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.

 

 

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Why do FSBOs often fail to sell? It’s really not a hard question to answer.

Why do FSBOs often fail to sell?

Why FSBOs often fail to sell?As a real estate professional, I’ve seen my share of FSBOs. Most of the time, they end up with a Realtor’s sign in the yard after months of languishing on the market with a “For Sale By Owner” sign. I just passed a former FSBO yesterday. As usual, it has a Realtor sign in the front yard.

Why do FSBOs often fail to sell?

Why do they fail at a higher rate than a professionally listed property?

  • Homeowners seldom really know the current market. That leads to an overpriced home that savvy buyers would never buy. I showed one last year that was 62% overpriced. I guess the seller assumes there is always a buyer with more money than brains out there. What you want, and what a home will sell for may be light years apart.
  • Showing a FSBO can be challenging. When an agent sets up a dozen showings in one day, scheduling becomes an art. Access is the key to making that day successful. If a FSBO can’t allow the house to be shown except on a limited schedule the odds are radically against it. That’s true of listed properties too. Access is critically important.

There’s more to selling homes than placing a sign in the yard.

 

  • Homeowners may not know how to negotiate an offer. There is usually some give and take in a real estate offer. If a FSBO is locked on a price and won’t budge, or won’t let a home inspection or repair request become a part of the deal, or is refusing a termite inspection, or is demanding of a closing date closer than a lender can accommodate, then a buyer can’t buy it. In a case like this, the house is basically an island with no way to visit it.
  • Homeowners may not disclose things, or they may disclose too much.
  • Homeowners may not understand legal contracts. I ended up re-writing a contract for a FSBO a few years ago because there were so many legal liabilities in it that could eventually come back to bite the seller. The seller had no idea, and the buyer, who wasn’t represented either, had no idea of the legal ramifications of a binding contract full of potholes. Contracts are a Realtor’s bread and butter. Most FSBOs never see one away from a Realtor initiated deal.
  • Listed homes sell for more than FSBOs, on average. On average, listed homes sell 10-13% more than FSBOs. A 2015 article by the National Association of Realtors showed that the average FSBO sold for $185000, and the average Realtor listing for a similar house, sold for $240000. That’s a 23% loss by going it alone. Is it worth it?

Why do FSBOs often fail to sell? – Make the best choice

This list could go on and on, but the reality is that a FSBO is almost always better off selling through a competent Realtor. As is the case in most real estate transactions, fees can be negotiated. If money is an issue, let the agent know that up front and he/she can work with you. Having a qualified agent on your side can reduce stress, and it will help you get across the finish line with a better deal.

Why do most FSBOs fail? For the same reason car mechanics don’t do brain surgery. It’s not their area of ability, and for the sake of the community, they’re better off leaving brain surgery to medical professional who do it everyday. The same is true of real estate. Those who do it everyday are your best resource for an excellent outcome.

When you’re ready to list your FSBO with a competent real estate firm, give Cornerstone Business Group, Inc., a call. We are your local real estate sales pros in this area.

Loudoun County, VA Real Estate Year in Review – 2017

Loudoun County, VA Real Estate Year in Review – 2017

The Loudoun County, VA real estate market ended 2017 with a consistent pattern of positive results. Loudoun County, VA is the third most populated area in Virginia. The current population has grown to over 385,000. The average income in Loudoun County is approaching $120,000+. The population and income levels are reflected in the real estate statistics for 2017.

Loudoun County, VA Real Estate Year in Review: Positive Numbers

The Loudoun County, VA real state market saw 5000+ sales in 2017. Compared to some of the County’s neighbors, that is an incredible number. The Winchester-Frederick County, VA total sales for 2017 was 1745. Loudoun County’s immediate western neighbor, Clarke County, VA saw 210 says in 2017. The volume of sales is just one of the many positive numbers for the county.

Sales Prices are Increasing

The average sales price in 2017 was $508,571. That is a 6.7% increase from 2016. Loudoun County, VA Real Estate Year in Review - 2017Realtor.com predicted a 3.9% nationwide increase year to year in 2017. Loudoun County, VA with its proximity to the metro-D.C. area has a certain level of insulation from market drawbacks and price slowdowns. The area price appreciation over the past five years has increased 12.3%. Homes in the state of Virginia have appreciated 4.76% statewide for the past year. Again, that puts Loudoun County, VA ahead of the average both nationwide and statewide.

Another market predicting number is days on the market. The Loudoun County, VA real estate market is very steady in this category. From 2013 to the present, the market has not deviated a single percent. The 2013 DOMP was 38 days, and the 2017 DOMP is 38. Only 2015 (58), and 2016 (51), saw any minimal change in that number, and both years were marginal and not strong predictors of the market health.

Loudoun County, VA Real Estate Year in Review: Distressed Properties and Market Health

Loudoun County, VA Real Estate Year in Review - 2017The number of distressed property sales in 2017 were 245. Lower distressed property sales are also a good indicator of market health. In 2013, distressed properties sold were 598, 2014 were 264, 2015 were 337, 2016 were 322 and 2017 at 245. That is a number that is heading in the right direction with 2015 being the only anomaly over the past five years.

Distressed properties are made up of short sales and foreclosures. When a neighborhood has a number of these properties, property values drop at no fault of the other homeowners. As those numbers decline, property values stabilize and homeowners can demand a more market based value for their homes. Anytime distressed properties are included in the equation, market values will be skewed lower and true property values are masked by their presence.

Loudoun County, VA Real Estate Year in Review: Inventory

Market inventory has become the 800 lb gorilla in the room for much of the nation. The Loudoun County market has 545 available homes as of January 1, 2018. Low inventory has a circular effect on local markets. Sellers don’t list because there is no where to move to, and buyers can’t buy because there is nothing to buy. As long as the market stays healthy, and buyers and sellers move about with freedom, the 2018 Loudoun County market looks poised to have another banner year.

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

What’s a good home-buying timeline?

What’s a good home-buying timeline?

When you’re buying a home, there is a timeline of events that will happen. So, what’s a good home-buying timeline? On rare occasions, you may get the itch to buy a home, and start and close in 30 days. That is not the norm. From the time you have a need to buy a home until you close, you’re most likely looking at 45 days or more. What’s the time-line?

What’s a good home-buying timeline?

  • Financial – Pre-approval
  • Realtor Search
  • Home Search
  • Contract
  • Home Inspection
  • Appraisal
  • Contact Insurance Provider
  • Financing Approval
  • Title Search and Document Preparation
  • Closing Date Set
  • Closing Document Review
  • Contact Utilities
  • Confirm That Funds Are Wired to the Closer
  • Closing

What's a good home-buying timeline?

What’s a good home-buying timeline? – Finance & Realtor Search

Get your pre-qualification or pre-approval letter first. It is always better to have a pre-approval letter, but a pre-qualification letter is better than nothing. This is the first step on your timeline. Getting your financial abilities clearly spelled out will let everyone involved know what to look for when you’re buying a home. Do this about 45-60 days before you hope to close on a home.

Call a Realtor. Actually, call a few Realtors. Interview agents until you find one that works well with your personality and goals. Don’t be shocked if they ask you to sign a buyer broker agreement. A BBA is the equal to a listing agreement when selling a home. In the state of Virginia (7.1.2012), it is required for all buyer-agent relationships. The length of the agreement is negotiable. If you are uncomfortable signing one, ask that the length of the agreement be short (30 day, 60 days, etc.). Find an agent who has your best interest at heart, sign your BBA and get ready to get started.

What’s a good home-buying timeline? – Home Search & Contract

Once you’ve been pre-approved and you’ve located a good Realtor, it’s time to settle on your home criteria and hit the streets. Eliminate as many possibilities in the Realtor’s office before setting appointments. Volume of showings is not the quickest path to the perfect home. Matching criteria with available properties is where you should start your search.

Once you’ve found your perfect home, negotiate an acceptable deal and write a contract. This is where you Realtor will be a priceless addition to your home search. Your Realtor can show you what has sold in your chosen neighborhood.

If you’re planning on offering 50% less than the list price, your Realtor can help you see if there is any possibility of your contract being accepted. The information in the multiple listing service will tell you if homes are selling at list, 1% below list or 50% below list. If they are selling at list or 1% below list, you’re 50% below will not have a chance and you’ve just wasted your time and your Realtor’s time.

This is especially critical in a competitive market. If inventory is low, you can’t afford to make useless offers if you really want the property. Make your best offer and let the seller negotiate if there are needed changes.

What’s a good home-buying timeline? – Home Inspection & Appraisal

Once you have a ratified (accepted) offer, you need to schedule a home inspection (10-14 days, $300-$450 paid out-of-pocket up front). Home inspections look at a home to see if the systems (plumbing, electrical and heating & cooling), roof, appliances and construction are in good working order. If they aren’t, you can walk away, negotiate repairs or accept the property as is. Home inspectors and home inspections are perfect, but they do give a glimpse into the home’s health.

Around the same time, your lender will call for an appraisal (14-21 days on average, and around $450-$650, often paid up front, and out-of-pocket). It’s good to have the home inspection and any negotiations done before the appraisal just in the event the deal falls apart at that point. There’s no sense in paying for an appraisal on a home you will not be buying.

What’s a good home-buying timeline? – Insurance & Financing Approval

Now that the home inspection repairs are agreed to, and possibly complete, you will want to contact your insurance provider to make them aware that you are buying a home and you will need insurance (14-21 days). You may want to shop around to make sure you’re getting the best deal. Prices can vary radically.

Around 21-28 days, you should have a loan approval from your lender. It may take longer, but that is something that should be inserted into the contract. Most lenders can give a loan approval in this amount of time or less, unless there are circumstances that need to be reconciled before that phase can be complete.

What’s a good home-buying timeline? – Title Search & Closing Date Set

Your closing attorney, or closing agent, will be searching your title during this time (14-28 days). The attorney, or agent will be looking for any anomalies in your title’s history. Most will searches will go back at least 60 years to see if the property has had a clear chain of title as it has passed from seller to buyer.

Once the closer has confirmed that the title is clean and can be transferred, a closing date is set. This date should coincide with a date set in the contract. Most contract language says, “On or before” a certain date. That means you may close early if everything is complete and everyone can close early. On occasion, you may close late because something wasn’t completed in time. In that case, you’ll need to have an agreed upon addendum signed by all parties extending the closing date. Those are not as common, and they are normally just a few days or weeks long.

What’s a good home-buying timeline? – Review Closing Docs & Contact Utility Companies to Have Services Set Up.

The closing docs, or CD (for a loan funded sale) needs to be in your hands 3 days before closing. All parties (including lenders) will need to agree to the CD and sign off on the numbers. If there are mistakes on the CD, it will need to be corrected and the 3 day period restarts.

This is a good time to have your utilities set up with your new water, electric, gas, oil, Internet and cable providers. Make sure they are set to start the day of closing. This should be done a week or two before closing. That gives you plenty of time to run around making deposits and filling out applications. This is not something you want to put off to the day of closing. A lot of sellers will have their utilities set to expire on the day of closing. Make sure to put it on your calendar.

What’s a good home-buying timeline? – Confirm That the Funds From Your Lender Are Wired to Your Closing Agent on or Before the Day of Closing & Close.

Make sure the wiring instructions for sending money is handled by you and your closing attorney or agent. Do not send money based on an email received at the last-minute without talking directly to your funding lender. Do not click on a link in a last-minute email offering wiring instructions. A recent real estate scam has been for a thief to send an email with wiring instructions that go to a scam account. It can be devastating. Make sure you and your closing company are monitoring this phase closely, and always talk directly to the people you’ve been working with. This not a time for new names to be added to the contact list.

The last timeline issue is to close. You will meet your closer and sign a one inch pile of papers that are redundant and confusing, but hopefully you’ve picked a closer who will explain everything clearly and with a bit of humor. It can be really boring at this point, and the humor goes a long way. This is an area where having a great Realtor can be a huge plus. Your Realtor can give good recommendations of highly skilled home inspectors, lenders, closing companies and other services.

There is one final conclusion to your process. You get the keys. Congratulations on your home purchase. When you’re ready to start your own timeline, give Mike Cooper, or any of the agents at Cornerstone Business Group, Inc. a call. We are your local real estate sales pros, and we’ll get you across the finish line (hopefully, with a smile).