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.

Market is Primed for Mid Level Move Up!

Right now our market is still very hot in the under $400,000 price range. There is very little available in this range and what comes to market is quickly swallowed by the throngs of first time home buyers trying to get a piece of the action.

Things are by no means as crazy as they were a few years ago, but the market remains very healthy and rather robust in the entry level. Things at the top look a bit murkier. Many sellers have listed property, some at puffed up prices and there simply is not enough high end buyers to grab them. I am seeing price reductions on many listings in the $500,000 and up range.

Our market is transitioning into neutral conditions and this does tend to start at the top. But those who bought a three bed two bath ranch home back before 2015 could be in a very strong position to get top dollar for the current house and then beat up a seller on that move-up house at $500,000. Perhaps a buyer spent $250,000 in 2014 on a 1500 foot ranch house and now can sell it for $330,000. Once the search for a $500,000 replacement home starts it may not take long to see the pricing is soft up there, very soft in some cases.

New construction is driving resale prices down in the $450k-$550k range. A nice step up home that could command $600,000 a year ago has likely softened up to $500,000. Prices are actually falling in the tradition sense of the median values. That has continued to inch up, it is just a supply and demand issue that has created this move-up opportunity. There is a still much more demand than supply at the bottom range of price, but the middle and top have seen a spike in inventory that is giving buyers an opportunity to be picky and even beat up sellers a little on price.

Locally we are still selling large numbers of houses and things are strong, but there is always a little opportunity in the winds, and people sitting on a mortgage more than five years old, in a small house could take advantage of this mixed market.

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.