Mortgage Lending Seems to be Weathering the Storm

Mortgage rates have managed to stay low and in some cases dip a bit lower still. The combination of a pandemic and now civil unrest has not been too disruptive tot he local real estate market nor seemingly the lending aspect of real estate.

When rates dip low that reveals a wonderful opportunity for buyers to get a lower payment or to afford a larger or nicer home without paying more money for it. Generally low rates lead to an uptick in activity for buyers and thus a rising price condition. However, COVID-19 has managed to keep a lid on prices. The recent civil unrest may also help keep prices in check. For buyers this is good news a combination of low rates and stable pricing is always a good thing.

Buyers thinking about a home should get started now because rates will only remain low while investors are leery of equities. Furthermore as COVID-19 response restrictions are eased more buyers are likely to emerge and the market could potentially see a return to upward pricing.

Mortgage lenders seem to be handling the COVID-19 well in underwriting. The tendency in a downward job market is for lenders to become more tight with buyers. So far it seems only marginal. Other lending lines like credit cards and car loans are getting real stingy.

This is a strange set of conditions we see now so buckle up and enjoy the ride.

Rates Tumble Again

Interest rates continue to be quite favorable and buyers thinking about SW Washington would be wise to invest in local real estate. I wrote last week about Oregon's HB 2001 which bans the Single Family Zoning in all cities in Oregon with more than 10,000 residents.

With rates in the basement and a strong chance for a rush to SW Washington as Oregonians flee the destruction of suburbia, real estate is as good a prospect as it has ever been. Oregon Governor Kate Brown signed several pieces of real estate related bills including HB 2001 over the summer.

Clark County already has a slight real estate price advantage over Washington County and Multnomah County in Oregon. But a rush of new comers across the mighty Columbia could put enough price pressure on our market to move us ahead of our southern neighbors. Buying now before the reality sets in over there could prove rather fortuitous.

Even if we don't see a mad dash north, these low rates are a perfect opportunity to get into the housing market or make the move up to your dream house. Many people fail to realize the significance of these super low rates. Lets say a homeowner bought a 1500 SF 3 bed, 2 bath house in 2014 for $250,000. Lets say it's worth $350,000 today. If the homeowner borrowed 237,500 at 5.5% they have a payment of roughly $1790. They owe about $218k and sell at $350k. Minus closing expenses lets say they walk with a 100k. Now they buy a $500,000 house, much nicer and put down 20% which they just pulled out of the house they sold BTW. The new house won't have mortgage insurance but it will have higher taxes and a bit higher payment coming in at $2300.

But what about the people that bought in 2011? They probably got the same 1500 foot house for $200,000. Their payment is $1300 a month. They owe 155k and sell for the same 350k. After expenses they walk with a very tidy $165k. That shiny new half million dollar home will cost them $1900 which is pretty close to what their current house would rent for.   

Real estate is amazing and one of the best ways to grow wealth for average citizens.

Rates Have Tumbled!

Turmoil in markets and a flow of cash to the US have created an opportunity for home buyers. Rates fell last week to near all time lows, although not quite as low as a few years ago. That said this will be a temporary lull in rates as things settle out in the markets, rates will normalize again. Buyers should consider taking advantage of the low rates as even a 1/4 point reduction in loan rate can add thousands of dollars in purchasing power.

I have written ad nauseum about the virtues of rate over price. Price is fleeting but rates are forever. Well, 30 years of forever at least. Saving a few thousand on price is nowhere near as important as capitalizing on a rate savings of 1/4 to 1/2 percent. Do not underestimate the power of low rates.

This article I wrote back a few years ago and it still holds true today. I even dedicated an entire chapter to mortgage rates and home prices in my 2010 book, Don't Panic.

originally published July 6th, 2018 by Rod Sager

I have spared no lines of text on the issue of higher interest. Rising interest rates will severely effect buyers ability to purchase a home if they are not using cash. Buyers will enjoy a a flattening price market, but they will not enjoy having their dollars stretched thin by rising rates. 6 of one half-dozen of the other?

Let's say we offer $350,000 on a house now with rates at 4.5% FHA. Buyer will need $12,250 cash down. The PI payment (principle and interest) is $1,711 per month for 30 years. Now the property taxes and mortgage insurance will be added to the payment as well, but interest rates do not directly effect those values. If a buyer waits a couple of months to offer they may find a similar home priced at $355,000. Now if rates remained the same the down payment is now $12,425 and the new estimated PI payment is $1,736 per month for 30 years. That's not so bad, right just $25 a month more. Well, sort of, over thirty years that's $9,000! But this year rates have been slowly climbing so it is far more likely rates will have risen over the next couple of months and probably that 4.5% now will cost 4.75%. With the higher rate, the payment moves up to $1,787 per month. That's $76 per month MORE for 30 years which adds up to $27,360.

Most importantly is that the rising rates was more damaging than the rising prices. The amount of additional monthly income required to qualify for an extra $76 a month payment is going to be $160-$230 depending on the loan type and credit profile. Many buyers get priced out on rates rather than actual home appreciation values.

It is important to remember that loan officers will give an approval based on the price of the house, but the underwriter is actually approving a monthly payment not a purchase price. The loan officer converts the payment into a price to make shopping a little easier for the buyer.

It is very important to understand that the average mortgage rate has been very low for nearly 10 years. In fact The 46 year average Freddie Mac 30 year fixed rate dating back to 1972 is over 8% So even as rates rise into the fives they are still historically low.

The chart below shows the loss of purchasing power as rates rise. Please note the chart is only looking at Principle and Interest and not the combined payment including taxes and insurance. Rising or falling rates won't directly effect the taxes and insurance. The chart shows an FHA loan with a maximum approved PI payment of $1,500. The actual payment on this loan with taxes and insurance would be closer to $2000. The moral of this story is buyers should take advantage of these low rates while they can.

Gentrification Revisited

original published 11/30/2018, by Rod Sager

Gentrification has become a 'dirty' word in some circles. For those unaware of this term, it is used to describe the redevelopment of older run-down areas into more vibrant and affluent neighborhoods. There are always going to be growing pains when this type of real estate turnover happens.

The funny thing about it is this: when neighborhoods are run down they tend to produce less income and thus less taxes for local governments. They also typically have a higher drain on local services funded by those taxes. People are often complaining about all the issues associated with these types of neighborhoods, increased crime, vagrancy, drugs, etc.

After the neighborhoods start to get redeveloped the local area often becomes more expensive and sometimes people that live there can no longer afford the rents / prices. This creates a whole new layer of complaints from constituents.

When old industrial areas are converted to residential, this is less of a problem since no one "lived" in the abandoned industrial areas. One might think of Portland's South Waterfront or Vancouver's new waterfront. But ultimately these areas create a sphere of affluence around them putting upward pressure on rents and property values in nearby neighborhoods.

It can become the classic scenario of pleasing one group by pissing off another. For local governments chasing tax revenue the choice is easy, gentrification benefits the community at large so long as the local elected officials use the new found tax wealth to benefit the community at large. Sometimes that happens other times not so much.

In general Vancouver USA will benefit from the gentrification of Downtown and surrounding areas. What is most important for those who feel they may be on the pricing bubble is to buy while you can. As values push upward, those who bought will benefit greatly where as those who continue to rent will find themselves on increasingly thin ice. Soon they who choose to rent will become the voices against gentrification. Yet often they were the voices against the run down, crime infested neighborhoods that are being fixed.

The moral of this tale is that if you want to be able to stay in an area that is rising up, you better buy while you can. In these rising value scenarios, renters have to move, owners choose to move. That is a big difference.

Fixers On The Comeback Trail

For a number of years buyers have been most excited about move in ready properties. Of course clean and tidy homes have always held an advantage in the resale market, but back before the crash, a lot of buyers were seeking fixers to put some classic sweat equity into. That more or less died off after the crash.

One thing that certainly aided in the decline of the fixer market was the lack of decent financing options. Sure hard money lenders were always there waiting to take you payment in the form of a few broken bones if necessary...kidding... sort of. But mainstream lenders were very gun shy about houses that were not real clean. 

This latest run up in values however has made it difficult for traditional rehab companies to acquire property cheap enough to pencil a remodel and resale. That same run up in values has brought a whole new wave of potential homeowners back tot he drawing board and the fixer is making a return to prominence.

Although lenders are still not a loosey-goosey with the vault as they were in the mid 2000s, and let's be honest that is a good thing, they are starting to lighten up on the condition requirements. This make the dream of home ownership available to a larger group of people, and in general that is also a very good thing.

Buyers at or near the bottom of the price range for homes can start looking at fixers. bear in mind that FHA and VA are still a bit more picky about condition so using a conventional lender is the best approach for buying rough property. Be sure to stay connected to a real estate pro as they will help guide you to what can and can not fly with a bank loan.

Real estate is still America's best investment for the mainstream consumer.

Urban Condos and Appraisal

Urban condos have some unique qualities that can make one identical unit in the same building have a broad range of price discrepancy. Now differences in similar units are certainly not exclusive to urban condos; homes on corner lots, homes with a view, backing to open space, etc can all add or detract for the market value. But urban condos add additional dynamic and not all appraisers are in the "know". Simple concepts like interior facing units versus exterior facing units might seem simple enough, but does the appraiser know that one is exterior and the other is interior. Maybe, maybe not. Appraisers do not go inside the comps they use, rather relying on data from the local MLS and tax records.

It is important that Realtors® make these differences clear when listing a unit with favorable conditions. There are other items that carry some weight in suburban housing but much more importance in an urban setting. Walk scores are used by a variety of websites to determine how well a property fares when the resident is walking rather than driving. In suburbia this is not as pressing as most suburbanites expect to do a fair bit of driving to get things done. But in an urban condo people often choose to either not own a car of share a car between them. Walkable scores and easy access to public transit are critical. Realtors® should not assume that appraisers get these dynamics. Putting that info in the remarks, which most appraisers WILL read can help that appraiser understand why a buyer offered X for a unit that "seems" similar to another that sold for Y.

Different buildings may be very close to one another yet have dramatically different prices and quality levels. In suburban developments neighborhoods vary wildly in quality and desirability. In urban areas the "neighborhood" can be as small as a single block. In a secure urban building you can have units selling for seven figures because the building has super high end facilities and the units are up high with great views and a building literally right next door has similar sized units for 1/3 the price. It's all good in the neighborhood 'downtown'.

Locally Vancouver USA is rising up with a lot of mid-rise and high rise development going in downtown and along the new waterfront. It's a very exciting time, but we Realtors® still have to stay sharp and frosty and be sure to help both the buying public and appraisers understand the intrinsic value proposition of their listed units ;)

Inventory continues to be tight

It seems that the market remains very tight on inventory anywhere near the median price. It looks like one has to get to 150% of median before inventory starts to push beyond 2 months. With rates creeping up and buyers scrambling it is still a tough go for the under $400k buyers.

I seem to be unusually busy for the dark and wet season. There is also some indication that we may see some inventory levels swell a bit as spring approaches. I welcome a little bit of moderation in the market.

Right now rates have been slow to move, but they are definitely headed north on the chart. This is just a year to date chart so it is only four weeks, but this could be an ongoing trend. For buyers this means time is of the essence. Even if inventory doesn't open up in the spring, rising rates will thin the herd of buyers and that will result in a softening of appreciation. Most analysts are still counting on modest home price gains for 2018.

I have said it many times before on this blog, rate is a much bigger killer of deals than price. For conventional loans the benchmark for house payment to income is 28%. Of course there are things in a buyer's profile that can create a variance. To push that number higher the borrower might have exceptional credit, extra large cash down payment, large savings, or any combination thereof. Government loans often have a housing ratio that can approach 40%. But if we use the standby rule of housing payment at 33% or 1/3 of income that means every dollar the payment increases the income must be $3 higher.

A borrower approved for a $300,000 loan at 4% will have a payment of roughly $1800 a month including taxes and insurance and this assumes no mortgage insurance. That typically requires a gross income of $5400 per month. Of course I have seen lenders under the right circumstance allow much more than 1/3 housing ratio, but a third is a solid baseline. If rates increase to 4.5% then the buyer is looking at an $80 per month increase in payment and thus will need $5640 per month in income. Don't forget that over a five year period the home owner will pay $4800 more in house payments at 4.5% than at 4%. Over the full thirty years... are you sure you want to hear this? You need to! $28,800 That is all interest for the bank and its investors that could have been in YOUR pocket.

Interest rates will need to rise all the way up to 6% just to get to the 50 year average so don't fret higher rates, just understand that if this trend continues, you will pay more even if prices were to drop in say 2019 or 2020.

Home ownership is mostly about equity investment. You own the property and you gain equity as you pay down the loan and prices rise. Rates and prices and all the drama, isn't worth diddly squat if you don't take advantage and buy your own home while you still can.

Home Warranties Are Generally Good To Have

I am and have been a strong advocate for home warranties when purchasing a resale home. There are a lot of competitors in the marketplace and that has led to reasonable pricing. Typically a one year home warranty in our local market (Clark County, Washington) runs in the $375-$450 price range. The various companies all try to position them selves ideally in the market and that means that prices and coverage will vary. Which it the best for any individual is a bit subjective.

Objectively, these warranties often cover a great deal of potential problems in the home. Everyone should hire a professional home inspector and I have advocated for that as well on this blog. But home inspectors cannot see the future and what is working fine on inspection day could fail a few months down the road.

My experience with these warranty plans is mostly positive. bear in mind that the insurance company is not going to warranty an item that was already bad when you bought the house. Buyers should hold onto the inspection report as a claim made in the first few weeks of ownership will likely throw a red flag to the insurance company. The inspection showing proper functionality would serve to alleviate any issues an adjuster might have with the claim.

I have found that these warranties are highly valuable. They are relatively inexpensive if you think about it. $400 against a purchase that locally is almost assuredly over $300,000. Should a major issue occur such as a failed furnace or major appliance in the home the cost will be return multi-fold. If nothing happens in the first year the money wasn't wasted and I generally don't complain when nothing breaks in house. I am not sitting about whining about how perfect everything works, "Gee, I wish something would break, I am so bored..." Yeah, that isn't how life works. If nothing fails it's a big Gold Win, If something does fail, the insurance picks up the tab. Win.

These programs typically have a small service fee associated with a claim. $50 or $75 tends to be a common amount. The insurance company then pays to fix or replace the item. I personally had a furnace fail on a house I bought back in the 1990s. I had paid for a warranty and they came out and replaced the entire furnace. It was a $3000 job back in the day and I had paid around $300-$350 for the policy. That is the only claim I every made on a home warranty plan but that one claim has paid for every other policy I ever bought with a stack of cash as change.

Buyers should research the various companies a choose the plan best for them. Cheaper is not always better so pay close attention to what the basic coverage includes and what costs extra before choosing a plan. My experience is that most of these warranty companies have a solid claims service, but do your own checking and pick the best plan for you.

One final note about the difference between Homeowners Insurance and a Home Warranty Plan. They are two completely different things. homeowners insurance protects you and the bank lending on the home from disasters like a house fire, flood, earthquake, tree falling into house, etc. They absolutely DO NOT warranty anything in the home. If your home burns to the ground in a fire, the insurance company pays to rebuild the house and replace lost personal items that you have covered up to whatever policy limits you pay for. The home warranty pays to fix things that fail or wear out.

I highly recommend home warranties. Below are just a few companies offering plans. I am not affiliated with or making a specific recommendation for any of these, but I have some experience with all listed and they have been generally favorable.

• American Home Shield
• 2-10 Home Warranty
• First American Home Warranty 

Views on the stingy dime...

I wrote a blog post earlier this week about Vancouver's "secret" view neighborhoods. Although secret may be a little 'strong' there are many places in America's Vancouver that offer pretty solid views with homes that are rather modest in design and price. Most often view property in Clark County, Washington is found in places like Prune Hill in Camas, or along the Evergreen Highway. These neighborhoods have large luxury homes with price tags that make tech tycoons blush.

But there are several spots in the area where small homes from the 1940s and 50s were built in the Heights and many offer excellent views, particularly when the view is facing north as it does in Harney Heights.

Here is that aforementioned blog post:

Originally posted on September 19th, 2017 on 'Enjoy the View' by Rod Sager 

Vancouver's Secret View Neighborhood

Photo from RMLS, sold home 2015 

A secret view society in the 'Couv', really? No not really, but there are a few places in Vancouver that are simply not noted for having views, but yet have great views. One of these "secret" neighborhoods is Harney Heights.

The broad area referred to as the "Heights" actually is composed of many neighborhoods including, South Cliff, Dubois Park, Evergreen Highlands, Northcrest, and several others as you move east towards Cascade Park. South Cliff and Dubois are rather spendy areas and many of the homes in that area feature spectacular views of the Columbia River and city lights. But Harney Heights is much less pretentious and the homes on the bluff are very reasonably priced when the view is taken into consideration.

Harney Heights is at the west end of the "Heights" area and is immediately east of Vancouver's Central Park area. Most of the homes in Harney heights are WWII and mid century designs. They are mostly modest homes and the vast majority do not feature a view. But all of the homes along the bluff that overlooks Fourth Plain Village have a nice view to the North and many offer a surprisingly breathtaking view of the Mighty Mount Saint Helens. These homes are only about 100 feet higher than the valley floor but the bluff is very steep and it is enough to see over the top of most of the trees in the area.

The result is a pretty nice view of the Cascades including our favorite angry volcano and the surrounding terrain. Of course the night time view will feature all the city lights from the scores of neighborhoods in Northeast Vancouver.

These homes are not terribly expensive. They are generally smaller homes with less than 1600 square feet and many are classic bungalows. The ones with views like the photo will of course fetch a premium, they are still rather affordable many with prices in the $300k range.

Whether you are on the south side of the Heights or taking advantage of deals to north, enjoy the view.

Swimming Pools in the Northwest?

The Pacific Northwest is known for its amazing scenery, spectacular greenery and long sunny summers... er, that last one is a stretch. So we may have the best summers on the planet, but they are also quite possibly the shortest summers on the planet. Outdoor swimming pools have a fairly brief season here in the great Northwest.

So why is it that I list a excellent home with a fantastic little built-in pool and the offers are coming in from all directions? Well my friends, a small neighborhood home with an in-ground pool is very rare in these parts. Well rare stuff usually fetches lots of money right? Well maybe... pools are rare around here due to the brevity of the season and the relatively high cost of installation and maintenance. Very high end homes in our area often have pools but they are also quite likely enclosed for year round use.

A traditional in-ground outdoor pool here in Clark County, Washington can attract a fair number of buyers, but the problem will come when the appraiser arrives. Appraisers are all over the board on swimming pools in our area and so seller's should avoid adding a bunch of anticipatory value in it. Even if the offers come in the appraisal may not.

For sellers the best time to list your home with an in-ground pool is June, the buyers have little trouble imagining the next few months of pool parties and fun in the sun. The best time to buy a house with a pool is November, no-one is too excited about the ice rink you have out back ;) It is kind of like buying a boat, buy in November sell in June!

I love me a nice pool. There is something just resort like about hanging out in the yard BBQ fired up and lounging by the pool. Even if it is chilly outside, the pool still adds that aura of being on vacation. So all you Californians, pay big bucks for the house with the pool, we get great deals.


 

Washougal is Heating Up!

This local real estate market is heating up in general. Washougal is a city that used to have a reputation for being "way out". I find that silly at best as Washougal is still less than 20 miles to PDX. As pricing in close like Portland and Vancouver bumping buyers out, more people seek relief in the places a bit further out.

Locally there is another trend with higher end properties. Camas has become so expensive that many people are looking for a similar experience at a more affordable price. Cue up Washougal. Rival town to Camas for a hundred years. Over the last decade Clark County's gateway to the Gorge has opened up the hillsides for development and these areas offer spectacular views that rival and in the case of the Gorge are superior to the coveted Prune Hill in Camas.

Homes with sweeping views that would quickly approach and exceed one million dollars in Camas can be found in the $700s in Washougal. Camas has become a desirable spot in Clark County over the last 20 years and it has built up a demand that has pushed prices into the stratosphere for the once blue collar mill town. This in turn has added to the overall demand of the east county area along the Columbia and Washougal has stepped up.

I have been fortunate to be involved with a development in Washougal called, 'Colorado Ridge' and I am very impressed with the amazing properties the builders are producing in this neighborhood. I have the home pictured here listed on the MLS and co-listed with my friend and business associate Bert Girod. The home is brand new just getting the final details done and has some 4200 square feet of living space with a view from nearly every window and two spacious decks. All of it for less than $800k. Washougal is a hot little spot and it offers something truly hard to find in this market; VALUE.

Do You Really Know What Your Home is Worth?

In this day and age of Internet information many people feel like they have a solid handle on the value of their home. After all, sites like Zillow offer an instant value with a single click of just about any house in America. But how accurate is Zillow? They use a variety of data but mostly public records. Unfortunately companies such as Zillow are not intimately aware of the important details about any individual house. All of their posturing in the market really boils down to public data on a spreadsheet.

I think the coolest thing Zillow ever did was the old heat map but that is gone. But Zillow is a great tool for looking at trends across a broad market area. Are prices going up? Are they flat? Are they trending down? I am a professional Realtor® with a variety of tools at my disposal and I still enjoy playing around on sites like Zillow and Trulia because they offer an easy interface and provide a quick way to analyse broad markets and compare relative housing costs in different areas. How does Vancouver, WA compare broadly against Denver, CO?

Looking at an individual house however on Zillow is a fool's errand. They simply do not have enough information about the comps they used relative to to home they are evaluating nor do they know anything about the condition, upgrades, etc to the house they are applying a Zestimate to. They disclose all this in the fine print so they are doing it right, legally.

The last 18 months have been good to real estate values in the residential market locally and for the most part across the nation. Any homeowner thinking about value on their home would be wise to ask their trusted real estate pro to do a comparative market analysis. They should be willing to do that for free. Of course the alternative is to hire an actual appraiser but a local agent can give a solid evaluation providing they can see the home.

It is never a bad idea to be aware of your home value. Whether or not selling is in the near future or not, knowing where you stand against the market and any loans on the property is solid info to keep on hand. Talk to a Realtor® about the value of your home and go ahead and have some fun on those internet real estate sites, just keep a health pinch of the proverbial salt handy before jumping to any conclusions based on broad based internet data.

Why Interest Rate is more Important than Purchase Price

So many buyers get wrapped up in the notion of securing the lowest price on a house. This is part of the natural buying process. We all want a great deal right? The funny thing is that we are generally selective with that desperately seeking deals mentality. Houses, gasoline, electronics, and cars are items that Americans will shop to death until they find the golden deal. Other things like groceries, clothing, and shoes not so much. I see people buying Campbell's soup at whole foods. $2 for the same exact product Winco sells for 99 cents. Whole Foods offers many top grade products that are not available at discount markets, like Winco. So Whole Foods has its place. Funny thing that is. Oddly purchase price on items we pay cash for is paramount. It is the only thing that matters so long as the product is the same. Houses have many variables. The largest of these is interest rate. I think it is very important to recognize what the difference is between even subtle rate changes.

Two scenarios interesting results:

200,000 home 30 years fixed FHA at 4.5% with 3.5% down.

• Down payment is $7,000
• PITI payment is $1,371
• Total of payments over 5 years is $82,260
• Total interest paid over 5 years is $41,609
• Balance on loan after 5 years is $175,935

210,000 home 30 years fixed FHA at 4.0% with 3.5% down.

• Down payment is $7,350
• PITI payment is $1,368
• Total of payments after 5 years is $82,080
• Total interest paid after 5 years is $38,960
• Balance on loan after 5 years is $183,291

Using a fixed annual appreciation of 4% (actually lower than we are seeing now) we can calculate a future value for both houses. The first house would be valued at $243,331 and have an equity position of $67,396. The second would be valued at $255,497 with an equity position of $72,206. The lower interest rate on the loan allows for a more rapid pay down in principle and places the buyer in a stronger position to sell later. We always want the best price but not at the expense of a higher rate of interest. Right now rates remain very low, lower even than I used in these scenarios. Buyers may miss a golden opportunity if they wait to long to buy. Many buyers continue the effort to barter down prices in a seller's market. With each house they fail to buy due either to being out bid or flat out rejected by the seller, they run the risk of an interest rate hike. Even if they get the "deal" they are seeking, in the long run they may very well still end up paying more and they probably "settled" on a less than prime home. 

Let's look at two more scenarios with a larger down and long term implications added:

$200,000 home 30 years fixed at 5.0% with 20% down

• Down payment is $40,000
• Amount borrowed is $160,000
• PITI payment is $1,116
• Total of payments after 30 years is $309,209
• Total interest paid after 30 years is $149,209
• Total of payments after 5 years is $66,960
• Total interest paid after 5 years is $38,461
• Balance on loan after 5 years is $146,925

$210,000 home 30 years fixed at 4.5% with 20% down  

• Down payment is $42,000
• Amount borrowed is $168,000
• PITI payment is $1,108
• Total of payments after 30 years is $306,443
• Total interest paid after 30 years is $138,443
• Total of payments after 5 years is $66,480
• Total interest paid after 5 years is $36,219
• Balance on loan after 5 years is $153,145

Here I used twenty percent down so the difference is less dramatic. The striking fact here is the house that cost $10,000 more has a slightly lower payment since the interest rate is a half point lower. The fact is the half point better rate buys 5% more house. Too many buyers hold out for the best price only to find that rates go up or that prices go up and the deal they are seeking never materializes. Notice how much less interest is paid in the first five years on the more expensive house. The buyer of the $200,000 home will pay $2,200 MORE in interest over the first five years with the higher rate. 

Let's assume again the real estate market appreciates at an annual rate of 4% over the first five years in each of these transactions. This time lets handicap the more expensive house by suggesting it was slightly over price and the "cheaper" house was slightly under priced. Let's say the target value of the scenario one house is is $202,500. Scenario one represented a $2,500 "deal" and scenario two was $2,500 above market so its base value is $207,500. In general the market doesn't allow for much fluctuation. And buying a fixer and fixing it up versus buying a move in ready home is an unfair comparison. After five years the market value of the houses is $246,372 and $252,455. All else being equal, scenario one (less expensive house) has $99,447 in equity and scenario two has $99,310. The more expensive house did have a higher down payment of $2000 and a higher loan amount by $8,000 and yet after five years the equity position is about the same. If the scenarios were not handicapped the equity position in the less expensive house would be $96,405 versus $102,353. In my experience they are rarely any "deals" in real estate. There are too many buyers competing for the same houses. Some buyers find "deals" by looking at houses that need a little TLC. They don't show as well and thus don't generate as high an offer. Once the TLC is done the buyer reaps the benefit of the now higher value.    

The moral of the story is that the lower price is nowhere near as important as most buyers think and interest rates determine how much house you can buy or more importantly how quickly you reduce principle on your loan balance. 

The Investment Trap

Many buyers fall into a trap when looking at homes. This trap is especially common during a market that is robust and appreciating. This is what I call the "investment trap". I wrote about this in a chapter of my first book in 2010 (Don't Panic, Now is the Time to Supercharge Your Portfolio, America Star Books, 2010). What is the "investment trap"? Read on...

To understand what I mean by this we first must look at the core reason people choose to buy a home rather than rent. There are many advantages to home ownership but there are some disadvantages too. So buyers are making a choice between the two. Today I am skipping the reasons for and against and working under the presumption buyers have made the choice to buy. Most buyers however, and there are a great many surveys that validate this, buy over renting because of the "investment" opportunity in the house.

First of all understand that there is a legitimate investment opportunity in buying a home. The opportunity lies in the creation of equity through appreciation and reduction of principle over time. But many buyers spend way too much energy worrying about the investment angle rather than the suitability of the property for its intended use. All too many buyers treat the purchase process as if they are buying an investment property to rent out rather than a property for which they will live.

In the book I query the notion that if a buyer wants to treat a home as an investment then they should be renting out rooms to tenants to maximize the investment. This may seem extreme, but many buyers miss out on the perfect house because they low ball offer in a seller's market, looking for an investment deal. The real estate market is a commodity market like any other. It is cold and ruthless and does not care about the plight of those who ply its roads. There is nothing wrong with looking for a deal but at some point buyers need to take the counsel of their trusted real estate professional. If a buyer does not trust their agent, then perhaps they need a new agent.

If a buyer is seeking a house to live in, then that house is first and foremost their home. It is designed to provide safe and comfortable shelter for their family. That is the primary function of the home. It is secondarily an investment opportunity. Those that insist upon seeking a "deal" often miss out on the best value of all, which is the perfect home for their family and lifestyle. In an appreciating market the equity advantage is near parity across the whole of the market. Don't get me wrong here; a trusted professional should be looking out for buyers by helping them negotiate the best terms possible once the buyer has chosen a home. Buyers need to be aware that some houses are priced right.

Owner occupant buyers are well advised to look at homes that will provide them with the most comfort and convenience within their budget. Once that home is found they can work out the best terms possible in the marketplace. In my experience appreciating markets do occasionally produce overpriced listings from sellers trying to capitalize on the upswing in values. A professional agent that knows the market well, can help buyers identify an overpriced listing and advise them on a solid offer that gives them an opportunity to get the lowest price possible on that particular property. A well priced property in this market will likely get sold at full price and rather quickly. Under priced homes are often selling instantly with multiple over asking offers. There are some nuanced exceptions, but like I said before, the market is cold and ruthless.

Those buyers caught in the "investment trap" that place the investment value of a listing in front of the value it can provide as a "home" often miss the best opportunity of all. There is a secondary "trap" as well. In an appreciating market prices will likely get higher rather than lower. Every time a buyer misses out on a home the next one that comes on the market may be more expensive than the one they passed over or lost in the bidding exchange. They are also at risk of unfavorable interest rate changes that create greater expense and reduce the investment value. These buyers may end up "settling" for something less than ideal when the best option was missed.

The investment trap often keeps buyers from getting the very best house for them. Sometimes the ideal house is not the best "deal". In the end buyers will find that almost any home they choose over a long term will be a solid investment. I believe many a great opportunity is lost when buyers buy a house instead of a home because they put investment value first rather than second where it belongs.

Take a Look at Washougal

Sometimes I like to focus on a neighborhood in the area and since I just wrote a piece on Washougal on my "View" blog I figured that would be a nice neighborhood to address today. Washougal is immediately adjacent to Camas and shares with that community many shopping areas and services. The two cities are symbiotic and yet rivals at the same time. Camas has become rather affluent over the last 15 years and prices in that city have gotten out of reach for many middle income people. Washougal however remains a relative value.

A common perception about Washougal is that it is far away. It isn't; and I talk about its proximity in the blog post below. Washougal offers some amazing view properties and a great variety of upscale homes that are generally priced 15-25% less than rival Camas. Washougal also offers a nice selection of vintage homes and smaller starter homes and with prices that remain affordable in this increasingly more expensive housing market.

Washougal is a classic small town that is big enough to offer the daily services of a larger city without losing the charm of rural America. Washougal is also very close in to all the "big-city" services of Vancouver and Portland.

The blog post below was re-posted from my blog, "Enjoy the View" take a look at it below and see that Washougal has much to offer.

Washougal offers some fantastic view properties and some of them are surprisingly affordable. Washougal is also one of those places that some people "think" is far away. The reality of it is this; it isn't. In fact, according to Mapquest, at 10:15am this morning a trip to PDX from downtown Washougal is 17 minutes. The drive is less than 15 miles! How in the world is that, "Far Away"? The answer is; it isn't.

In all fairness Washougal actually covers an enormous area once you get out of "town". There are places up in the mountains with a Washougal address that are easily 20 minutes to town. Even still, any location in the "country" is likely to require a bit of extra driving, it is the price one pays for the seclusion afforded to country living.

There are two Washougals. The city of Washougal which offers up some fantastic Columbia River view properties that rival the much more expensive Prune Hill in Camas. These homes are less than 20 minutes to the airport. Then there is rural Washougal. Here you will find a virtual cornucopia of small acreage properties across a variety of price ranges. many of these properties feature a fantastic view. The views range from Columbia River Gorge, Mount Hood, to Portland city, and across to the Coastal Mountains.

Washougal offers opportunity at many elevations as well. The city properties are typically under 600 feet so the winter conditions are mild. Some of the rural areas approach 2000 feet where Christmas is truly a winter wonderland. It is hard to find an area that offers as much diversity in view property as Washougal.

Washougal and Camas are immediately adjacent to each other. They share a common business corridor along 3rd Street / E Street. Washougal however offers generally lower property taxes and lower housing prices overall. This can spell value for the savvy shopper.

As a note of caution for buyers looking in the area, be sure to pay attention to just how far out a property is. I know I just spent a paragraph explaining that Washougal is not far away, but I also noted that the rural portion of Washougal is very large. If the property is located along Washougal River Road mile marker nine is the approximate point at which you enter Skamania County. It is a fifteen minute ride back into the heart of Washougal from that point. Belle Center Road along SR 14 in the Gorge is about eight minutes out of the center of town (Washougal). Even if you head all the way out to the Mercantile Store at mile marker ten Mapquest says it's 25 miles and 35 minutes to PDX :)

We are so spoiled here in Clark County Washington. Our out of the way destinations are still only half an hour out!

So come out and visit Washougal and when you do, be sure to Enjoy the View.

Fancy a View? Find a Forever View

Norwood Street, Camas, WA

A view is perhaps the most subjective part of evaluating real estate. What is it worth? In high end real estate a view is not just appreciated, it is often expected. View lots can easily command premiums in the 200% range. The problem with a view is that it may not be a 'forever' view. If one were to pay a handsome price for a property based on a wonderful view; they would be most displeased if that view were eroded years later. Trees can grow up and block a view. A neighbor can build in front of the view.

359th Avenue, Washougal, WA

The value in the view is subject to the person buying the property. I happen to value views very high. I like a good view. Other buyers may not be so inclined. If a view is something highly valued by a buyer, then that buyer should exercise caution to be certain the view will last.

Homes that are perched out on a cliff or bluff are likely to have a lasting view. Homes set on large parcels with allot of space in front of the view will also likely be able to control the fate of the view. Waterfront properties tend to keep the view indefinitely as well.

Ammeter Road, Washougal, WA

Buyers should not pay a large premium for a view that is easily corrupted. If a neighboring property owner has the authority to plant big trees or build a large structure that will block the view, then that view's arbitrary value is greatly reduced.

A view is also subject to its own 'greatness'. Is the view a peek-a-boo view? Is it seasonal only? Is the view out a obscure bathroom window? Or is it a grand panorama placed conveniently in front of a large living room picture window? All of these factor into the value an appraiser might place on the 'view' a property offers. An appraisers opinion of the view's value may not align with the buyer's idea. If the buyer is borrowing money for that home; the appraiser's opinion becomes a Gospel truth.

500 Broadway, Vancouver, WA

Urban views in high rise condos are often fleeting. The city may approve a taller high-rise right in front of an existing high-rise. The view shown here on the relatively low, 5th floor of 500 Broadway, Offers a straight shot right up Broadway. Since it is unlikely the city will ever approve a building in the middle of the street, this view is at least partially protected.

There are many views here in Clark County, Washington that are suspect at best. Yes they offer a beautiful vista across the river into that other state...Oregon. But often there are young trees that will soon grow mature or another subdivision that may go in soon. Buyers willing to pony up big bucks for a view need to be sure the view is going to endure.

Buyers should understand that short of deeded protections in the land in front of a properties "view". There are no guarantees that any view will always be there. Buyers should consider the likelihood that the particular view they are buying is going to be a 'forever' view. The view below looks across four acres that is owned by the view holder. This is a fairly protected view.

Bear Prairie, Washougal, WA

Long term land prices could get hot.

It has been an amazing half-decade these last five years. After the "crash" it seemed as though Clark County, WA had a lifetime supply of ready to build lots owned by a variety of investment and banking groups. Yet suddenly we find our selves in a bit of a land crunch. Developers are trying to find new build able parcels and are finding that market increasingly tight.

The politics in the area have long been running towards sustainable, non-urban sprawl. It has become necessary for builders to look at urban infill projects and higher densities. The further belabor the issue, the State has created new requirements for storm water mitigation on new subdivisions. All of this leads to higher land prices and greater expense passed on to the buyer of new homes.

Those buyers wishing to take advantage of low interest rates on a brand new home should step up the pace as prices will likely rise faster on new construction than resales. That said, the resale market will benefit long term from increased building costs. The more expensive new homes become the more people will turn to resale property to meet their needs. Furthermore, urban infill on small lots is not for everyone and many families will choose and older home on a big 10,000 foot lot over a newer homes stuffed into a neighborhood like anchovies in a can, on 4,000 foot lots.

The real estate market is in a dynamic flux moment, hey that sounds really cool. What I mean is that we are on the precipice of a shift in they way our community will grow. Clark County has hung on to suburbia and rural development but alas, the time is near that builders will need to move towards a more urban profile in their projects. We have already seen this paradigm shift over the last decade, particularly in Vancouver and that will spill over to much of the county as time marches on.


To the left is the current Urban Growth Boundary map for Clark County. There are still some areas of nice flat build able land, but pickens' are getting slim and that has the building community a little edgy.

In the end build able land will become increasingly expensive and builders will either have to build more dense or more expensive. Any opportunity that a buyer has to acquire property now will likely be money well invested for the future. Interest rates remain low and prices, although on the rise are still below the levels of 2007. This adds up to a great value proposition.

Urban Contemporary Living in Clark County

I wrote a blog post on another real estate blog of mine about view properties in Downtown Vancouver ("Enjoy the View - The Urban Contemporary View is Alive and Well in the 'Couv'". It got me thinking about what a great value opportunity we have in this market for urban condos.

A quick local history lesson will help illuminate our fantastic opportunity here in America's Vancouver. Lovable former Mayor of Vancouver, Royce Pollard led the city on a quest to renew the urban Downtown core of Vancouver that was in derelict condition. Although the epic recession of 2009 delayed some of the development, the Downtown was truly rejuvenated by these efforts and a tremendous live/work walk-able urban environment was successfully created. It is most notably present in the area surrounding Esther Short Park.

In the mid 2000s and until the real estate market crash in '09 the area was booming and some urban condos on the upper floors of the taller projects were fetching seven figures. But the crash was hard on the condo market. Condos all over the city are still a great value. The downtown core offers modern amenities in buildings that are less than 15 years old across virtually all price ranges. There are listings starting as low as $129,000 for units that front the park! For the more luxury minded buyers there are fabulously decorated units with Brazilian cherry, travertine and marble, granite, etc; available in the $400-$600k range. These units are often large, often exceeding 2000 square feet and are perched up high enough to provide amazing panoramic views of the Vancouver Urban core, the Columbia River, West Hills of Portland and even Downtown Portland's prominent buildings.

This is a true value proposition. Vancouver's Downtown does not get as much attention down in Portland as their own urban contemporary projects in the Pearl District or the South Waterfront. This keeps Vancouver priced well and there are many advantages to our Downtown. The 'Couv' is busy enough to give a city buzz, but not so much as to keep you awake all night. Most of the Esther Short Park area is very walk-able with nary a need to drive. Furthermore, the upcoming waterfront redevelopment will bring national spotlight attention on our impressive modern urban environment in the Downtown area. That should help boost values in the recovering economy.

I mentioned in the linked post above, that young singles with entry level income can often qualify to buy the less expensive Downtown condos. It is often young people that enjoy the vibrancy of a downtown scene and they are routinely priced out of that experience either as a renter or owner. Right now that may not be the case. This current situation in the Downtown Vancouver area is likely a fleeting opportunity. As the price of single family detached housing continues its robust upward movement, pressure will mount on the condo market and this low price opportunity will evaporate.

For buyers that fancy the urban scene; Downtown Vancouver is worth a look.

How to Find a "Deal" in this Market.

Locally and in many markets across the country real estate values are perking up and multiple offers are becoming more common. This situation can make it difficult to find a property that is value priced. It seems that every sharp priced home is bid up. This 'auctionesque' environment can be exciting, but it rarely leads to getting a "deal".

Here in Clark County, Washington the market is healthy but there are still value properties floating around, one simply needs to know where to look. In our local market the properties that are selling quickly in general tend to be priced well for what they are, priced less than 110% of median and move in ready condition. Of course, in any market a well priced listing will generate offers. Locally there are many properties that need some TLC that are sitting in inventory without offers. Some of these represent solid values and with just a little effort can become nice homes. This is where I see an opportunity to pick up a value.

The consumer real estate market seems to be driven by buyers for less than median priced properties and move in ready condition. These homes that are clean, turn key properties are getting bid up out of the 'value' range.

Trying to buy a high demand  property in a low inventory environment leads to paying a premium price. Looking at low demand properties leads to finding a deal. If we break up single family residential properties into three broad categories of condition, heavy fixer, light fixer and showroom clean. It is the light fixer that is ideal for a consumer looking for a value opportunity. The heavy fixer is generally not financeable. Those properties are often bought by investors for all cash. The showroom ready homes are in demand and get bid up to the top of the market prices. Light fixers are often financeable; maybe not FHA or VA but certainly conventional loans and can be had for great prices.

When looking for a good deal; looking at low demand properties is usually where buyers will find a great value. Below there are two examples of homes that sold this year. Both are dated 1970s ranch houses and are absolutely solid comparables across the board except condition. Both are dated but one is a clean turn key move in ready with fresh paint and carpet the other a HUD owned as-is property that really only needed carpet and paint and the roof was near the end of its life.

This home was listed for $165,000. It sold a just a few days and was bid up to over $175,000

This home was on the market for several months. It needed TLC but was financed. It was listed at $137,000 sold for $140,000 with a seller credit for closing costs. 

These two properties are very similar in age, style and very close together in the same general neighborhood. The difference was the condition, and what a difference that made. The $140k house could likely be brought up to par with the $175k house for less than half the difference in price. That represents a value of $15,000 to $20,000.

The market is being driven by people that want to move right in. Buyers that are willing to take a property that needs some work can find excellent values in bank owned properties or short sales in need of light repair. There are deals to be had for those willing to get their hands a little dirty.

Don't Overlook a Home's Potential

Our local real estate market and many markets around the country have transitioned into a seller's market after several years of a very strong buyer's market. The upper half of the price range is still fairly neutral but the lower half is clearly favoring sellers. In a seller's market, buyers must be able to look past minor imperfections if they want to find a house at a good 'value'.

Photo from Anthony Real Estate, via Google Images

The turn key, move in ready, charmer will get bid up over asking. Often those homes end up being less of a value than that cosmetic fixer buyers sometimes look past. Paint and indoor decor are easy to update. A bad roof or siding can be more expensive, but often homes that have been left with that old 1970s interior are overlooked. Updating an otherwise solid older home can be done over time as the buyer lives in the house. all too often throwing in some new carpet and a fresh coat of paint can completely transform the feel of a house. These dark old houses may sell for ten to fifteen thousand less and require half that for the remedy. Therein lies the value.

For first time home buyers, it is imperative that they take advantage of our current low interest rates and our still fairly low prices. I have attached an article from Realtor.com that offers some good insight into cosmetic fixers.

Cosmetic issues are easy to remedy
By Michele Dawson

Home shopping for first-time home buyers, it's an exciting, albeit nerve-wracking, experience. If you're like others in the market for their first home, you probably have in mind exactly how your soon-to-be home will look. But it's important not to fall into the bad decorating, dingy walls and dirt-bare back yard equals bad-home trap. If you don't see past the hideous wallpaper, funky light fixtures and avocado green carpeting, you may miss out on a home with great potential. And, if you're looking for a home in a seller's market where homes are being snatched up as soon as they go on the market, you'll come to realize you can't be choosy if you want to make a competitive offer.

One of the first things to do is to get pre-approved for a loan and determine the maximum you can afford to offer for a house. Don't look at homes that are asking for more than 5 percent above your maximum, otherwise you'll be setting yourself up for disappointment if you find the perfect—but outside your budget—home. So what to do? The floor plan of the home is extremely important. If a floor plan isn't quite to your liking, consider rearranging it or adding on. If you're looking at an existing home and will need to remodel or expand to suit your needs, the estimated cost of renovation needs to be considered when making an offer. Also, consider the features of a home: 

Walls. While these are among the easiest to remedy, they also make a huge first impression. If the walls need to be painted, are covered in wallpaper or are painted a color you find distasteful, picture them crisp and clean in the color of your choice—that's how they could look after you paint them. 

Floors. Like walls, carpet or floor surfaces that are old or outdated can be easily replaced. You could even ask for a carpet allowance in your bid, especially if you're in a buyer's market. 

View. Things like old, ugly—even dirty—windows and window treatments can make a view appear less desirable. Those things can be improved, so unless the only view you have is of your neighbor's clunker on the side of the house, don't get hung up on what is surely a fixable view. 

Landscaping. Your best bet is a moderately landscaped yard because you can always improve landscaping without spending too much. Worst case, even if you're looking at dirt, landscaping is one of the easier projects to tackle. Plus you get to design it however you'd like if you're starting from scratch. 

Closets and garages. You can never have too much storage space, which is why so many newer homes have three-car garages. But if you encounter a converted garage that is now a bedroom or storage room, don't give up. Converted garages can almost always go back to their original purpose without much cost or labor.

Kitchen. The most popular room in the house, many homeowners want their kitchen to be large and have modern appliances. Don't let outdated color schemes deter you because there's nothing like a fresh coat (or two) of paint to make a kitchen your own. Plus, if you like the rest of the house enough to make an offer, you can give the kitchen a minor spruce-up with some new appliances or a major overhaul complete with new counter tops, cabinets, and flooring.

The exterior. If the home doesn't have good curb appeal, try to picture it with a fresh coat of paint and revitalized landscaping.

Pools. If you want a pool, buy a home with a pool already built in. Pools are expensive and you will not get a full return on the cost when you go to sell. Let someone else lose the return. The cost of repairing a pool is less than putting one in, so if you're looking at a home with an old pool that looks like it's in bad shape, it's still a better bet than putting one in later.

When making an offer, consider what you can't live without, as well as your budget. Also, be sure you hire a professional home inspector to inspect the house. If the home's systems are in good working order and the house has everything you want except a minor item or two, make an offer accordingly. Most importantly, keep in mind that unless you're building your dream home from scratch, you'll probably never find the perfect home. But seeing past a previous owner's bad decorating choices to the core of the home and its potential for livability will yield you the home you've always wanted. It may take some work, but hey—it's yours.