REAL ESTATE BLOG

What cools a market?

September 13, 2023

To understand trends in the housing market, it makes sense to look at the larger economy.

Let’s revisit the upheaval in the U.S. housing market over the past 3 years. Beginning in March 2020, COVID-19 dramatically changed the way Americans relate to their living spaces and, therefore, the size and location of their home. Millions of professionals quickly transitioned to remote work and began looking for larger homes where they could acquire a home office and other amenities to suit their lifestyle.

At the same time, to reduce market volatility, keep credit flowing and limit economic damage during this unprecedented event, the federal government began purchasing mortgage-backed securities in significant quantities, causing mortgage rates to plummet and the housing market to explode. This led to higher home prices as increased competition led to a red-hot housing market.

Fast forward to today and we find ourselves in an entirely different economic climate. Both the rise in inflation and the uptick in mortgage rates (hovering around 7% since the fall of 2022) have hugely impacted the housing market and the sentiment of would-be homebuyers. When mortgage rates tick up, like they did after the Federal Reserve announced a rate increase in the beginning of August, mortgage applications go down. In June, home purchase activity was down 15.6% from the same time in 2022.

Inventory

The housing market is also incredibly reactive to supply and demand. Not enough housing? That feeds into a hot market where dwindling inventory ratchets up competition leading to higher prices. Is there a noticeable uptick in new construction? If other factors align, this can help cool the market. Available housing for purchase is a crucial “temperature” gauge.

When rates go up

One salient takeaway for homebuyers is that the recent rise in mortgage rates has catapulted the average monthly mortgage payment to $2,520 for a 30-year mortgage. That’s an increase of 49% from two years ago when mortgage rates were 2.98% and the average monthly mortgage payment was $1,694.

These are precisely the kind of financial distinctions that can sway a homebuyer. Is it any wonder that many have been holding their breath waiting for a market cool off?

Where home prices are cooling off

The key fact to know is this: While some cities and regions are experiencing a clear reduction in home prices, many others have seen little or no cooling. Supply and demand have a way of imposing its own logic and there are areas — cities, suburbs and sought after zip codes — where sticker prices have stayed stuck.

Let’s first look at some popular areas that have begun to cool off and have become more affordable. Interestingly, the top cities for falling prices are almost all areas that saw their prices go up considerably during the pandemic.

“Those markets where the prices really took off — are the markets where they’re now suffering the biggest declines because affordability has been the hardest there,” says Moody’s Analytics chief economist Mark Zandi.

Buying for less at a higher rate now may be less expensive than buying later with a lower rate

May 20, 2023

Buying a home for less at a higher mortgage interest rate now may be less expensive than buying a home for more with a lower mortgage interest rate later.

This week I read an article - one of many - about how many home buyers are obsessively focused on their low interest rate they secured in the decade-plus of artificially low rates. And they are right, it is cheaper to own a home with a low interest rate. But many forget to observe current housing trends to see where prices may be heading, so......

Home prices have come down in many areas to adjust to the reality that many buyers confronted with higher rates simply can only afford to buy less expensive homes. This has triggered a shift in developers focusing more on rental properties that have increased in value, with a combination of rising rental rates, as fewer people choose to buy - or are forced to rent. That combined with enormous tax incentives and loopholes that make being a landlord (especially a big one) more profitable.

Too many are focused on short-term trends. What could happen LONG-term? At some point rate hikes will pull back as we enter a high probability recession. At that point we could see those not severely impacted by an economic downturn re-enter buying mode. Pent up demand is a powerful driver of markets: if you doubt that, simply look at 2021-2022 as a reminder. And what did that do? It pushed prices up, up, up, up, up.....

NOW.....combine pent up demand (sales volume has dropped about 25-30% year over year, a historically huge number, even after massive gains in 2020-2022) with millions of younger people entering the home buying market. Many fed up with super-high rents, retirees buying an additional home (or two), people living longer and working longer, massive in-migration, the greatest transfer of wealth in history, elevated building and labor costs.....and then throw in that we are already under-supplied/under-built by millions of homes (and the average home is over 30 years old and in need of renovation/repairs)...

What happened to oil and gas prices the last time the world realized it needed lots of oil and gas and a war broke out amongst two of the world's biggest producers a triggered a huge supply disruption?

So while buying now may be more expensive, fueled by higher rates, buyers beware: When rates come down (maybe not as low as 3%), the housing markets could reawaken dramatically, possibly post-covid-lockdown-style, and we know what that does to prices....

Owning a home may be closer than you think

April 14, 2023

Now that we’re in 2023, the prices of homes have slowed their upward growth, as high mortgage rates have cooled demand. But those home prices are still elevated from where they were just a few years ago.

According to the National Association of Realtors, the median sales price of existing single-family homes in the United States was $300,200 in 2020. At the end of 2022, the median home price in the United States rose to $392,600—a 30.7% increase in just two years.

For many people, a mortgage is the biggest financial commitment they will make in their lifetime. However, there are ways to save on your mortgage and make homeownership more attainable. Some are strategies that can help you save money over the life of your mortgage, and some are loan products and options that you should talk to a loan officer about.

By taking advantage of these options, you can achieve your goal of owning your own home without breaking the bank.

Save on the first few years of your mortgage

1. Adjustable Rate Mortgages

2. Reduced Rate Mortgages

First Time Homebuyer Programs

Paying more now to pay less long term

1. Pay points

2. Shorter term loans

- courtesy of OriginPoint

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REAL ESTATE PROJECTIONS FOR 2023

January 9, 2023

Real Estate and Inflation
One of the best investments to hedge against inflation is Real Estate. Securities can become worthless, reducing in value to zero if the market fluctuates enough. With Real Estate, over time, homes continue to increase in value. In many cases, the value can double in ten years.

Here is a real-life example: In 1974 a home was purchased for $88,000 in the Bay Area of California. In 2008 that home sold for approximately $1,150,000 million with an annual growth rate of 7.9%. This was typical.

1974.........$88,000
1984.........$176,000 to double in 10 years
1994.........$352,000 to double in 10 years
2004.........$704,000 to double in 10 years
2014.........$1,400,000 to double in 10 years.

This house doubled in 10 years 3 times and on its way to double again in the next 10 years.

National Forecast:
The National Association of Realtor’s Lawrence Yun Predicts U.S. home prices won’t experience major decline and may possibly rise slightly in 2023 if mortgage rates remain at 7%. “For most parts of the country, home prices are holding steady because the available inventory
is extremely low,” Yun said. “Some places are experiencing price gains, while some
places, most notably in California, are seeing prices pull back.”

In 2023, Yun expects home sales to decline by 7%, while the national median home
price will increase by 1%, with some markets experiencing price gains and others price
declines. He also projects a strong rebound for housing in 2024, with a 10% jump in
home sales and a 5% increase in the national median home price.

“Housing inventory is about a quarter of what it was in 2008,” Yun said. “Distressed
property sales are almost non-existent, at just 2%, and nowhere near the 30% mark
seen during the housing crash. Short sales are almost impossible because of the
significant price appreciation of the last two years.”

California Forecast:
Existing, single-family home sales are forecast to total 333,450 units in 2023, a decline
of 7.2 percent from 2022’s projected pace of 359,220.
California’s median home price is forecast to decline 8.8 percent to $758,600 in 2023,
following a projected 5.7 percent increase to $831,460 in 2022 according to a housing
and economic forecast released by the California Association of Realtors (CAR). Though these projections are based on statewide numbers, real estate is very
regional and some regions could experience less declines and possible increases.

December 28, 2022

Storms can inflict substantial damage on homes. Many insurance policies do not cover this damage, or do so with deductibles so high they negate any potential offset. This past week's massive storm on the East Coast may not be as damaging as the fires that have decimated entire neighborhoods in California, but it's another reminder about reviewing insurance policies regularly, especially at a time when inflation pushes replacement and repair costs higher.

Storms can act as a prudent reminder to all of us to look closely at our insurance policies and to evaluate preventative measures that could minimize, reduce or eliminate future damage. Getting reimbursement from an insurance company can feel good, but that soon fades once you factor in the time, aggravation and losses most incur from storm damage.

Many around the US are being confronted with sharply higher insurance premiums, including landlords, who usually pass these higher costs on to their tenants. Insurance companies are increasing rates to make up for billions of dollars in losses due to worsening climate disasters, and surging inflation means homes require more dwelling coverage to pay for rebuilding costs. The combination of these factors has resulted in some fairly drastic rate increases in 2022.

If your property has experienced storm damage, it is critical to have the damage closely and quickly evaluated by your insurance company. Report the damage immediately. Take many photos to document the damage. Try to get an insurance adjuster in to evaluate the damage ASAP. (PS: Damage in the garden that has not damaged any built structures is often not covered and downed trees are not exactly inexpensive to remove.)

WINTER STORMS & PROPERTY INSURANCE

MORTGAGE RATES: NAUGHTY OR NICE?

DECEMBER 2022

The Effect of Mortgage Rates on Sale Price - It may not be what you think

Real estate is hyper-local. While this true, there are large macro trends that impact real estate markets nationally. Different markets handle these outside pressures differently, which is why it’s important to not only understand individual regions and communities but also larger factors that drive home valuations.

A commonly cited factor impacting housing prices is the mortgage rate. Though these two are inextricably tied, mortgage rates are only one of many factors impacting the value of housing over time. Those who predict that higher mortgage rates on their own will drive housing prices lower are usually wrong.

Other notable factors:

Unemployment

Housing supply

Lending guidelines

Population changes (increase/decrease? changing demographics?)

Rate of new construction

So, just how correlated are housing values to mortgage rates? Less than you might think. Take a look at the chart below, which shows the median sales price of a home sold in the United States vs. the 30-year fixed mortgage average. Since 1970, markets that saw a decrease in the median sales price of a home sold were more likely to have falling interest rates than rising ones.

The only real comparison for the scale of rate hikes we have seen recently are the Fed’s actions in the late 1970’s and early 1980’s to curb inflation. Because of the Fed’s actions and other factors including inflation, mortgage rates rose from 8.65% in 1977 to 18.63% in 1981. Over those 4 years of incredibly high rates, the median sales price of a home in the US rose from $46,300 to $70,400 - that’s just over 52% growth!

This doesn’t mean our current market is primed for huge home price growth - but it does demonstrate the complex relationship between home values and mortgage rates.

A BREAK FOR BUYERS: HOW TO PAY LESS ON A MORTGAGE WITH THE TEMPORARY "BUYDOWN" LOAN

NOVEMBER 2022

A Temporary Buydown will help buyers lower their interest rate for the first years of the loan. This type of loan could make a huge difference in the ability to purchase a home. In order to get a Temporary Buydown, the seller of the home has to offer to fund it.

Why would a seller offer to pay to help you get charged less on your mortgage? It depends on the conditions in the local housing market. If a seller needs to sell, but there aren’t enough buyers able to afford the monthly payments on the house due to current mortgage rates, a Temporary Buydown can help close the deal.

In addition, it’s a great alternative to cutting the asking price of the home. This way, a seller can help make the buyer’s monthly budget work while still getting a full price offer. Funding a buydown contribution could potentially be less costly than what they would have taken off the price of the home.

A Temporary Buydown reduces your interest rate on your mortgage for the first years of your loan, and then payments go back up after the initial period is over. The most common is called a 2-1 buydown and needs to be included in the purchase contract as a seller concession. The seller offers a credit depending on the price of the home and the length of the program, and is usually calculated as a percentage of the purchase price. The real estate agents negotiate the details between all parties.

Buyer incentive: Ease into mortgage payments with less mortgage payments for the first few years and the possibility of refinancing after that. This also allows buyers additional funds to handle the initial expenses that come with moving into a new home

Seller Incentive: With the rise in rates, the buydown allows more buyers the opportunity to buy by affording initial monthly payments on the house. In addition, funding a buydown contribution could potentially be less costly than lowering the price of the home.