Analyst Projections are Softening for 2018

The overall Portland Metro area has already seen a slowdown in the rate of price appreciation in the first 1/3 of 2018. There is near unanimous analyst agreements that market conditions will soften as the year progresses. For buyers that may not seem like the case especially resale buyers in places like Portland, where inventory remains critically tight.

A low inventory definitely tips the scales towards sellers int he supply and demand view of economics, but demand in real estate is a little different than demand in many other commodities. Demand for real estate is almost always high, but the problem isn't that there aren't ready and willing buyers, there are plenty; the problem is that there are many "able" buyers.

The greater Portland-Vancouver market has seen housing price growth so outstrip income growth that many ready and willing buyers are simply no longer able. Many sellers still believe they can list their home for a sky high price because they have a "rare" commodity. But having something rare still requires having more buyers than sellers. For example, if I have a rare and desirable item that I price so high no one can afford it, I will not sell it, even if it is the only one on Earth.

One real classic trap that I see seller's right now falling into is the chasing down the market. Last year a seller could float a high price above market and get away with it. Buyers outnumbered sellers so much that someone would always step up and make an offer close enough to close. But now I am seeing, and the analysts have confirmed, that strategy is leading to a series of price reductions from sellers.

A series of price reductions puts buyers in a position of strength against sellers. As interest rates rise the pool of eligible buyers shrinks. Sellers are well advised to price their home at market pricing because higher interest rates reduce the buying power of prospects for the home. Remember inventory IS in short supply, but recent conditions have also reduce the supply of "able" buyers. This local market is moving into a neutral status where it is neither a seller's or buyer's market. I still think current conditions tend to favor sellers, but another few upticks in interest rates could level the field.

For younger buyers that have never seen a mortgage rate above 6 percent, I'll tell you this. The 50 year average rate on a home loan is still above 6%. Young people have seen these historic low rates as the "norm" when in fact this has been an abnormal decade for interest rates which are now beginning to normalize. Paying 6% on a mortgage loan is still reasonable when compared to the long term averages.

That however does not mean the buyers shouldn't try to score a house while rates remain lower than 6%. Interest rate is a much bigger impediment to buying a house than price. Interest rates will likely rise faster than prices this year, so buyers should focus on their ability to pay, not trying to grind out the lowest price on a house.

So overall Clark County, Washington saw roughly 10% growth in the median home price from 2017 to 2018, most analysts are projecting 2018-19 growth to be about 1/3 that in the 3% range. So prices are still rising, but not at the rate they were last year. Incomes are the limiting factor. For buyers, the price slowdown may feel like a reprieve, but combined with the up creep in rates the purchasing power will make the market "feel" like it's rising just as fast as last year.

Sellers need to be cautious, analysts are not the end all be all. Market conditions can be fragile, and they are in my opinion fragile right now. If national and local economic indicators remain strong most of the analyst projections will likely pan out, but any negative economic factors could lead us back to a buyers market. Sellers: A bird in the hand is better than two in bush, in 2018.

How will Rising Rates Tug on our Market?

Since the beginning of the year mortgage rates have been on a rather steady upswing. It's not like they have launched into space, but rather just a slow and steady rise. The 4th quarter of last year more than 3% GDP growth and that was the best quarter since the economic crash in 2009. This is putting upward pressure on rates. A strong economy is nearly always met with higher interest rates.

For the real estate market, higher mortgage rates are a real braking device. A buyer looking at a $300,000 mortgage can expect to pay a principle and interest payment of $1347 at 3.5%. This of course doesn't include taxes and insurance but those are not readily affected by rates. At 4.5% that same $300,000 loan has a PI payment of $1520. At 5.5% it rises to $1703. A $356 increase in payment generally will require an additional $700 to $1000 in monthly income to qualify. Even if housing prices stay flat and do not change, buyers will lose buying power as rates continue upward.

Most analysts are expected the price appreciation to soften in 2018 to around 3% - 5%. Even at the low end of that scale a $315,000 house will be $324,450 in a year. If a buyer can get 4.25% today that house with 15K down will have a PI payment of $1476 plus a few hundred more in taxes and insurance. Next year at the low end of analysts projections the same house will have a PI payment of  $1657. That is more than $200 a month more expensive. That means at least $500 a month in additional income to qualify.

I still find buyers that are resistant to this concept and often they find themselves priced out of the market or settling for way less house than they would have been able to afford had they acted earlier. The worst part is that over time the interest rate does much more financial damage than paying a higher price. The rate of principle reduction is slower, the total amount of interest paid is much higher. In fact, a $300,000 mortgage at 4.5% will have a total of 360 payments of $1520 for $547,200. At 5.25% it's 360 payments of $1657 for $596,520. So just three quarters of one percent leads to $50,000 more in payments over time.

Rates are on the rise, so it's time to buy or die. So to speak.

Time to Revisit Interest Rates

I have been warning of rising rates for several years and the Fed tried to keep a lid on rates to help the economy. The economy is now moving very well. Strong enough that inflation worries have now replaced economic worries. This has led to actual treasury bill increases and a strong tug on rates is underway. There has been a slow but steady increase in mortgage rates since late last fall and this is expected to continue.

 Many buyers are still trying to find a house they can afford. I can't help but notice that some buyers remain hesitant to buy a house and often over a trivial matter. That is all fine and well but the train is leaving the station, and some will be left standing on the platform.

Here is the deal. The rise in rates has been slow and steady. It isn't enough to turn the market around and cause prices to fall. It is however enough to slow the rate of price growth. Most analysts are predicting a much more modest gain in pricing in 2018 than we had in both 2016 and 17. But prices are still expected to rise and more importantly the cost of borrowing money will go up. Borrowing is a much larger burden than price.

Let's look at a scenario. Sally and Bob get approved for a loan in February for $300,000. The loan officer has qualified them based on their income and debt load. Let's say that they have an income of $5,000 per month. So they qualify for $1450 a month plus taxes and insurance at 4%. Now let's say rates continue to rise at their current pace. By May they will no longer be able to get 4%. Now rates are at 4.5% Now the PI payment is $1520. They will have to come in with extra cash to "buy down" the rate or settle for less house. But the homes are a little more money now. So prices have risen by 1% and their borrowing power has dropped to $282,500. So the house went up $3000 and the loan went down $17,500. They have literally lost $20,000 in buying power in couple of months.

This is the scenario that is building into the market now. Buyers are not the only ones that need to be concerned. Sellers looking to sell the current house and buy another one may find themselves in a pickle if they keep waiting to sell their house. Inventory is squeaky tight right now and buyers are ready to snatch up seller's listings, yet sellers are sitting on the hands. Meanwhile, what ever house the seller plans to buy after finally selling their current house, will end up costing them more in the form of higher rates.

Cash buyers are of course somewhat immune to the interest rate issue. In fact rising rates help the cash buyer as it tend to slow down the rate of growth in pricing. Steep increases in mortgage rates can lead to lower housing prices.

Interest rates are far more destructive to buyers than price. Keep that in mind as we watch rates start to move up towards the more typical 5-6%. Rates have been at or near historic lows for the last 8 years and things are beginning to return to normal. 

Sell your house first!

So many buyers are sitting on a house they don't want to list because they haven't found a replacement house. Their logic tends to be sound. They don't want to sell their home and then not have a place to go. The worry is that this crazy seller's market is making it hard to get a house. Multiple offers and a tight inventory is leading many potential sellers to sit on the fence.

This is a seller's market and sellers are not that comfortable taking offers from buyers with a house to sell. This is actually kind of silly when you think about it, the house they are sitting on will probably sell in jiffy.

Buyers should be aware that the same difficulties they are experiencing in finding a house will be experienced by the buyers looking at their house. Sellers can make unusual requests in this kind of market. For example the seller could sell the home with a long closing period so as to give them time to acquire their next home. Buyers are more willing to accept these kinds arrangements because they too are getting desperate to secure a house.

The bottom line is that a buyer with no sale contingency is in a stronger position with the seller and those that offer with a sale contingency will either have to offer more than the other buyer or lose the deal.

Personally, I prefer a real estate market with a little bit more inventory. This one house for every three buyers baloney tends to wear thin on the market and if it goes on too long, buyers will simply give up.

This is a great time to sell a house, not as good for buyers, but great for sellers. Those considering listing their home have a nice window this summer to get sold for top dollar before economic conditions in the lending world slow things a little bit. No one knows for sure when rates will rise, but the Fed Chair, Janet Yellen has been indicating the time is ripe for some increases int he Fed rate.

If you are going to tread this market with a sale contingent offer plan, be sure to make the rest of your offer as tasty as possible for the seller. Remember most listed properties these days are seeing no shortage of willing and able buyers. Sellers are in the driver's seat.

#200 How did that happen?

Well a few years ago I changed my monthly real estate newsletter that went out in email form to a weekly Real Estate Blog. Look at that! Issue 200 on this blog has already arrived. Yikes! I do thank all of you for reading this blog.

I do hope you have all found useful information regarding the state of our industry both locally and nationally. I do strive to bridge the gap between facts and conjecture. There is always going to be a great deal of speculation in an industry as influential and popular as real estate.

Speaking of speculation, interest rates are on the minds of many these days. There is a lot of chatter coming out of the financial world about where mortgage rates are heading on the news of a hike in the fed rate over the next few cycles. The Fed Rate doesn't have nearly as much direct influence on mortgages as many people think. It does have a significant indirect effect in that it signals to the markets at large the government's relative attitude regarding the state of the economy.

The Fed Rate (Federal Funds Rate) is a short term interest rate. In fact it is the rate at which banks charge each other for overnight loans. The reason banks make these overnight loans is due to Federal government regulations requiring them to have a certain amount of cash on hand at the end of every business day. Since banks are constantly moving money around, making loans and receiving deposits, they often find themselves short of the government regulated minimums and other banks are in excess of those minimums as billions of dollars move from bank to bank.

The reality is, it doesn't directly effect any long term lending. It does effect short term lending. The reason so many people in the industry point to it as if it were a direct influence is due to the reason the Fed Rate rises. The Fed's action is often due to a rise in inflation and is often raised in an attempt to slow the release of ready cash into the economy.

Generally when the stock market is hot, investors are less interested in collateralized long term debt as an investment. Making 3%-5% annually on mortgage debt is great in a bear market or in a less robust stock market. But when the wall street bull is running the big money starts to gravitate towards stocks and that means lenders need to "entice" the investors with more generous rates of return.

As far as long term mortgage rates are concerned, I have been warning that the 3% party was going to end. In all honesty, it lasted WAY longer than I ever expected. Frankly, it is a testament to the fact the the recovery from the 2008-09 crash was much slower than our slick politicians in Washington DC were willing to admit.

The bottom line on mortgage rates is this. Over the last 70 years rates on 30 year real estate notes has averaged around 6.5%. We had historic highs in the 1980s when mortgages were deep into the teens and historic lows just recently when 30 year money was available in the low threes.

Buyers need to recognize that over the long haul paying a higher mortgage rate will hurt them more than paying a higher price for a home. This market offers no favors to those sitting on the fence. Sellers likewise need to recognize that the robust seller's market will slow a bit as interest rates rise. This means they need to drop the attitude that leads them to believe they don't need to accommodate buyers, and follow best practices for selling a home.

Our real estate market locally in Clark County has a much different dynamic than the market in bordering, Portland, OR. Portland is built -out. They only have infill and re-development options. There is no "new dirt" in Portland. They will likely continue to see pressure on the resale market. Here in Clark County, we do have available, buildable land. The builders are here and the nails are being hammered in. This puts real limits on the resale growth potential as new homes will always carry more value than resales, all else being equal. Right now the median home price county-wide is just above $300k. New homes are widely available in the $325-400k range and that means it will be hard to push a similar 20 year old resale much above the current median mark.

Additionally wages have not kept up with home prices locally and that will begin to slow the rate of new buyers coming into the market. Sellers need to decide whether to sell now or hold tight, but the future is uncertain where the now is known. Right now, we have a modest number of buyers seeking homes from a severely restricted inventory. This is good for sellers now, but when other homeowners decide to sell before rates get too high, inventory will swell and the sellers market will become more neutral. Now is a great time to sell that house and get your new home while rates are still low.

Thanks for helping me reach 200 posts and here's to the march to a thousand!

Interest rates are going up, No really they are this time!

So now nearly every analyst is on board that the Fed will in fact need to make a move up on the short term rates. Long term yields are moving up as well. Mortgage rates are finally going to lose the Federal Government's support and rates will begin to normalize. This means that buyers have an cheap money window that is closing. Rates are in the threes and we will start to see them inch up with each meeting of the Fed. Starting in December, yes next month, were are almost certain to see the first of several incremental increases that will lead to a slow rise in mortgage rates.

Buyers, I know the holidays are looming, but now is the time for you to cash in on the biggest Christmas gift of your life, a sub 4% mortgage that will keep on giving long after the 2016 Holidays fade away.

Economic Indicators are Trending Up; "Op Window" is Closing

Many market analysts are mildly bullish on the numbers coming out of the marketplace as we enter the final quarter of 2014. For me personally as a Realtor®, this was my strongest year ever. I enjoyed sales that were even better than the pre-crash heyday of the mid-2000s. Low interest rates and improving consumer confidence has made conditions for real estate ripe over the last two years. In 2011 through the middle of 2013 the first time home buyer segment was roaring. Prices were still a little depressed and rates were low so people that had been long priced out of the market saw a rare opportunity to own real estate. Economic recovery and confidence has led to a spill over into the middle and upper end markets.

Looking forward; the strong potential for the economy to swing into a more robust growth could lead to rising interest rates. If the rates get too high, they can have a negative effect on real estate sales and appreciation can slow. The "op window" for many buyers may be closing. Prices have swollen over the last two years by nearly 20%. If rates were to get closer to the 30 year average and settle in at 6%-6.5%, many entry level buyers will find themselves priced out. A strong economy is a good thing and even higher interest rates are worth having when strong job growth and higher incomes are part of the equation. Right now, buyers are in the open window of opportunity. They can lock in a low interest rate that can save them tens of thousands of dollars over the life of the loan before the improving economy drives prices and rates up.

Fear and uncertainty are what keep people from buying real estate. But no matter what, people need a place to live and buying right now for many people is just as affordable as renting. As the economic conditions improve the cost to own will rise faster than the cost of rent and that window will close as well. It is a good time to buy and a good time to sell.  

This was published by Kiplinger this month:

By David Payne

The economy looks better than was previously thought: Look for about 3.5% growth at an annual rate in the third quarter, driven by motor vehicle sales, business equipment, exports and nonresidential construction. A likely upward revision of second-quarter growth to near 5.0% after a dismal first quarter (a -2.1% growth rate) is also likely. In the fourth quarter and into 2015, growth should settle down to a 3.0% rate. That would mean average GDP this year would be about 2.2% over the average for 2013.

Setting the stage for more sustained growth in coming months: After wringing out inflation, disposable income grew at a strong 4.0% annualized rate from December 2013 through July 2014. Consumer confidence is at its highest level since before the recession. Motor vehicle sales in July hit their highest level in over eight years. An index of manufacturing activity points to strongly expanding output. New orders for business equipment have climbed 13 percent at an annual rate since May, indicating strength in business investment spending. Plus, hiring is on the rise, layoffs are scarce (indicated by a very low rate of initial unemployment claims since May), and retail sales have rebounded.

And growth may accelerate more dramatically through 2015. Improving business confidence could push investment growth back up. Consumer spending and confidence remain below what would be considered normal levels by the standards of past economic expansions. As job growth returns and consumers feel more secure, more robust income and spending increases may well be triggered, pushing second-half growth over the expected 3% pace. While that happening in what remains of this year is an outside chance, it’s a good bet that in 2015 such a virtuous cycle will kick in.

There is a slight possibility that rising interest rates next year could have a mild depressive effect, knocking growth down from an above-average (better than a 3%) rate to a simply average (2.5%) pace. For now, however, we expect that the likely small increase of a quarter- or half-percentage point in rates won’t have much impact on GDP growth.

Rates up a FULL point over last year.

The all time record low rates of this past spring are now in the history books. We have seen them creep up by a full point over the last few months. But it is important to understand that historically speaking any rate under 6% is a good rate. That said 4.5% is a GREAT rate. If this upward trend continues however, this extended period of extra buying opportunity will finally come to a close.

Higher rates will eliminate some people from the dream of owning a home. For others it will limit the size, type or neighborhood of their next home. Yet there are still buyers out there waiting. Waiting for what? Even higher rates, bigger payments or worse another decade of renting?

Over the last thirty years rates have averaged much higher than today's rates in the mid 4s. The chart below shows the average mortgage rate on a 30 year fixed loan since 1975. Our current rates are still the best in over forty years.

The last three years have truly been a golden era for buyers in the American home market. Prices have been low as we recover from the "crash" of 2008-2009. Rates have been at or very near ALL TIME record lows for the last two years. This golden era has already lasted twice as long as I expected it to and something will have to give. Either rates will spike, prices will spike or a little of both. The bottom line remains that this is a great opportunity to take advantage of a rare combination of low rates and low prices. First time home buyers can get into a well priced home with payments lower than rent.

If an entry level homeowner has some equity, they can sell their small house and move up to a big house while prices are still low and rates are low. I think many home owners sitting on a house they bought in 2005-2007 are waiting for values to rise. Some have to, because they need equity. Others are sitting on equity and are waiting for a better price. The problem with the latter is that it may be seriously flawed logic. If prices rise 10% over the next year they will get an extra $15,000 for their current $150k home. But that move up larger house currently listed at $250k will likely rise $25,000. So in essence they are stepping over the proverbial quarter to pick up that proverbial dime. And as they wait, they run the risk of also having a higher interest rate next year on that new larger and more expensive home. If that happens they could spend tens of thousands of dollars in additional interest over the life of the new loan. 

The empty nester looking to downsize can still take advantage of these low rates now. Even if they get a little less cash out of their larger home now, they may save tens of thousands in interest on that final home for retirement with our current low rates. I cannot over estimate this old saying, "You will feel the sting of high interest long after the joy of a low price has faded away." Conversely, you will enjoy the benefit of low interest, long after the sting of a high price has faded away. Price is fleeting, interest is forever, well at my age it is forever anyway. 

Based on the chart above, some of us may not even be alive next time we have rates in the threes. These current mortgage rates are being suppressed by the federal government's willingness to buy the mortgages at the low rate. They are doing this to prop up the real estate market while the economy recovers. Once the fed backs away from that policy, and they will, rates will likely return to a more "normal" 6-7%.

This is a pivotal moment in the real estate for anyone considering a purchase, a sale or both. How many times have you looked back in life and said, "If I only had done this, or that..." You know, like buying Apple stock when it was five bucks a share in the mid 90s. Now is one of those times in real estate but the bottom has been revealed and things appear to be moving up. As I said in my book, 'Don't Panic', "Buy low and sell high, and that is right now, my friends."