Virus versus Housing

Last week I mentioned that the Wuhan Corona virus and associated economic issues might lead to an influx of cash for real estate. That has not materialized yet. Bonds, Gold, Hard Money, all of the normal flow points for equities in distress are also down. That means the wealthy "market makers" are holding onto cash. This is very surprising to me because there are few if any places on this planet where cash is earning money, in fact in many countries cash COSTS money.

I believe that investors are genuinely spooked by this virus and are waiting for the cases to start declining rather than continuing upwards. Once the dust settles they will likely move that cash back into equities, bonds, gold or where ever they think the best opportunity is. Until that happens mortgage interest rates will continue to climb, the stock market will remain flat or possibly dip lower. We really have to wait to see what the "big financial fish" do before we can get a handle on the long term market effects for real estate and other sectors.

Locally our housing market hasn't reacted that much to this condition. There does seem to be a tad less buyers out and about house hunting, but well priced homes seem to be getting traction despite the doom and gloom. Hopefully Washington's governor will not go too far with the draconian wand like they have in California, Oregon, and New York. Yes, we need to keep people safe, but there are also practical limits to this thing and I believe the aforementioned states have already tread into those murky waters of over reaction.

That said, we should all be mindful of the call for some social distancing and limit excursions to solo activities and necessary outings. Looking at houses is necessary :)

 

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?

2015 Could be the Last Chance for Deals

That headline should have got your attention. We have seen modest to robust appreciation across the USA over the last two years in the real estate market. The mortgage rates have been ranging from really low to ridiculously low and the economy has been slowly moving towards full recovery.

This has kept real estate as a value. Prices have run from the basement in 2010-11 rising to the point now that they are about where they were in 2007-08. Rates are the real story however. They unprecedented long run of sub 6% rates has kept housing active despite and overall economy that has run from dismal to fair.

2015 could represent a turning point however. If this economy gets into full swing, we very well could see the Fed back off the loan guarantees and rates could end up where they really should be in the 6% range. Coupled with the last two years of appreciation that would move the home affordability index much higher and lock out many buyers that can buy today but couldn't with 6% mortgage rate.

As an FYI 6% is still a very good rate and well below the 50 year historical average of 6.8%

Buyers should take care of their finances and get ready to buy in 2015 if they want to secure a housing "deal". The deal may not be so much a price deal but a rate deal. I have said it many times before and I will say it again here, rates kill buyers much more than price.

2014 has shown us that the entry level clean house was king. These little 1400 square foot 3 bedroom 2 bath homes have pushed up towards the $200,000 in the local market while just 10-15% percent more money buys a house nearly twice as large. These low rates have brought out the entry level buyers in force. Any upward movement in rates will "thin the herd" at the bottom and that could mean a serious appreciation slowdown at the entry level. I have seen the starter houses already showing signs that the economic ceiling has been reached. The middle however should continue to move up in appreciation with a modest but healthy rate of growth.

The real estate market doesn't just move in broad based motions. There are subtle differences for neighborhoods, price ranges, style, etc. Prices can be moving up in mid size house while remaining flat at entry level. That is my prediction for 2015 if we see interest rates move up into the 6% range. The market a few years ago allowed two minimum wage earners to buy the median priced home in our local market (Washington minimum wage at $9.32/hour). That is off the table now and that means a lot of buyers can no longer afford a house. This is why the bottom of the market has seen a leveling on appreciation. As the economy ramps up, middle income earners are getting back on the job, better wages, etc. that will help push the gap between entry level and mid-level back into proper proportion.

I believe the value proposition for 2015 will be in the upper middle and lower high end homes. Locally that means $350-500k. That is probably where the "deals" will be found. I am no Nostradamus, but that is where things appear to be headed. 2015, it's time to jump in. 

A New Year with New Opportunities is Near

As I look back at 2014, I have to smile. This past year was very solid in just about every way one can measure a real estate business. Sales up, volume up, income up. All good stuff. There are many analysts that are quite bullish on real estate for 2015. Some are reserved but many are making like a rodeo star and riding the bull.

One of the trends among those in the "know" is the idea that interest rates will be creeping up in 2015. The economy is beginning to show some promise and the feds are starting to get serious about easing their "manipulation" of mortgage rates.I don't see a spike coming, no that would end the bull ride rather quickly. I don't want the rodeo clowns cleaning up a mortgage disaster. But a gentle upswing in rates could prove to be just what the market needs. Investors could loosen their grip a little on underwriting guidelines if there is more profit in the form of interest earnings. Buyers that are still dangling their feet over the edge of the "I might buy a house soon" fence should start jumping in when they see a rising trend in rates. As they jump in the sales pressure of new buyers entering the market might be partially offset by the tendency for rising interest rates to slow real estates. The result could be another year of very healthy and smooth 6-8% appreciation. Rapid appreciation is great when you on the gravy train of equity, but it tends to lead to harder crashes. A nice gentle slow and steady rise is sustainable and definitely safer for the overall economy. I have attached and article along with a link to it directly online that talks about potential trends for 2015.

This article was published in U.S. News and World Report

By Susan Johnson, December 9th, 2014
As housing recovers, prices in many markets across the U.S. have shot up. In fact, RealtyTrac reported that the median sale price of U.S. single-family homes and condos in October had reached its highest level since September 2008. Price appreciation and the lure of foreclosures created a feeding frenzy for real estate investors willing to pay cash and made it harder for traditional buyers to compete.

But experts say that 2015 will be marked by a return to normalcy and balance for real estate marketsacross the country. Stan Humphries, chief economist for Zillow.com, predicts that home value growth will slow to around 3 percent per year instead of the 6 percent seen recently, and that will make real estate less attractive to many investors. “It's been a tough market for buyers," he says. "I think it's going to get easier in 2015. Negotiating power will move back to buyers and away from sellers. It will be a much more balanced market." (Too many buyers and too little inventory, or the opposite, contribute to an unbalanced market.)

Redfin.com's chief economist Nela Richardson agrees. "It's been a clear pattern that the investor activity has been shrinking over time," she says. "Investors like to go in where they can buy low and sell high. Price growth is starting to slow dramatically, so they can't sell much higher than what they buy. Investment property is less compelling in 2014 going into 2015."

More inventory and less competition from investors means even traditional buyers are becoming “more picky, and they're willing to let a home go if they don't think it's a good fit for them," Richardson adds. "Buyers are less worried that they'll miss out on something. Houses are more like buses now. If you miss one, another one will come along." Whereas buyers might waive contingencies in the recent past to make their offer more attractive to sellers, they're now more likely to insist on contingencies for financing and inspections.


That said, foreign investors may still find high-end American real estate appealing because of economic turbulence in their home countries. For instance, the U.K. is toying with a so-called "mansion tax" that would apply to those who own properties worth more than 2 million British pounds (or over $3 million), and China has placed restrictions on homebuying in large cities. Some foreign investors also worry about currency fluctuations devaluing money they hold in their home countries. "That section of the market is still all cash – people buying up these huge places because it's safer here than in their own countries," says Herman Chan, real estate broker with Bay Sotheby's International Realty in San Francisco.

Buyers from outside the U.S. may use their properties as a rental, a pied-à-terre (a secondary residence used for travel) or a residence for children studying at American colleges. But for buyers looking for more moderately priced homes, 2015 could offer a respite from bidding wars and all-cash offers. "People who've been on the fence about selling are finally going to pull the trigger, which is great for buyers [because it creates more inventory]," Chan says. "Now people with regular jobs and 20 percent down finally have a chance to get into the market."

For years, many millennials have postponed homeownership in favor of renting, but that may also change next year as a growing number of Gen Yers start families and seek more stability. "By the end of 2015, millennial buyers will represent the largest group of homebuyers, taking over from Generation X," Humphries says. "They prefer smaller units closer to the urban core, so it will be interesting to see whether they follow the time-honored path towards the periphery of the metro."

Baby boomers are also likely to make a move in 2015. Chan says he's "gotten so many calls from baby boomers recently saying, 'We’re downsizing, and we're moving to be closer to our grandkids or our son or daughter.'" With fewer homes underwater, they're finally in a position to sell.

While mortgage rates may not remain at the historic lows seen recently, more people may qualify for home loans as issues like foreclosures or short sales age out of their credit reports and Freddy Mac and Fannie Mae ease mortgage eligibility. Freddy and Fannie recently announced a new mortgage program for buyers with a down payment as low as 3 percent. "Freddy and Fannie have always been the industry leaders, and they're saying, 'It's OK to lend to people who don't have 5 percent down. It's OK to extend credit in a reasonable and safe manner," Richardson says.