2019 Outlook

The stock market took a blow to the face this month and that may seem like trouble, but it is more than likely just a sell off to take profits off what has been a monumental rise in equity value since 2016. The red hot stock market has been a major factor in the Fed decision to tighten things up with interest rates and that has in turn led to some minor softening in the real estate market, particularly for the single family residential market.

The Wall Street blues could lead to a more robust interest in putting all that sell off cash into mortgages that are now bringing investors a decent 4.5% - 5.5% ROR. That bodes well for buyers as a stable lending market will settle in nicely to our near neutral market conditions.

Analysts continue to project that the next two years will see home prices outpace inflation but the media is painting a grim picture because the rate of growth is expected to slow substantially. But double digit housing inflation is not sustainable and the market is simply settling in to a more normal growth rate.

Buyers should understand that even though prices are not skyrocketing, they are still inching upwards and getting in sooner offers more opportunity for equity growth, equity growth is good. Don't be misled by media reports of a slowing market to mean that prices are reversing and getting lower, they are not. Some overpriced listings are being reduced to points they should have been at all along but the median continues to creep up.

It seems like interest rates are stabilizing and historically speaking a 5% mortgage is still a fabulous deal. Here's to 2019 and solid year for real estate! 

Market Nearing Neutrality

Our market continues to see new inventory and this is softening the seller's advantage across a variety of price ranges. Even the median price range is offering a larger selection for buyers. Locally it is only the sub-median that remains a strong sellers market, but I am seeing some resistance to high prices even in that tight market.

Pressure in the Vancouver market is still largely external. Portland, OR is still a bit tighter on inventory and is seeing price pressure upwards albeit at a slower pace. Many would be Portland buyers are looking at Vancouver as a nearby alternative. Vancouver has a variety of neighborhood styles, many that resemble popular Portland neighborhoods.

Clark County also offers up a bit of suburbia as well as a bit of country living which is all but Absent in Multnomah County.

The external market forces are keeping Vancouver and Clark County on a modest pathway in median home price appreciation but things are relatively flat compared to the steep spike of a the last few years.

Many projections are flying about from the usual suspects about growth in pricing locally and many have revised things to a much more sustainable 3%-4% for the next year. Clark County continues to add new construction units in both the rental and sales inventory. Vancouver is adding thousands of units across the entire rental spectrum from luxury riverfront apartment properties at $5000 a month to more modest properties with income restrictions in the sub-$1000 range.

Some analysts are a bit concerned about the Millennial age group as that demographic seems more likely to prefer renting than owning and that is a new twist in America's age old "dream." This coupled with increasing inventory could soften the market even more for 2019 possibly throwing us into a full neutral sales condition in the first half of next year.

Business insider had a detailed article about Millennial home buying here. 

All Eyes on Interest Rates

Happy New Year!

Interest rates are the biggest single influence on the real estate market. There are many 'barometers' for the industry, but interest rates are the one that really can make a market move or stall. The feds have been using all of their influence to keep rates artificially low. The reason is that the real estate market was very fragile from 2009-2013. But as the market heated up the interest rates should have been allowed to creep up. The feds continued exercising their pressure to keep them down. I believe the economy was dependent on strong housing.

Buyer and sellers need to pay close attention to how increasing rates will effect them. Rising rates will make a house more expensive to buy.

For sellers that means a shrinking number of buyers that can afford the house. This will hurt the middle pricing the most. Wealthy people at the very top buying seven figure properties are less impacted. Although the max mortgage interest deduction for taxes was recently reduced so that may have a bigger impact than rates in the high end.

The bottom of the market will always have the most buyers. Even as rates rise the demand for entry level housing will remain stronger. People that once qualified for a 2000 foot 10 year old house may have to settle for a 1500 foot 20 year old house if rates are 2 points higher.

The middle takes the biggest hit in a rising rate market. 120% to 200% of median suffers when rates rise too fast for wages. Locally that means homes priced from $400k to $700k.

Buyers need to understand that waiting for a "better price" in a rising rate market is often counter productive. Most analysts are suggesting a slow rise, but a quick rise will lead to falling real estate prices. The higher rate is far more likely to kill a buyer than high price. I have written on this blog about the effects of high rates against high prices. Read here: Why Interest Rate is more Important than Purchase Price.

Cash buyers win big when rates move up but loan dependent buyers have to thread the needle of value trying to get a good price without paying the bank too much. Sellers have to consider the next home they will buy when selling the current house. Are they moving up to a larger house? Downsizing? Moving up could be a problem if rates are rising as the qualifying income needs to be higher to support higher rates the new house may soften in price but the higher rate could push the payment out of reach. Downsizing is less of an issue as the seller could come in  with a large down payment and a much lower principal balance.

Higher interest rates however are not all doom and gloom. Historically speaking the average rate on a mortgage over the last fifty years has been in the low to mid sixes! We have been in an extended period of sub 5%. So long has it been since rates were at 6 percent I would think millennial buyers can't remember ever seeing them that high.

When the stock market is roaring and mortgage rates are only at 4% investors that might otherwise buy mortgage backed securities may seek their fortune elsewhere. This makes underwriting tight as banks must lure investors to the mortgages through the prism of low risk. As rates flex up towards the 5-6% range the returns are better and investors get pretty excited. Guide lines can soften, making the mortgages a little easier to obtain for buyers. That helps keep the prices on existing homes moving up rather than flattening out. It's about keeping buyers in the market. This is only effective to a point. Back in the eighties when mortgage rates were in double figures the real estate market was brutal. Funny thing though, people still bought houses!

Rates ought to be around 5-6% right now, and the fed is moving away from its tinkering so we will starting creeping up towards that in 2018. We should see rates settle in at market values in that range over the next 12-18 months. Buyers shouldn't fret as that is a very "normal" range and still slightly lower than the historical average.

2018 should be a solid year for real estate. The out of control seller's market should soften into the near neutral market and that will be a welcome sight for me. I have never liked it when the market is too heavily tilted in one direction. Either a mild seller's market or a neutral market is typically best for all parties to a real estate transaction.

New Homes are Bigger and More Expensive

For the first time in years the average size of a new home actually dropped last year. According to the National Association of Home Builders, NAHB last year's median home size was 2392 square feet down from a peak of just over 2465. This in stark contrast to the median of just over 2000 SF at the turn of the millennium and 1400 SF in the early 1970s.

The development costs have gotten so high that builders truly struggle to make a profit on floor plans that have less than 2000 square feet. Most people are unaware of the cost of developing a lot.

Let's say a developer buys a plot of say 20 acres and decides to make a residential subdivision. There are many fees and studies required to get approval for the subdivision. There are also substantial costs to get connected to services. There are essentially two broad classes of expenses, General development costs and individual lot costs.

The broad costs are things like, cost to divide, traffic impact studies, infrastructure, environmental studies and mitigation, etc. The individual expenses are electrical, water and sewer connections, other utilities, lot prep and excavation, etc.

These are costs that have skyrocketed over the last few decades as state and local entrenched un-elected bureaucrats wield a mighty pen. This has been a big part of the upward trend in home size. Builders are trying to recoup all of the development costs by building bigger and more expensive homes.

Most people are unaware of just how much money is sucked into the bureaucracy. Don't get me wrong, there are many legitimate concerns, 'we the people' should have about how land is developed, but it the heavy hand of government is a bit out of control at the moment. I am not a land developer so for the purpose of this article I am using broad strokes and general estimates based on my experiences and research. Different markets and conditions lead to a great many variables, but the following represents a good idea of how it works.

Let's say that 20 acre parcel sold for $1,250,000. The developer would spend somewhere around $750,000 to get the subdivision through the system. This includes the endless parade of traffic and environmental studies, water runoff studies and appropriate mitigation, etc. Now the builder could have small 100 lots or 50 large lots. But the large lot will only net the builder maybe at best $10,000 more on price and maybe he could build bigger more expensive homes on the larger lots. So why have a subdivision with 50, $500,000 homes when she can have 100 $350,000 homes? The difference is an extra $10,000 in gross revenue for the development. More lots helps to spread out the costs to reduce the overall impact of the broad development costs on each individual lot.

Next the developer will have to build the public infrastructure. Yes my friends the developer pays to put in infrastructure that is then deeded back to the local government agency. There's another $1,000,000. So now we have 100 lots at a cost of $2,000,000 or $30,000 per lot. The developer has to get the individual lot expenses in line as permits to build, are needed, utility connections and such. A city sewer connection alone is somewhere in the neighborhood of $7000-$15000 depending on the local area. By the time it is all said and done, that little postage stamp lot has a cost of around $70,000-$80,000. The developer will sell the lots to a builder at a 8-10% profit so now the lot is around say $85,000 To build a very basic style of house with modest grade materials, two story, 1800 squares will run about $100 per foot. That means the raw costs to build in this scenario are upwards of $265,000. The builder will  need to make a 8-10% profit so that modest home hits the market at $290,000. If the home is built with nicer amenities and materials such as slab granite counters, solid wood cabinets, high grade flooring, fiber cement siding, etc. the build costs jumps quickly into the $150 per foot range. Now that 1800 SF luxury home is coming in at $390,000.

Developers take on a great deal of risk for what ends up being a modest 8-9% profit. Done right real estate developers can succeed and prosper, but the landscape is littered with development failures. If we want to create a market for new homes that our future generations can afford, perhaps the first spot to look is the bureaucracy.

Metro Area Market Trends

I pulled some data from the National Association of Realtors® for the Portland-Vancouver Metro Area and the results are interesting but not surprising.

Many agents and media outlets have suggested the market is a raging bull and although in context it may be true. But the perception has been that it is a seller's market in the vein of 2005-2006 and that is simply not the case. Back before the crash in 2008-2009 it was a ridiculous seller's market. Homes were fetching whatever the seller wanted and condition was almost a moot point. Double digit appreciation was practically expected rather than being a gross anomaly like it really should be.

This current market is much different and frankly much healthier. yes we are in a seller's market. But sellers still have to present a quality product at a fair price. Over priced listings are NOT selling and that is a very definitive difference between 2005 and 2015.

Buyers are also showing reservations about homes that are in questionable neighborhoods or that need TLC as they say. The market is raging but only if you have a solid move in ready house in a conforming neighborhood. Other homes are are taking longer to sell. 

The media can sometimes make a mountain out of the proverbial mole hill and sometimes they underestimate things. It seems the story is not always what it seems.

We are in a healthy real estate market here in the Portland-Vancouver market. Values are rising in the 3-5% annual range and that is just dandy. If sellers want to have a vigorous multi-offer situation they need to be in a solid hot neighborhood AND they need to have that house looking real sharp. Sellers that are unwilling to comply with the conditions presented by the cold-hearted market will only find disappointment.

Buyers on the other hand, need to realize that the house they want, the clean and sharp beauty in the perfect neighborhood will not be on the market long. It will also sell for more than the asking price. Buyers making low offers on hot houses will also be met with frustration. 

The National Association of Realtors® has some projections for pricing over the next twelve months and the outlook is HEALTHY.

Inventory is Tight

Inventory is very tight right now in many markets across the country. Here in Clark County, Washington that is very much the case. Buyers are snatching up all the clean, well priced and move in ready properties in the first couple of days they are on the market. Multiple offers on these homes are becoming the normal rather than the exception.

When it comes to homes that need some attention and minor repairs, these tend to hang around a bit longer. These are the homes that buyers can acquire without getting into a bidding war with half the county. The market over the last year or so has been filled with eager buyers looking for move in ready properties. The fixers are not seeing the rush of buyers.

As a Realtor®, I often find myself with frustrated buyers that have been outbid or too slow to act to get a house. I try to show them properties that need a little TLC but are still financable but some buyers just don't want to deal with any "fixing". One idea that can help these buyers is to seek the fixers that have a willing seller and get the seller to make the repairs before closing. Buyers that are up against a financial barrier have to remember that they may not get the perfect move in ready, big house on the small dime. There are often choices between a smaller property that is cherry or a bigger property that needs a little work.

The important thing to realize is that as prices continue to nudge their way higher, the buyer only gets in a tighter spot. Unless that buyer gets a huge promotion or takes a new job making allot more money the housing prices are rising faster than income.

Some buyers need to consider buying a smaller home to start and then use the equity they gain over time to leverage a larger property a few years down the road. Real Estate can be a very good way to build wealth and having the benefit of both a home and an appreciating asset is a major step towards financial independence.    

July's MLS sales figures for Clark County were stellar

The numbers are in for July from our local multiple listing service and they look great. Looking back first at last year, July 2012 was healthy but not stellar. Inventory was starting to tighten up and demand was strong enough in certain segments to generate multiple offers. 499 transactions were closed in July 2012 for Clark County against this year's total of 696. We are still well off the frenzied pace of 2005-2007 but clearly the best we've seen since "the crash".

Evaluating numbers is never as easy as just looking at the one or two "big" stats. Often people, including some Realtors®, look at median price or total unit sales as an indicator that all market segments are moving equally. Just because the median price is up 21% by no means suggests that any random house that was sold last year is now worth 21% more this year. The real estate market is very complex with neighborhood fluctuations, locations, home size, price range, and styles often performing independent of each other based on market demand or supply.

The chart below shows the "big" over all county stats for this local market and then breaks the numbers down a little further to show some broad segment trends. The big question for John and Sally homeowner is often geared towards, "can I sell MY house right now"? If John and Sally own a condo they may not be much better off this year than they were last year in market appreciation. The condo market is almost always late to recover.

Last year the sales figures were heaviest in the entry level market. Those $125-150k three bedroom ramblers were being snatched up and as such, supply tightened up and prices soared. This year that market segment was priced high enough that demand slowed down a little, but the middle market surged with larger four bedroom houses seeing significant increases in unit sales. Those bigger mid sized homes saw a massive 59% increase in sales but a more modest 13% increase in median price.

Last year I said that the bottom has to tighten up first before the middle can take off. Well, the bottom did tighten up and now the middle is taking off this year. That is driving the increase in median price. The smaller two bedroom houses have peaked with only a 1.3% increase in median price despite a large surge in unit sales of 46%. Even the bread and butter three bedroom market that was red hot last year, is showing preliminary indications that the buyers are nearing their limits. The 18% increase in median against a large surge of 29% in units sold is still quite robust, however. The sellers in the entry level often move up to that bigger house and as they sell their 2 and 3 bedroom homes they move into the middle market. The 59% increase in unit sales in that segment will likely produce more impressive median increases when we check the numbers in a few months.

Of course this discussion has to hinge on keeping other complex variables favorable, such as the general economy, jobs and the ever critical mortgage rates.

The big takeaway for homeowners is the fact that their home that may have been upside down or too tight to sell, could in fact be a seller today. Contact your favorite Realtor® for a Comparative Market Analysis on your home. Most offer this service for no charge, I certainly will.

   
         

Keeping an Eye on the Market

I wrote this article for the Equity Northwest Properties Blog this morning and decided to re-post it here for you.

There is a huge inventory of homes that were purchased at or near the height of the market from 2004-2008. The average homeowner moves every seven years so many of these homeowners that bought at the peak are getting towards that "time to move" point. The problem is that values for many of them are still not quite high enough to clear the loan obligation. Many of these would be sellers are sitting on the fence patiently waiting for the market to yield the price they need to exit clean.

For Realtors® and sellers this is a 'watch the market' time. We enjoyed a robust 8-12% gain in values over the last twelve months. If this upward pricing trend continues, many homeowners will finally exit the proverbial tunnel and be able to sell their home and clear all liens and fees.

Our local market and many other markets around the nation are seeing tight inventory, especially in the entry level price range. This is driving an increase in price. Low interest rates are also helping to keep demand relatively high. As these 'top of the market' homes become viable to sell again, we will see less of a squeeze on inventory. This can be a bit precarious, too much inventory may cause prices to flatten out if demand does not keep up. So long as interest rates remain at or below 5%, I believe the market will continue its growth, even if inventory levels fatten up. A combination of higher rates in the more normal range of 6-7% and bulkier inventory would likely cause the prices to stop rising or at least severely slow down.

What does all this really mean? For buyers that really want to own, rather than rent, now is truly the time to buy. Rates are low and there is no guarantee they will remain low. Prices are rising but still relatively low. For sellers, things are a little dicey at the moment. Selling now could be the genius move of the decade or it could be one of those "oops" I should have waited situations. No one really knows what this fragile market will do. If you are a owner occupant seller and you actually want to move then selling as soon as possible makes sense. If you are selling based on an investment then you are forced to gamble a bit. Wait or sell? For an investor I would wait a little longer but of course that may or may not pan out. In the end, I believe real estate should be a long term investment and waiting will rarely cost you money, it may just cost you some time.

Sellers and would be sellers should remain 'market engaged'. In other words, pay attention. Things are moving in generally positive directions and the opportunity to sell will present itself soon. Potential sellers should stay in contact with their favorite agent or broker and 'keep and eye on the market'.