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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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 

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Don’t wait too long to buy a house. It may cost you more than money.

Don’t wait too long to buy a house. It may cost you more than money.

One of the most common questions Realtors deal with is related to “how much house” a buyer can afford. The first place to start when you want to buy a house, is the lender’s office. A lender is a great resource in the home buying process because the lender can determine what buying power a home buyer is capable of. Then, with that information in hand, a buyer knows what price he/she should be shopping in. It would be terribly frustrating to shop for a $400000 house if a buyer’s buying power is $232000.

Don’t wait too long to buy a house: The cost of waiting.

There is second issue buyers should also consider when they start the process to buy a house. That is time and interest. Time and interest rates can work for you, or they can work against you. A buyer may start the process qualified to buy a $232000 house at 4.5%Don't wait too long to buy a house. You may find that you can't afford what you could before., but what happens if he lingers for 6 months and interest rates inch up over that time? Let’s say rates climb to 6%. That $232000 house will now be out of his buying range. Now, he can only afford to buy a $196147 priced home, but his house payment will be the same as the $232000 house.

Don’t wait too long to buy a house: Even small changes will hurt your purchase.

Even if the rate only went up 1% to 5.5%, the buyer’s buying power slips to $207119. No one wants to rush into buying a house, but being too causal in home buying process may cost you. In this scenario, the buyer lost nearly $25000 in buying power. If it went to 6%, he lost $35853 in buying power. It’s very likely that the $36K loss in buying power is not going to produce the house he envisioned when he started the search.

Don’t wait too long to buy a house: Time really is money. Your money.

Time really is money when the market is showing increases in housing prices and interest rates. Every increment up means less buying power. A buyer needs to be focused on finding the right house within his/her price range within a reasonable time. If not, he/she might be settling for less house at the same monthly costs.

You may also enjoy reading:

Buying a home? What is the process?

You can’t buy the first house you look at, can you?

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

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

The Oakdale Crossing, Raven Wing and Raven Pointe neighborhoods had a good 2017 in real estate. All three neighborhoods show year over year improvement in sales numbers, distressed property sales and average sales price. They also show a drop in distressed properties (short sales and foreclosures). The five-year sales have increased over 32% from 2013, but the years between 2013 and 2017 were a roller coaster. In every area, these neighborhoods have been up and down.

Oakdale Crossing, Raven Wing, Raven Point: The ups and downs of the past 5 years.

In 2017, total sales for the three neighborhoods were 37. That was a 131% increaseOakdale Crossing, RavenWing, Raven Point - 2017 Real Estate Review over 2016. Ironically, 2016 saw a -40% drop in sales over 2015, but 2015 saw a 23% increase in sales over 2014. Finally, 2014 was down -21% over 2013, and 2013 was down -21% over 2012. The numbers could give you whiplash if you were a seller in these three neighborhoods.

In the current breakdown, Oakdale Crossing had 6 sales, Raven Wing had 17 sales and Raven Pointe had 14 sales. Raven Wing has consistently carried the most sales from 2013-2017. On average, Raven Wing has double-digit sales compared to its immediate neighbors. Raven Pointe rose to 14 in 2017, but it has been below 8 for the past five years. Oakdale Crossing is typically in single digits with 2017 being the highest in the past five years.

Oakdale Crossing, Raven Wing, Raven Point: What’s in a day

Oakdale Crossing, RavenWing, Raven Point - 2017 Real Estate ReviewAnother way to see how the market has improved over the past five years is to look at the days on the market. The average days on the market can be a very revealing number, or it can yield nothing of valuable to the understanding of a neighborhood’s health.

In these three neighborhoods, this is one number that tells the story of the roller coaster ride these neighborhoods have been on over the past five years. The market of 2013 was the first year where real change was noticeable after the down days of the 2008 recession. It was also the lowest days on the market of the past five years. The 2017 days on the market was the lowest since 2013. At 75 average days on the market, it was 15% below 2016, 13% below 2015, 61% below 2014, and 23% above 2013. Again, there was volatility, but these numbers show a market fighting to get back to a healthy norm.

Oakdale Crossing, Raven Wing, Raven Point: Price change

Price change, up or down, can also show a market’s health. The price change in these three neighborhoods has shown the same pattern as the numbers above. The 2013 average home sale was $377,721. That was 8.5% increase over 2012. In 2014, the average sale price was $404,864, but 2013 dropped to $391,483 and 2015 dropped even further at $377,517. The biggest price change happened in 2017. In 2017, the average home sale was $436,964. That is a 16% increase over 2013 and a 16% increase over 2016.

When the numbers are looked at from a distance, it truly has been a roller coaster ride for the past five years. The thing that separates 2017 from earlier years is that all numbers are up except days on the market. That one number is the least important because there are so many factors that can increase or decrease that number, and those factors may not be related to market health.

For instance, a home that is overpriced will take longer to sell. A home that is hard to show will take longer to sell. A home that is in poor condition will take longer and a home that is plain vanilla in a sea of banana splits may take longer to sell. There are so many factors that can lengthen days on the market that it becomes the lessor of the market health parameters.

When you’re ready to buy or sell in any of these three neighborhoods, give Mike Cooper at Cornerstone Business Group, Inc., a call. Mike and Cornerstone are your local real estate sales pros in Oakdale Crossing, Raven Wing and Raven Pointe.

You may also enjoy these previous reports on these neighborhoods and the local market. 

Oakdale Crossing is on the bright side of the economic recovery.

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

Should I list my home in the Winter months?