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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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.

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Berkeley-Jefferson County, WV Real Estate Market Review – 2017

Berkeley-Jefferson County, WV Real Estate Market Review – 2017

The BerkeleyJefferson County, WV real estate market had a great 2017. Both markets saw increased numbers at all levels, and they outperformed their immediate southern neighbors of Winchester City, Frederick County, and Clarke County, VA by 31%.

Berkeley-Jefferson County, WV Real Estate Market Review: Positive Numbers

The Berkeley-Jefferson County, WV real estate market increased sales 7% over the same period in 2016. The markets have grown 19% over the past five years. Property values have also increased 4% year to year and 18% over the past five years.

More bang for the buck

The 2017 market saw an average sales price of $209,988 for a single family home with 3 bedrooms and 2.5 baths. Just across the border in Virginia, that same house would have cost a buyer $277,755.

The Berkeley-Jefferson County, WV real estate markets are geographically positioned Berkeley-Jefferson County, WV Real Estate Market Review - 2017to give commuters into the D.C. – Northern Virginia area more home for the money and an equal or better commute to work. The Amtrak Caperton Station in Martinsburg, WV adds value to living in the area.

Home values have increased steadily for the past five years. The 2016 average sales price was $201,341, with 2015 being $192,578, and 2014 and 2013 at $190,586 and $173,226 respectively. That 2013-2017 change in sales price is 19%. The steady increase in home values shows a market that has not only healed from the 2008 recession, but it one that is thriving.

Berkeley-Jefferson County, WV Real Estate Market Review: A Critical Indicator

One of the more critical indicators of market health is the volume of distressed property sales. This an area where the numbers show the biggest improvement. The number of distressed property sales in 2013 was 29% of the market.

Berkeley-Jefferson County, WV Real Estate Market Review - 2017Distressed properties are made up of short sales and foreclosures. Foreclosures dominated the market as the recession of 2008 became the dominate factor in home sales. By 2010, short sales entered the market in volume and created a second wave of bad news for local residents. The change from 2013 to 2017 has been dramatic. Current distressed property sales are down 24% since 2013. The local market has settled into a pre-recession norm of about 5.5% across both markets.

Another positive indicator of market health is days on the market. The days on the market have not changed a single digit in 5 years. Days on the market were 76 in 2017 and they were also 76 in 2013. The middles years drifted back and forth between 93 DOM in 2015 to 89 in 2016, but those changes are small. As long as inventory doesn’t become a challenge for the local market, the Berkeley-Jefferson County, WV real estate markets are set for a banner year in 2018.

When you’re ready to sell or buy a home in the Berkeley-Jefferson County, WV real estate market, give Cornerstone Business Group, Inc., a call. We are your local real estate sales pros.