The cost of low housing inventory and rising interest rates.

The cost of low housing inventory and rising interest rates.

The real estate market, nationwide, has enjoyed the benefits of lower home prices coupled with lower interest rates for the past ten years. Unfortunately, that is about to come to an end. The costs of rising home prices, low housing inventory and rising interest rates are starting to impact housing across the country. There are a few areas throughout the country that are busting with inventory, but many areas with low inventory are presenting buyers with a conundrum.

When interest rates fell at the beginning of the 2008 recession, buyers were able to jump into the market and pick up great deals. There were plenty of foreclosures, and they were followed by short sales. Distressed properties presented buyers with great opportunities to get their dream home at a lower price, and lower interest rate which offered a lower mortgage payment. Even fair market prices were down because of the recession and the impact of distressed properties. As the economy has turned into a healthy economy again, those benefits are about to change.

The cost of low housing inventory and rising interest rates: Low Inventory and the psychological factors.

Low inventory can create a major problem. For instance, when there are 1,000 buyers and 200 houses available, tension forms in the market. Buyers get into multi-offer situations often causing them to pay more for a home than the list price, and creating a higher mortgage payment than they wanted when the search began. It’s stressful and can create anger, hurt feelings and often animosity among the parties involved.

The season may be partly responsible for some of the low inventory. Granted, it is Winter, and homes may sit a little longer during the colder months, but according a RealtyTrac study released in the Fall of 2015, January, February and December are three of the top five selling months nationwide. There may be other factors keeping some homes on the market.

Low housing inventory has a psychological impact on buyers. For instance:

  • Buyers get frustrated because they can’t find anything, and they quit looking.
  • Buyers get tired of racing out to see the latest listing only to find that it’s in terrible shape, in a less desirable neighborhood, or that it has three offers before they opened the door.
  • Buyers get irritated at the long process and fail to keep their financial data up to date, and then they don’t have the required documentation available when a deal comes along.
  • Buyers can get depressed and lose hope because they get outbid on deal after deal.
  • Buyers can’t find homes available in the area they wish to live.
  • Buyers adopt a “why-bother” attitude and continue to rent.

When things like this happen, fewer buyers are in the market and the homes that are available sit longer than normal. It gives the appearance that something is wrong in the local market, when in reality, it can be the psychological impact of low inventory on frustrated buyers.

The cost of low housing inventory and rising interest rates: Low inventory and higher interest rates

Add higher interest rates to low inventory and you have another major challenge for buyers and sellers. Sellers wishing to capitalize on low inventory are trapped when interest rates increase. Higher interest rates reduces a buyer’s buying power, and in turn, can cut the buyer pool. Lower buying power changes what a buyer looks at in the process. Let me show how this works. For the sake of simplicity, let’s say the buyer is not putting any money down and the buyer is working with a 3.92% interest rate. I’m also going to ignore the added cost of taxes and insurance. This will be a purely principal and interest scenario.

The buyer’s dilemma

  • A buyer has been pre-qualified for a loan with a mortgage payment of $946. That’s a perfect payment amount for the buyer. At the time of pre-qualification, the buyer was qualified to buy a $200,000 3 bedroom 2 bath detached home. In the process of working through low inventory, the buyer can’t find a good home in the $200K price range.
  • A month goes by and interest rates have increased to 4%. In order to keep the The cost of low housing inventory and rising interest rates.mortgage payment at the $946 range, the buyer’s buying power drops to $198,000. That’s not too bad, but it may be a little less of a house than the buyer wants.
  • Interest rates are on the rise and within two weeks, they are at 4.25%. Now the buying power is $192,500. Remember, inventory is low and there is a huge number of buyers for properties under $200,000. Competition increases as buying power drops.
  • Another frustrating month goes by with low inventory, and now interest rates are 4.75%. The buyer’s buying power has slipped to $181500. The volume of buyers has increased, but inventory has not. The flurry of contracts thrown at every listing make it nearly impossible to win a bid without forfeiting contingencies that would protect the buyer.
  • Finally, interest rates climb to 5% and the buyer’s buying power drops to $176000. Multi-offer wars are happening everywhere and buyers are buying homes they don’t want in neighborhoods they don’t like, but there is nothing else they can do if they want to own their own home.

This scenario played out before the market downturn in 2008. I’m not saying that we’re heading for another housing bubble, but even without the other issues that caused the last bubble to burst, we’re in a tricky place for buyers. The greatest struggle they have with low housing inventory and rising interest rates is buying power. The higher the rate, the lower the buying power.

The cost of low housing inventory and rising interest rates: Mortgage payments

Another issue that plagues buyers when interest rates increase is the mortgage payment. If our buyer is qualified to buy the $200,000 house at a higher interest rate, the buyer will also find that he has a higher mortgage payment as rates climb.

Our $200,000 buyer would love to keep the mortgage payment at $946, but as interest rates increase, his payment will also increase. The desirable $946 payment rises to $$999 if rates rise to 4.38% when he finally buys. If it goes as high as 5%, that same $200,000 home, will cost the buyer $1,074 a month. Waiting a few months increased the payment $128 a month, or $1536 a year.

The cost of low housing inventory and rising interest rates: Long-term costs of waiting.

In our scenario above, there is a hidden cost that buyers rarely think about. What is the long-term costs of waiting too long to buy a home as interest rates rise. Let’s go back to our $200,000 purchase at 3.92%. If the buyer stays in that home for 30 years, the long-term cost of the home will be $340,427 in principal and interest. Fortunately, a high percentage of buyers move every 5 years.

Most will never realize that cost, but let’s say our buyer does stay through the entire 30 years, and lets say the buyer was qualified to buy the house at $200,000, but interest rates climbed to 5% by the time of the purchase. That 1.08% climb will cost the buyer an extra $46,085 dollars over the life of the loan. When it is all said and done, he will have paid $386,512 for his $200,000 house. Also, his mortgage payment is no longer $946. It ends up being $1074.

The time-value of money has an adverse relationship with interest rates. When rates fall, buyers can buy more and when interest rates climb, buyers can buy less. During the lower rates of the past ten years, buyers could causally look for a home over several months and even years. Today, if a buyer sees a home he likes, that meets his needs and is in his price range, he better move on it. Three months from now, it may be out of his price range or not available.

When you’re ready to buy or sell, give Cornerstone Business Group, Inc., a call. We are your local real estate sales pros, and we’re here to help you make something great happen.

 

 

Advertisements

Clarke County, VA Real Estate Market Review – 2017

Clarke County, VA Real Estate Market Review – 2017

The Clarke County, VA real estate market is very much an island. The 2017 real estate market review makes this even more obvious when you look at the Clarke County market compared to the immediate neighbors in Frederick, Warren, and Loudoun County, VA and Jefferson County, WV. Each of those markets showed a good progression forward, where Clarke County bounced around like it has for the past five years.

Clarke County, VA Real Estate Market: The positive numbers are window dressing, but that’s OK.

The two most positive numbers are made up of numbers that can both show market health, and in one case, can add little to no insight into the local market. The number of days on the market is the lowest in five years. The 2017 number of days on the market was 91. The next closest was 110 in 2015. The problem with using days on the market as a positive or negative indicator is that there are too many factors that influence that number.

A home may be overpriced. It may be in a less desirable neighborhood or area. A home may be in poor condition, or it may be hard to show. Any of these factors, or any combination of these factors, may keep a home on the market for longer than necessary.

There is one positive number that is good news, but it’s not a huge difference from the past five years. That is the number of distressed properties. There were 14 distressed properties in the Clarke County market in 2017. The number is down, but 2015 had less with 12. The highest number over the past five years was 2013 with 30, but the numbers have bounced around. In 2014 there were 24, 2015 had 12, 2016 had 22, and 2017 had 14. The numbers are so erratic, it would be hard to make a case for good or poor health.

Clarke County, VA Real Estate Market: The average sales price

Average sales price is typically a good indicator of market health. Here again, it would Clarke County, VA Real Estate Market Review - 2017be hard to pin a determination of good or poor health on this market because it is all over the map. The 2017 average sales price was 388,966. That was down from 2016 with $391,217. It was even further down from 2015 which was $434,873.

The two years prior to 2015 also showed the same up and down pattern that the following three years showed. In 2014 the average sales price was $329,227 and 2013 was $347,757. Up and down and back again.

A buyer in the Clarke County, VA real estate market needs to understand that Clarke County is a different animal. Berryville, which is the county seat, is a small town with a huge desire to stay a small community. It took years to get a Food Lion grocery store on the edge of town. As of this report, there are still no fast food chains allowed in Berryville. When you leave the county seat and travel south on Rt 340 to Waterloo, you will see a Sheetz convenience store. Across the street is a Shell gas station with a convenience store, and a McDonald’s completes the third corner. That’s it.

Beyond that, you can stop at a number of mom and pop stores and businesses throughout Clarke County, VA.  So, for the real estate market to be on it’s on trajectory is no surprise at all. I seriously doubt that it will ever change. That’s what makes it the quaint and quiet community that people love.

When you’re ready to buy or sell in Clarke County, VA, give Cornerstone Business Group, Inc., a call. We are your local real estate sales pros in the area.

Currently Available Homes for Sale 

If you enjoyed this post, you may also enjoy:

Winchester-Frederick Co., VA Real Estate Market in Review – 2017

Warren County, VA Real Estate Market Review – 2017

Loudoun County, VA Real Estate Year in Review – 2017

Feel free to contact us for more information:

Shenandoah County, VA Real Estate Market Review – 2017

Shenandoah County, VA Real Estate Market Review – 2017

The Shenandoah County, VA real estate market had a great 2017. The market continues to expand sales and distressed properties (short sales and foreclosures) are dropping yearly. There are plenty of reasons to be enthusiastic.

Shenandoah County, VA Real Estate Market: Positive Numbers

The Shenandoah County, VA real estate market has a lot of positive numbers to bolster Shenandoah County, VA Real Estate Market Review - 2017buyers and sellers. The average sales price is up 8.5% over 2016, and it is up a stunning 16.6% over the 2013. Not every year has been in positive territory since 2013, but four out of five have been better than post-recession 2009-2012.

The market is still 16% off of the 2007 market highs and off 3.6% from the 2008 highs. It is up 30% above the 2011 recession low. Since the market recession began in 2008, the Shenandoah County, VA real estate market has fought its way back year by year with only a few years of serious difficulty.

Shenandoah County, VA Real Estate Market: Distressed Numbers

Distressed properties are a key indicator of a market’s health. When a market has high foreclosures and short sales, the average home valued drops. The presence of distressed properties creates an environment of uncertainty and the real estate market climbs the stairs of certainty.

Shenandoah County, VA Real Estate Market Review - 2017Distressed properties made up 7% of all sales in 2017. That may sound high, but the market neighbors to the north, Frederick County and Winchester City, average 6%. The 7% number is more of the norm and less of a reason to panic. When you realize where the market has been, that 7% looks pretty good.

The percentage of distressed properties in 2016 was 10%, 2015 was 11%, 2014 was 13% and 2013 was 22%. Those numbers are all higher than the average, but they are numbers showing a market that is recovering from the recession. When you factor in the 2008-2012 numbers, a better picture evolves. In 2008, at the early stage of the recession, distressed properties made up 34% of home sales. That was followed by 29% in 2009, 43% in 2010, 40% in 2011 (the worst year of the recession in Shen Co.) and 38% in 2012.

The 2008-2012 numbers make 2017 look incredibly good. The difference from 2017 to the worst number of distressed properties in 2010 is a 16.3% change. That’s substantial. The change shows a market that has found its way back to profitability.

Shenandoah County, VA Real Estate Market: Days on the Market

Another indicator of a market’s health can be days on the market. This isn’t always the case, but it can be an indicator of a positive move forward. The 2017 DOM average was 112. When you compare that to 2013 at 146, you can see a positive change in the contract to closing time.

Days on the market went as high as 156 in 2009, but it has not been below 112 DOM since the recession. The Shenandoah County, VA real estate market average days on the market tends to be at the 100 DOM range. Anything below that would show a change in the flow of home sales. Even before the recession, homes were at or around 100 days on the market.

When you look at the Shenandoah County, VA real estate market, you see increasing home sale prices, lower distressed properties and shorter days on the market. That is a sign of a healthy market.

When you’re ready to buy or sell in the Shenandoah County, VA real estate market, give Cornerstone Business Group, Inc., a call. We are your local real estate sales pros, and we can help you make some great happen in 2018.

Available Homes in Shenandoah County, VA – January 2018

Canter Estates Subdivision in Stephens City, VA – Real Estate Review – 2017

Canter Estates Subdivision in Stephens City, VA – Real Estate Review – 2017

The Canter Estates subdivision in Stephens City, VA had a solid real estate market in 2017. Like many of its neighboring subdivisions, all the right numbers are up, and the unwanted numbers are down. That is consistent with the broader Frederick County, VA real estate market.

Canter Estates Subdivision in Stephens City, VA: Good numbers

The good numbers in the Canter Estate subdivision are price, distressed properties and Canter Estates Subdivision in Stephens City, VA - Real Estate Review - 2017days on the market. The average home sale in 2017 was $330,386. That is a 4% increase in sales price. Where the average sales price really shines is in the growth over the past five years. There is a 12% improvement in average sales price from 2013.

Each year since 2013, the average sales price has inched its way into positive territory. The average sale price in 2013 was $290,836, $301,240 in 2014, $311,423 in 2015 and $316,874 in 2016. Each year since 2012, an incremental change has taken place that has helped the Canter Estates subdivision regain its prominent place as one of the most desirable neighborhoods in Stephens City, VA.

Homeowners who purchased before the 2008 recession are finally seeing their value come back to near pre-recession values. There is still improvements to be made before the subdivision completely returns to those days of sometimes inflated values, but as of January 1, 2018, the average home sale price is still 10% below the 2007 market average. The local real estate market took a 37% hit with the market collapse in 2008.

Canter Estates Subdivision in Stephens City, VA: More good numbers

Distressed properties are a sign of a market in trouble. The 2017 distressed properties in the Canter Estates subdivision was 12.5%. That is higher than the local market average, but it may be more of an anomaly than a trend. It may also be the last heaving of the past market collapse.

The 2016 distressed number was 3%. That is a below average number. Also, in 2015 Canter Estates Subdivision in Stephens City, VA - Real Estate Review - 2017there were no distressed properties. But from 2014 backward gives a view where the market went during the downturn and where it is today. Those numbers were:

  • 2014 – 14.3%
  • 2013 – 20%
  • 2012 – 46%
  • 2011 – 33%
  • 2010 – 56%
  • 2009 – 30%.

In those numbers, you can see the wild ride the neighborhood had during the down days of the recession. The 12.5% number for 2017 is consistent with the whiplash nature of distressed property sales in the Canter Estates subdivision, but the overall market has made monumental improvements in the past five years, and this neighborhood is no different in those improvements.

Days on the market have been consistent over the past five years with only slight deviations along the way. The 2017 average was 35 days. That is two days above 2016, but here again, it is nominal. There is no changing trend to point to while trying to form an opinion of effect.

Overall, the Canter Estates subdivision is a highly desirable neighborhood with beautiful large homes of many styles. It is close to multiple highways which make it a great place for commuters to live. It is also a sprawling neighborhood with large yards, sidewalks for evening strolls and quick access to shopping, schools and parks.

When you’re ready to buy or sell in the Canter Estates subdivision, give Cornerstone Business Group, Inc. a call. We are your local real estate sales pros and we’re here to help you succeed.

If you enjoyed this post, you may also enjoy:

Oakdale Crossing, Raven Wing, Raven Point – 2017 Real Estate Review

Winchester-Frederick Co., VA Real Estate Market in Review – 2017