • Taking unpaid leave from job
Buyers should do the following:
  • Leave the down payment money in the account untouched
  • Continue making all debt payments on time as scheduled
  • Contact your loan officer before making any financial move
  • Immediately get documents requested by loan officer
Remember the closer you are to the maximums the harder it is to get exceptions. You will find that a bank making a mortgage loan of $200,000 on a $500,000 home with a borrower that has an 800 credit score, and $800,000 in the bank will be much more lenient than a 620 credit score borrower putting 3% down with a debt to income ratio of 50% and no money left in the bank after the loan closes. 

Buyers need to follow the loan officer's lead. Do not make assumptions, always ask the loan officer before making financial decisions. I have watched buyers lose their buying opportunity because they failed to heed the advice of the loan officer or failed to ask before making a financial move.

The most important thing to remember is this simple rule: He who has the money, makes the rules. They may not seem fair, but they are what they are and banks don't care about your feelings.

Friday, March 24, 2023

Market lacks sellers so buyers still compete for homes

Last month in SW Washington which for the local MLS is all of Clark, Skamania, and the Woodland area in Cowlitz. Closed sales were again light in volume and the bulk of the activity remains at the entry level. Median is holding firm around $500,000 just nudging up a tad this year so far. 

Inventory is the real story. We are very tight and some people feel like everything is slowing down and it kind of did since there was a point a little over a year ago were inventory was measured in DAYS, rather than months. But a neutral market is generally considered to be 5-6 months of inventory so 1.9 is still a hot seller's market.

The inventory has been ever so slowly creeping up but at the pace we have seen 5 months of Inventory would take two years. The spring selling season is knocking at the door. How the activity pans out in April and May as far as new listings will play a pivotal role in determining whether we remain locked in a tight market or whether buyers start to gain a little leverage.

I have said several times over the last year or so, this is not a tight market because we have a lot of buyers, it is a supply side problem of low inventory. Think of it this way if 100,000 buyers are competing for 300,000 properties that's a lot of buyers and ultimately a lot of transactions but buyers would have the upper hand. But if 100 buyers are competing for 10 properties... you get the drift right. There wouldn't be a lot of sales but the sellers would rule the roost.

I hear a lot of agents complain how "slow" the market is but in reality there are just too many agent vying for too few listings. From he buyers perspective it feels like a huge mass of competing buyers are snatching up all the houses and outbidding them. But it is really just an average number of buyers competing for a very low number of available properties.

Keep you eyes open as we stroll into springtime, perhaps sellers are ready to list and make that up move or downsize.



Friday, March 10, 2023

Multiple offers are not gone!

Although the market is a little less wild and crazy than it was 18 months ago, the multiple offer scenarios are not gone. Houses priced at or below the median and reasonably priced are in fact seeing multiple offers and bidding up. I just called an agent about a pending property I am using as a comp for another property. She had it listed at a very competitive price and I was curious about the offers. She had seven offers and several were well above asking. 

The median price has ticked down over the last several months, but I have mentioned this multiple times, and I'll do it again now, higher end properties are not selling as much as they were last year. More sales right ow are happening in the entry level market. That is lowering the median price despite the fact that actual prices are still rising, just at a slower pace that we have seen in recent years. 

2023 is shaping up to be a decent market. Inventory is tight and there are not enough sellers to go around, so buyers will remain in the hot seat for the time being. Sellers should remain cautiously optimistic and buyers should be very optimistic as things have at least calmed down a bit.

I have seen this pattern many times before. Right now is a great time for a buyer to make a move up. If you have a 3 bed 2 bath home priced around the median of $500,000 or less, you will sell fast and for top dollar. Then make the move up to a larger more expensive house where the market is not quite as crazy. Sellers int he mid-tier are more likely to work with a contingent buyer.

Don't worry about rates, if they go down later you can refinance if they go up later you stay put. Some buyers a parked in a loan with a low rate say less than 4% if you are one of these buyers, are you prepared to stay in that same house for the rest of your life? You have to ask yourself that question, because the 3's we saw were ALL TIME LOWS, we may never see that again. What we could see however is even higher rates later on and that could force you to stay in that same house. These 6.5%-7.5% rates are pretty "normal" when you look at the 50 year average.

If you are ready to make that move up, then now is the time.  

Friday, March 3, 2023

Is the Market still Hot?

The news media, the doomsayers, and other miscellaneous talking heads have declared the real estate market as terminally ill with rising interest rates. Hmm, all because rates are now at the 50 year average. Not above average, not the soaring double digit nightmare that was the late 1970s and early 1980s. No we're are 'plagued' with average interest rates. I'm sorry friends, 7% mortgage rates will not tank a real estate market. This slight slowdown in units sold is a typical adjustment period after coming off a long period of low rates, in fact the lowest mortgage rates in the history of 30 year loans. 

When you look at the historical housing market you see it has had a few bumps in the road over a 50 year history of going up, up, and up. You juxtapose that with the 50 year mortgage rates chart which shifts position more than a politician in a purple state. You see that this "crisis" is completely manufactured. The media and notably other organizations that have something to gain from negative news about real estate, may be behind it.

The real estate market is only temporarily slowed by changes in the interest rates. The demand for housing never goes away, increasing rates can make it difficult for some buyers and that can slow things down for a short while, but banks will always find a way to make loans, and people will always find a way to buy homes. Historically we have only had two major downturns in the last 100 years and they were 1929-1941 and 2008-2012. Every other "downturn" has been short lived and in the grand scheme of things, insignificant. 

Is it a good time to buy or sell real estate. Yes friends it is a good time. Real estate has always been and will likely always be an excellent long term investment. There is no 'day trading' real estate. The transactions are slow and expensive. It is a long term investment. Buyers and sellers need to stop thinking short term. If you plan on living in a house for less than 2 years, generally it's better to rent or buy a house and rent it out when you need to leave. Even during the Great Depression of 1929-1941 real estate was a good long term investment. Why do I say that when prices were declining or flat through most of that period? Because the home still provides you with its essential function of shelter for you and your family.

In my 2010 book, "Don't Panic" I have an entire chapter dedicated to dispelling the notion that your primary residence is an investment property. If it is an investment property you should be renting out any extra rooms you have to maximize that investment and increase your rate of return. But most people don't. Why not? Because it is their home, safe haven, shelter from the elements, a basic human need. That's why. Owning that shelter is better than renting it from a third party in 99% of life's scenarios.

As for the market, locally we are sitting on a 2 month supply of houses. With 4-6 months being average, we are in fact still hot. Yeah, it's a good time friends.


Friday, February 24, 2023

How is 2023 Starting Off?

January is typically a slower month for closed real estate transactions. But the numbers can still provide a trend insight. January 2023 produced 306 closed single family homes including condos in Clark County. The median price was $490,000 and the average a bit higher at $543,000. For review, the median is the halfway point so half sold for less and half sold for more than the median. Average is a classic mathematical formula add up all the sales and dived by the number of sales. Because there is a lot more room at the top of the range locally the average tends to be higher than the median.

Roughly 100 homes sold between $400-$500k and another 100 between $500-$750k. That is a the meat of the local market with about 2/3 of transactions falling that range $400-$750k. 

Compared to last year, January 2022 numbers were 507 closed units with a median price of $493,000 and an average of $553,000. As I have been reporting over the last year, values seem to be holding steady and the numbers bear that out. What has dropped is the volume of transactions. We only closed 60% as many transactions this past January as the prior year. The difference between the two years isn't o much demand as it is interest rates. Rates were comfy in the 3's in January 2022 where they were a more average 6's last month. Fewer buyers qualified to purchase in 2023 than last year, plain and simple.

So as of this first month's data, the sky is not falling and neither are prices. $490k vs. $493k is akin to a rounding error. What is happening in the market is buyers are not willing to pay large amounts over asking price unless the house is priced ridiculously low. Buyers are more sensitive to price in this current market, but they will pull the proverbial trigger on a well priced home. In fact they did just that 306 times last month.

I'll be watching the trends closely during March and April as these are the months that tend to set the tone for the local market during the late spring and summer peak season. I'm a cautious bull on Real Estate for Q2, 2023.  

Friday, February 17, 2023

Real Estate Market Settles in to 'Healthy'

Our market has slowed considerably and to some that is a bad thing. But in reality the runaway craziness of the last few years was not healthy. When buyers are bidding up properties they often pay too much and that may be great for sellers but it can create that "bubble" people often worry about. Now the market has settled in nicely. There are fewer listings and fewer buyers so that means fewer sales. Fewer sales tends to make people think the market is falling or crashing. So far none of that is happening.  

Prices have been stable and most sellers are getting close to final asking price. We are not seeing the prices being bid up like we were a few years ago and that has allowed the median price to dip about 5% over the last year.  Actual prices however have been flat. Higher interest rates have cut into buying power so people are buying less expensive homes to compensate, that is what has brought the median price down, not actual falling prices. 

Yes, you will see price reductions but behind the scenes most of those price reductions are sellers realizing that their agent was right and they were simply overpriced. You can't blame a seller for trying to get the most out of their home, but in stable healthy markets, buyers won't bite on overpriced listings.

So long as interest rates remain where they are we should be able to sell enough houses to keep agents like myself busy enough to make a good living, inexperienced agents may struggle a bit, but us veterans will be fine. Younger people have not seen interest rates above 6% in their adult lives, but the 50 year average for rates is in the mid sixes, we are quite literally looking at pretty average rates right now.

Vancouver is seeing strong demand for real estate and that is being driven by multiple forces including excellent job growth, higher wage jobs, Portlanders relocating, Puget Sound relocations, and even some retirees taking advantage of our no income tax. Pricing should remain stable as I think the fed is going to dial back the medicine for now. We can only wait and see. 

Builders may have to start building small homes again and Vancouver has shown a willingness to do zero lot lines and compact communities to help builders squeeze enough lots out a parcel to make $350,000 homes possible. Builders however tend to gravitate towards the larger luxury homes and they may feel a squeeze in 2023.

Overall healthy is the operative word, we have buyers and sellers in near equal numbers and that means stability barring any major economic changes in either direction.

Friday, January 27, 2023

Trying to time your closing is a fool's errand

All too often and sometimes against my best counsel, buyers and sellers will try to time the closing to a specific day. As the title states, that really is a fool's errand. I wrote a post right here own this blog back in 2020 that sums it up well:

"All too often I find buyers and sellers trying to line everything up for the perfect close and move. Real estate transactions have lots of moving parts, seriously, internal combustion engine levels of moving parts! Trying to time everything perfectly with a train of buyers and sellers all lined up like the proverbial dominoes, is like herding cats.

I have mentioned this before and it is worth mentioning again. Buyers do not try to time your closing with your move out date for perfect alignment. That is a recipe for drama. You have a seller who is moving and often waiting on another seller at the other end who is waiting on a seller, etc. Pay a few bucks extra rent and give yourself a two week cushion. It's the best money you ever spend because now you are moving slowly rather than in a rush. Even in the best case scenario with the "perfect timing" approach you end up damaging your current apartment/house and or breaking your valuables because you are in a hurry. The worst case scenario is that you have movers show up but your seller can get out! Save yourself the heartache buy giving yourself a two week cushion. You'll thank me later :)"

In the situations where multiple parties have transactions up or down the chain the number of moving parts multiplies making a percent timing situation that much more complicated and unlikely. We all have enough drama in our lives don't we? The wise person gives themselves and other a cushion to ensure a smooth and happy close.

Friday, January 20, 2023

Is the era of large homes over?

Many countries in the world are failing to reproduce at replacement level. Russia and China are notable examples. The United States has fallen to the lowest birth rates in our history now below replacement levels at 1.7 births per female with 2.1 the standard measure for replacement. Many young adults are foregoing the family experience and those that do decide to have a family are often sticking to just one or two children. Since this is a real estate site I'll skip the economic issues and implications of a falling population. I do believe however this trend will lead to lower demand for large homes.

Builders like to have large homes as they tend to be more profitable, This is especially true of two story homes which have a larger living area with a smaller footprint on the lot. The notion of a five bedroom house was once commonplace but these days families with one or two kids are not really looking for that many bedrooms. Builders will adapt, we can bet on that. 

Over the last several years I have noticed that the price differential on resale homes between large four plus bedroom homes and smaller ranch style three bed homes has gotten very tight. A nice mid-grade remodeled 1990s five bedroom 2500 square foot home in East Vancouver might get $600,000 in the current market, but a similar 1990s mid grade home in the same neighborhood with 1400 square feet and three beds will fetch $500,000. Think about that for a second, the smaller house has 56% of the living space but costs 86% of the price of the larger house. 

There has always been a price per foot increase on smaller houses built on similar lots due to the fixed land and development costs. But the gap has tightened much more these days. Smaller homes used to be mostly in demand by first time buyers and older people downsizing. Now these small homes are also acting as move up homes for the older millennials coming from a townhouse, condo, or apartment. The pressure on the classic three bed, two bath ranch is greater than ever. 

Many builders locally are capitalizing on a growing population and a sizable number of out of area buyers to keep our local housing market going. But these builders are still building a lot of large 3000 SF homes with 4-5 bedrooms. That market may dry up here in the next year or two. The future seems to point to smaller homes with upscale models attracting a "move up" market as well as basic simple homes at more affordable pricing for first time buyers. Townhomes are also a rising star among the new downsized American family.

Sellers looking to sell a large older resale home should anticipate downward pressure on pricing over ht next few years even if the general market is advancing. After decades of housing size increases were are starting to see some shrinkage. The era of large homes may not be entirely over, but it is about to become a bit inventory bloated in the market.

Saturday, January 14, 2023

Can Higher Interest Make Condos More Competitive?

This article was originally published by 'Urban Living in the Couv' 10/3/2022 by Rod Sager.

How’s that for a click bait title? Well it is true at least from a monthly payment point of view. One of the biggest hurdles that condominiums and to a lesser extent townhouses have to overcome is the HOA dues each month. Lenders require that the borrower qualify not only for the PITI (principle, interest, taxes, insurance) payment, but also the HOA dues. This means that the borrower has to qualify for much more than just the purchase price. When interest rates are low the HOA dues become a relatively high portion of that payment, but as they rise the cost of the monthly payment rises not the HOA dues, thus the HOA dues become a lesser percentage of the whole.

Here is an example. Back a few years ago we saw mortgage rates dip into the 2’s for awhile. But let’s just use 4% as an example. We shall suppose a borrower is looking at a condo that is listed at $500,000 and 4% mortgage is available with 100k down, HOA dues are $500 a month, taxes $2500 a year, no mortgage insurance. The PITI payment would be roughly $2185 plus $500 for HOA making the total monthly burden $2685 per month. The borrower must qualify for this amount. This buyer is only buying a $500,000 property in this scenario but qualifies to buy $554,000 house without an HOA fee. Generally traditional houses lack an HOA but have higher property taxes and homeowners insurance cost, but that is still a big difference. Now fast forward to the present day with rates now tickling 8% and things look much different. The PITI payment plus the HOA fees on the condo, all else being equal is now $3643 per month. This translates to purchasing power of $535,000 on a property with no HOA. Again, bear in mind that taxes and insurance are less on condos than traditional property because the HOA is paying the taxes on the land and carries structural hazard insurance so that the condo owner only has to cover the inside of the unit against hazards. Now most HOAs cover some of the utility expenses as well with water and garbage being fairly common. Some type one construction towers have heating and cooling covered by the HOA as well. In these scenarios with interest rates above 7%, the condo can reach near parity with a traditional house when utility expenses are calculated in.

There are already many people that want a less bothersome ownership experience free of yard work, and general exterior maintenance. Now that rates are climbing, condos actually start to look like a value in the marketplace even with the HOA dues. A typical small suburban single family house in Vancouver has property taxes at $4500 annually versus a comparable priced condo at just $2000. Look at the chart below asterisks reference footnotes explaining the composite average:
Data gathered from numerous sources including the National Association of Realtors® and National Lending Institute
  • * The composite average takes into account that many HOA fees include either a discounted rate or no charge at all for these services. In the case of parking some units have deeded spaces others requires a fee the fee is typically at least $100 in the urban core. The composite average merges these in to one.
  • ** Property Taxes and Home Owners Insurance on condos is severely reduced as the condo owner only pays taxes on the interiors space, the HOA pays for the land taxes. Similar for insurance in that HOA carries hazard insurance for the structure, home owner carries hazard and theft for the interior.
  • *** Although many single family homes do not have an HOA, most built in the last 20 years do. Typically dues are much less expensive as the HOA has mostly enforcement duties versus a condo HOA that has actual structural maintenance and heavy services to do. Composite average includes a lot of homes without an HOA at all, thus lowering the average for SFH HOA dues.
The real difference comes down to lifestyle. A condo will almost always have less chores and maintenance and a house will have more space and flexibility of use. Urban condos will nearly always have a more walkable neighborhood and be much less dependent on a car for daily activities. With rates now above the 50 year average the condo HOA fees are far less impactful than they were just one year ago.

Friday, January 6, 2023

Happy New Year! 2023 Could Be Good.

It's a new year and the prognosis for local real estate is decent, all things considered. As far as I can tell our banks are strong, and lending practices over the last decade have been largely well regulated. It is unlikely that we will have a mortgage crisis like we had in 2008-09. 

The interest rates have risen enough to eliminate marginal buyers and that has taken the edge off the market. The days of 10 offers on day one of the new listing are mostly gone. But locally our inventory remains tight enough that the market still favors sellers. The median sold price has come down some 10% over the last 8 months, but that is almost certainly due to the loss of all those multiple offers over asking. The median was puffed up during 2020-21 with sellers routinely getting 5-15% over asking in those crazy bidding wars.

Today a well priced home at market value will take 15-30 days to find an offer and the seller is likely to get very near asking or perhaps a smidgen higher if the buyer needs a little help with the mortgage costs. Sellers should be prepared to get offers near asking on a properly priced home with the buyer asking for closing cost help. The higher rates have made it impossible for some people to qualify for a loan that they would have qualified for a year ago. But lenders can arrange for a buy down of the interest rate that lowers the payment and thus allows some buyers to qualify. many buyers do not have the money up front however to pay for that. Sellers should also allow a little extra time for offers. The old adage that "a bird in the hand is worth two in the bush" is very relevant right now. That is sage advice for sellers in 2023.

Creative offers and quality negotiations will keep our real estate market strong so long as we continue to produce jobs, and inventory remains tight. I am predicting a slow and gentle landing in the market in 2023 again operating under the presumption that no major outside economic disaster intervenes.

Buyers and sellers should see a much more calm and frankly pleasant experience looking for and negotiating purchases this year than they did a year ago. Buyers should take note that lenders are going to tighten up a bit on underwriting. They may be a little more picky with documentation and that is typical in a market that is slowing. Remember that in 99% of the cases, the lender is taking on the vast majority of risk as buyers typically put down 20% or less when buying a home. The bank is the one with their tail in the wind, so as the market tightens so will they.

I look forward to a much less busy but still prosperous real estate market in the coming year.