Entry Level is Getting Tight

Our local market has become quite tight for entry level detached housing. The pressure is overwhelming in the sub $230k market. With a median household income of 50k annually, a healthy market supports a median home price of about $200k. Our median is much higher than that. In fact the Clark County median is rapidly approaching $300k. We stand at roughly $275k with a year over year appreciation at 11%. If 2016 matches that growth rate $300k will be the mark by this time next year. I do not think we will, but the point is already made. A median earner cannot buy the median priced home or even anything remotely close.

Rents are also very high right now. A renter will pay $1500 for a 3 bed 2 bath 1500 foot ranch house in this area. That same renter can own a similar house with a mortgage payment very near the rent. Unless that renter is planning on leaving the area, why would he not want to own the home? The payment is fixed, it is harder to get evicted when you own, and the landlord won't throw him out because he IS the landlord!

The primary difference is that a landlord will rent a $1500 house to a 50k earner. A bank may not. This is what creates market pressure on the entry level. Buyers get locked into a $220-$230k price range and there is less and less available. Slightly higher earners bid the properties up in a desperate attempt to get as much house as they can before the market passes them by.

The middle and top of the market are starting to feel some of the pressure as well. Sellers of these $250ish homes are moving up to bigger and better things. They are starting to bid up homes a bit. The pressure will never be as bad at the top as it is at the bottom because there are ALWAYS buyers at the bottom but the top is a more exclusive market with far fewer qualified buyers. Inventory is the primary driver of the high end market where as demand pushes the bottom. Demand for upper end real estate tends to remain relatively flat but the entry level sees wild fluctuations based on economic conditions. Add a tight inventory in the entry to mid level market and things get dicey for buyers. We are dicey right now to be sure.

Many buyers qualified to buy a home a few years ago, but they allowed market fear to get in the way and they hesitated. Now the market has passed them by. When considering an owner occupied property, the time to buy is nearly always now. Yes exceptions are true, buying in late 2007 was not ideal, but one always needs a place to live and even those who bought at the peak before the great crash, still had a home to live in and those folks are now seeing all their equity return. While the home was financially "underwater" it still served its purpose as a shelter. In the grand scheme of things the only bad thing about the value decline was that it limited the ability to sell.

Too many people put too much into the "investment angle" of the home they buy to live in. Yes, we always want to make a sound investment. But unless you are renting out every extra inch of that house, you are not maximizing your investment. I did not buy the house I live in as an investment, I bought it to provide shelter for my family and to use it for my own needs. Its value is not important until I decide to sell it or leverage it. As a real estate professional I do tend to look at the investment side of buying a house even when I intend to live in it, but I never let the investment potential or lack there of, be the overriding factor in the purchase. The primary concern is its use value. Investment potential is supplemental at best. When I look at property for investment, then investment potential is the overriding factor and it dominates the decision to buy or not to buy. Everyone that sat on the fence while the market was down has now lost all the investment opportunity as prices have risen. They all should have bought at the bottom and failed to act out of fear. Now many of them have to rent instead of own. My clients that bought in 2010-2012 have seen the value of their homes increase 50-75%. Again it really doesn't matter unless they want to sell and move into a bigger house or leave the area. But they are enjoying a mortgage payment that is 30-50% LESS than current rents. That DOES matter. Right now rent vs own is about par on payment for a basic 3 bed 2 bath home. Why again are qualified buyers not buying?    

As Prices Continue their Upward March, Buyers may be Left Behind

I have been harping on the idea of buyers sitting on the fence till they no longer qualify for several years now. And over the last 18 months I have watched as the required qualifications to buy an entry level home have crept up higher and higher. In 2011, I had no problems getting a pair of minimum wage earners into an entry level house. Now this is an unlikely scenario. Houses that were solid first time home buyer residences were selling at prices between $115,000 and $140,000. Now those very same houses are pushing through the $200k barrier.

Wages are rising at best 3% annually, but housing is well above 7%. How long before a buyer watches their dream home become unattainable? Three months? Six? A year? Too many entry level buyers lose opportunity by being too picky about their first house. I certainly understand that buying a house is a BIG deal. People are generally spending the largest sum of money they ever have spent when they buy a house. Having some pushy agent leaning on them is no comfort. But the reality is that the first house is almost always just that, the first house. Once a buyer has their first home they now enjoy the benefits of owning versus renting. They enjoy that appreciation working for them instead of against them, the reduction of principle through monthly payments, equity, control, and often there are tax advantages as well.

Waiting for the ideal house may work out for a buyer, but the odds favor sellers in a recovering market. Buyers should be cautious that the house they are buying is in solid condition, safe, etc. but they also should be mindful that perfection rarely rears its beautiful head and compromise today will likely reward fantastic dividends later.

Most first time home buyers end up making a compromise between what they had hoped for and ultimately what they were able to find and afford. The longer a buyer waits for the "ideal" property, the bigger that inevitable compromise will be. Sadly, for many the compromise will end up being no home purchase at all and back to the landlord they shall go.

I have lost clients that did not like to hear that side of the real estate reality and so they find another broker that sings a different tune. In the end, they almost always end up with the compromise I told them they would face or they scurry back to a rental property. Far more often however, my clients heed the call of the mark and end up gloriously better off later. The house at the top of this article was a "compromise" back in 2011. My client needed a fair amount of space for his two kids but a detached home was out of reach. Three years later the market delivered his salvation. He paid $118,000 for that townhouse and sold it last summer for $152,000. Now he has the detached house he always wanted in a neighborhood that was out of reach before. Patience and a small compromise today can often bring amazing rewards a short distance down the road of life.

From 2010 through the early part of 2012 buyers could be picky and they could kick sellers in the teeth. But that was then and this is now. Sellers run the show and buyers need to work the market very hard. Buyer's agents have their hands full trying find homes for their clients.

For home owners thinking about selling, this could be a golden moment with bold rays of sunshine beaming down from the heavens and angels shall sing... Many sellers have found that their previously upside-down home is now in the clear and there are buyers lining up to make offers.

Real estate has always been an opportunistic endeavor. For buyers it is about beating the closing window of opportunity and for sellers it is about getting in while the buyers are frothing at the mouth for inventory. Is that a golden ray of sunlight I see? Hark! can you hear a hymn of fortuity singing down from the heavens?

Higher Prices Push Houses Out of Reach

Home affordability is a big issue in many markets around the country, including ours here in the Portland/Vancouver Metro Area. I have posted an interesting article I found. Our local market is well above average in price and one of the less affordable when compared to the nation at large. We sit ranked at 192nd of 225 in affordability with 53% of homes within reach of the median income. But compared to cities like San Francisco, Los Angeles, New York and even Seattle; we are a relative bargain. Please enjoy the article and check out the link to visit their website.

This article has been excerpted from CNN/Money in its entirety

By Les Christie @CNNMoney November 14, 2014: 3:42 PM ET

Affording a home is getting more difficult these days.

According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI), nearly 62% of all homes sold nationwide last quarter could be afforded by a family earning the national median income. Two years ago -- when affordability peaked -- 78% of people could afford homes.

Of course, where you buy makes all the difference.While mortgage rates are near record lows, home prices are on the rise -- and incomes aren't keeping up.

Related: Best cities for Millennial home buyers

Short on cash? Steer clear of California, especially the Bay Area where tech money has sent home prices skyrocketing.

In San Francisco, the median home price is $875,000, making it the least affordable major U.S. city. Only 11.4% of homes sold in San Francisco during the third quarter were reasonably priced enough for the average family to buy, the index found.

Other major cities where home prices were out of reach included Los Angeles, Santa Ana, Calif., San Jose and New York.

Where home prices were most affordable was predominantly in cities that were hard hit during the recession.

Related: Mansions for under a million

In Youngstown, Ohio, for example, nearly 90% of all homes sold last quarter could be comfortably purchased by families earning the local median wage.

Syracuse, N.Y., Indianapolis, Ind., Harrisburg, Pa., and Dayton, Ohio, all recorded affordability rates of 84.9% or higher.

Despite the growing affordability gap, most buyers are still in a favorable position, said David Crowe, NAHB's chief economist. "Even with nationwide home prices reaching their highest level since the end of 2007, affordability still remains fairly high by historical standards," he said.

Related: Most Stressed Out Cities

Rose Quint, a vice president for survey research with NAHB, said conditions should remain favorable through at least next year. She believes home prices growth should slow while an improving economy should help people find jobs and boost their incomes.

One headwind could be rising mortgage rates, which could climb in the next year or so, said Tom Wind, executive vice president of home lending for EverBank.