The Impact of Interest Rates on Home Affordability

The Impact of Interest Rates on Home Affordability

Historical Interest RatesMost real estate buyers can’t afford their home. A first time buyer who saves up for a down payment, has good credit still can’t afford their home. Being able to afford their home means paying cash. When a buyer says that they can afford a $300,000 home for example what they actually mean is that their budget allows for them to afford the payment on the mortgage that goes along with a purchase price of $300,000.

When a buyer is in the market for a home, the search process is usually short enough so that the mortgage interest rates are relatively stable. But this is not always the case. For a long time now, interest rates have been historically low but as you can see from the attached graph they are still historically VERY LOW.  At a recent meeting I attended, the Chief Economist of the National Association of Realtors predicted that interest rates would rise .5% by spring and be up near 6% by the end of 2016. These are big jumps in a market where we have gotten very used to low rates. I fear that many potential buyers are beginning to expect the rates to stay where they are. And I hate to be the bearer of bad tidings, change is the only constant and the cycle for increasing interest rates is coming. When I broke into the real estate business as a green agent in Boulder Colorado in 1992 8% was a great rate. Now 4% is considered a great rate.

So when interest rates do go up the issue will not be how expensive a house you can afford, it will be how big a payment a buyer can afford. So, let’s look at how sensitive a payment is to changes in interest rates. This is called payment elasticity. Let’s consider the following scenario.

  • A buyer has been pre-qualified for a mortgage payment (not including taxes or insurance) of $1800 per month. Let’s assume a current interest rate of 4.5%,  at this rate they qualify for a top home price of $355,000.
  • They are excited about their home search and on their first time out with their Realtor (hopefully me :)) they see some really great homes. They are happy with the type of home they can get, but decide to keep looking.
  • They have a trip planned and then people coming into town, so they are not able to look at homes for a number of weeks. After that they find that there isn’t much to look at. The time between first looking at homes and their second viewing trip is two months. During that time interest rates increase from 4.5% to 5%. The next time out they find a house listed for $355,000 and write an offer for $350,000. The offer gets accepted and everyone is really excited until they talk to their lender who informs them that “interest rates have increased and they can no longer qualify for the house they have a contract on. Their top price range is now $335,000”. Crushed! Disappointed! Upset! Betrayed! These are just a few words that come to their minds as they quickly cancel the contract.

It’s called interest rate risk and it can really happen. In my scenario, the buyers lost $20,000 of purchasing power in a short amount of time as interest rates climbed just 1/2%. To see how this looks with real payments take a look at the chart below. In this scenario for every 1% increase in interest rates they lose $40,000 of purchasing power.  If in our scenario the buyers find a way to qualify their payment just went up $106 per month or

Moral of the story – Don’t ignore interest rates. If you are happy with your payment and happy with a house, jump on it. This could become an issue in the near future.

My source for the historical interest rates is FeddieMac

Why It Stinks To Be A Buyer In Boulder County Right Now

Why It Stinks To Be A Buyer In Boulder County Right Now

balancing actI have been talking about low inventory for quite some time. As a current illustration of this fact I just compared the inventory of single family homes in Boulder County at the end of October from 2007 – 2014.  Each year the inventory has decreased.  In October 2007 there were 2124 homes for sale in Boulder County, this year we have 1194. This is a 44% decrease.

As the listings decrease the market power shifts towards the seller and away from the buyer. Buyers don’t have many choices so if they want to buy they compete for a limited pool of properties and end up paying more if there were more to choose from.  Prices have been rising as a result.

To further illustrate the point I thought I would give a real life example of how few choices a buyer has in this market. Let’s look at the situation of two hypothetical buyers. The buyers are fictional but the searches and the results are true and accurate as of the later part of November 2014.

The Smith’s

The Smith’s are a couple in their late 20’s. They moved to Boulder three years ago and were both able to secure good jobs. They are off to a good financial start and have been able to save up a down payment and establish good credit. The price of their apartment has risen each of the last few years and they are ready to buy a make a home in Boulder. They are pre-approved for a purchase price of $200,000. So they have established their search criteria as: City of Boulder, 2 bedroom, 2 bath condo. They would love a covered garage space but they don’t want to be too picky.

SONY DSCThe initial search turned up fourteen properties. But on further review seven of those are already under contract. Of those seven remaining properties, five are only available to those who qualify for and are interested in the City of Boulder Affordable Housing Program. The Smith’s make too much money to qualify for the program and since this is a stepping stone property for them they wouldn’t be interested in the deed restriction which limits their future appreciation.  So in the end their are two active properties to consider in Boulder. Both of those happen to be located in the same complex.  After looking at them they decide to keep looking since they don’t care for the interior hallways and the 1970’s styling of the complex.

So after 20 minutes of viewing properties they are forced to scan the internet and check their email for their Realtor’s automatic MLS search results. When a new property does hit the market they are most likely competing with many other buyers who are looking for the same type of property.  If they do like it they will be forced to compete with multiple offers, leaning heavily on their real estate agent since they have only seen a few properties.  It’s a very difficult situation for a first time home buyer.

The Walter’s

The Walter’s have been renting in Louisville for a year.  The moved here to take a job and have enrolled their kids in school. This isn’t their first purchase and they are pre-approved for a mortgage of $375,000. They have $100,000 to put down, so their maximum price is $475,000. They would prefer a four bedroom home but would settle for a three bedroom if they had to. Their first choice is Louisville but they understand the tight market and are willing to look in Lafayette as well.

The MLS search for a price range of $400,000 – $475,000 in Louisville and Lafayette resulted in:

  • Ten active properties. Nine in Lafayette and one in Louisville.
  • Six listings that don’t already have a contract pending. All of these are in Lafayette.
  • Three of the listings are new construction which the Walter’s don’t prefer since they are not yet complete and they need to move out of their rental by a certain date.
  • So in the end they have three properties to view in Lafayette.

According to the U.S. Census the combined population of Louisville and Lafayette is 44,000 and there are 18,000 households. The median price for homes in Lafayette in 2013 was $399,000 and in Louisville it was $490,000. given this information you would expect to have more than three homes to consider at any one time. But that isn’t the reality of the market right now.

After one short appointment with their Realtor they have viewed all three possibilities and have ruled them out. They are now in the same waiting game as the Smith’s.  They may need to extend their rental by a few months which will cost them more money.

The low inventory has made it very difficult for buyers to make proactive steps in their move. They don’t have choices, they have an undefined time frame and when an acceptable property does come on the market, chances are they will need to compete with other offers in order to win the bid.

The low inventory has also caused many would be sellers to stay put.  The argument is “when I sell I won’t have anywhere to go”. Exasperating this is a very tight rental market.  Rentals are very expensive and finding terms that allow for short term but uncertain stay is very difficult.

These are extreme but not atypical cases and highlight the need for an experienced Realtor who can help you navigate through the process.  Currently I am trying to identify upcoming listings in a particular area on behalf of a buyer by sending out letters to a specific neighborhood.  It’s a great place to live and a great place to own real estate but right now it stinks to be a buyer.

The chart below shows the home inventory by month over the past four years.Boulder home inventory

 

Multiple Offers?  How Much Should a Buyer Offer?

Multiple Offers? How Much Should a Buyer Offer?

Businessman Flying on Money AirplaneThe Boulder real estate market is currently characterized by low inventory and good buyer demand. It’s a sellers market.  Many home buyers are finding that the houses that they are interested in buying are also coveted by other buyers. This leads to a multiple offer situation. A great situation to be in – if you are a seller.  For a buyer it really stinks. To see the situation from both sides read this article.

In our area multiple offers are most often handled in this way. The listing agent receives an offer and then lets all other agents who are showing or have showed the house know that they will be presenting the offer at a certain time and day. If another offer does come in the first offering party is advised of the second offer and is offered the opportunity to revise their offer.  For the buyer the information available is usually only limited to the number of offers that will be looked at. This information gap leads to much anxiety. How much should we offer?  What are the other offers? Are we crazy to offer $X? Will there be another better house coming down the line that is less hassle and not priced so high? Will it appraise if we go over full price? It goes on and on and each of these questions are rhetorical.

Since I can’t answer these questions for my clients with any clarity. I rely on experience to advise them the best I can and ultimately I leave it up to them to pick a number.  Sometimes we use an escalation clause to calm the anxiety a bit and to hedge an overpriced offer.  In the end it’s an inexact science and the results favor the bold.

So far this year there have been approximately 362 sales in the City of Boulder. In 23% of these transactions the buyer paid more than the listing price for the property. Presumably most of these 84 transactions had multiple offers. So in an effort to bring some data to the unanswerable here are the statistics from those multiple offer situations.

  • The average successful offer over all price ranges exceeded the listing price by 3.07%.
  • The highest percentage paid over the list price was 12.63%.
  • The average price paid over list in transactions under $300,000 was 3.13%
  • The average price paid over list in transactions between $300,000 and $600,000 was 2.72%.
  • The average price paid over list in transactions between $600,000 and $800,000 was 2.65%
  • The average price paid over list in transactions over $800,000 was 4.63% (3.8% if you exclude
  • In 14 of the 84 transactions the buyer paid $2,000 or less over list price.
  • The average premium paid across all price ranges was $15,500.
Five Reasons For The Drop In Home Inventory

Five Reasons For The Drop In Home Inventory

February InventoryWhere Did All The Homes For Sale Go?

It seems that the headlines around the country in stories written about real estate inevitably have two major themes; low inventory and increasing prices. And for anyone who is familiar with economics at all this isn’t a surprise. They should go hand in hand. Given equal demand,  a decrease in the supply of any good will result in an increase in the price of that good. The technical term is scarcity.  It results not only in a buyer paying more for something but in most cases they also have to demonstrate patience as they wait for delivery. But this equation doesn’t always end up with the same number of transactions taking place. Many of the would-be buyers get discouraged with the process of the purchase and decide to make other arrangements.

In the real estate world “other arrangements” mean that a would-be buyer decides to stay where they are or decide to rent instead of buying a new home. The market isn’t operating efficiently and in the end, the result is fewer sales.  We are already seeing all of these variables come into play: lower inventory, higher prices, fewer sales. Here in Boulder County inventory is down approximately 50% from the same point five years ago.

The question that I haven’t seen adequately answered is “where did all the homes for sale go?”  I don’t have ‘the’ answer but here are my ideas on the reasons why inventory of homes for sale has steadily decreased both nationwide and locally.

  1. Financial Distress – When homeowners don’t have enough equity or cash to sell a home they have three choices; pursue a short sale, let the home go into foreclosure or keep making the payments and hang on to the house until their equity rises to a point where their costs to sell are covered. Prices have risen and we are through the worst of the latest foreclosure wave but the most recent recession was deep and home prices did fall to a point where the recent appreciation in many areas is just now making up the accumulated loss. If you bought in 2005 – 2007 chances are that your equity vs. selling cost equation is still about breaking even. Therefore, the mindset for many people is, that I have made it this far and prices seem to be headed in the right direction so if I hold on a bit more it will be even better. Many in financial distress either can’t afford to sell or are waiting for more appreciation.
  2. Trade-up Conundrum – For homeowners hoping to trade-up to a larger, more expensive, or different house there are two parts of the equation, selling and then buying. Right now the selling part is easy. In the Boulder County area if you have a decent house you can sell your home for a good price in fairly short order. But once you sell you must find a new home, and fast. There are two problems here. 1) Low inventory means that a buyer has very few choices on the buying end and it might take a double move to make it work. 2) Prices are rising and there might not be enough equity (see #1 above) to put into the new home to make the financing and monthly payments work.
  3. Investment Buyers – When a new listing does come on the market competition between buyers is tight. Exasperating this competition is the proliferance of investors who many times make cash offers. More buyers means that it takes even more new listings to satisfy the demand.
  4. Rising Prices – I had a prospective seller do some quick math at the kitchen table recently. He knew that prices had risen approximately 9% over the past year on his $500,000 home. This meant that every month his home was going up another $3,750. There are some serious assumptions in this equation, but I don’t doubt that many homeowners do the same math. The answer to this optimistic equation for them is “let’s stay here another year and sell it next year for $50,000 more”. I love the optimism, but this type of thinking doesn’t work in perpetuity. If you follow the housing market, the stock market, the commodity market or any other free market, you know that these forward looking assumptions are easier to make than they are to collect on.
  5. No Place To Go – “Sure we could sell our house, but where would we go?”. These words are echoing across the area, and alas the nation. Instead of taking the plunge into the market, these would-be sellers/buyers then decide to do nothing, thereby fueling the self-fulfilling spiral of even lower home inventory. In our area this is further exasperated by a lack of rental homes that in a different market take up the slack if the logistics don’t work just perfectly.
When to Upgrade Your Property

When to Upgrade Your Property

Home ownership is a long term relationship. And just like other long term relationships in our lives, it needs constant attention and care.

Let’s imagine a typical situation. A family purchases a new home and uses most of their savings to do so. bad_bathroomThe first few years are spent installing landscaping and furnishing and personalizing the rooms. Everything is new and fresh and all is good with the world. After awhile the house is either just the way you want it or good enough. For a long time the homeowners live happily in the relatively new home, not much to be done but enjoy.

As many years go by the house starts showing some wear and tear and features that were once fresh and hip are now showing up on the “before” side of the “before and after” shows on HGTV. But the house still works so you live in it and fix something when it breaks. Unexpectedly you get a new job out of town and you have to sell your home in a hurry. Your realtor comes in for a meeting and nicely tells you that your home is dated. There’s not enough time or money to upgrade everything at once so the only option is to set a low price and hope for the best. It might take many years to get to this point but I see it time and time again.

The other option is to proactively upgrade your house over time. Yes, there is a honeymoon period on a brand new home where you don’t need to upgrade, but after five or six years you will want to start looking at your property with a discerning eye to determine what project is next. When you take one reasonable project at a time you will be continually improving your investment. Using this strategy you will not only keep your investment on the top end of neighborhood values you will be able to enjoy and take pride in your house as you live in it.

Here are some ideas of yearly projects to consider for your home:bathroom-before-updates

  • Replace flooring in a bathroom.
  • Upgrade the light fixtures throughout the house (sconces, bathroom light bars, chandeliers)
  • Upgrade the countertops in the kitchen
  • Replace the furnace and air conditioning
  • Re-carpet
  • Replace the vanity in a bathroom
  • Paint the exterior or interior of the home
  • Replace the front concrete walk with something more eye catching
  • Replace the appliances (non matching appliances are not a good selling point)
  • Re-stain or install a new deck

Take on one project a year and when the time comes to sell you will be ready to maximize the value.

 

Recent Testimonials

Recent Testimonials

I love serving my clients and it’s great to get feedback on how I’m doing.  Here are some testimonials I have received from clients I have helped over the last few months.

“We worked with Neil Kearney for the sale of our Gunbarrel home during our relocation out of state and were extremely happy with him!  He provided a comprehensive market analysis in a short time so we could price our home competitively.  His marketing of the house drove traffic to our home and led to multiple offers in a short time, allowing us to achieve our target price for the sale of the house.  Neil’s personal touch and communications while we were out of the state were a great comfort to us during our busy relocation.  He took care of all of our worries and kept us informed during every step of the sale of the house.  We highly recommend Neil for your agent!”

Jim and Anna McClatchey

 

“In selling my home I was searching for a realtor that had plenty of experience in pricing and selling properties, is familiar with my neighborhood and surrounding area, has a friendly demeanor.  Above those qualities, the single most important thing to me was being confident that my realtor would know how to price a house right without listing it for too less or too much.   A friend had recommended Neil Kearney to me, as he had told me that his experience with Neil had surpassed his expectations.  I took my friend’s recommendation and Neil Kearney personified each of those qualities I was looking for in a realtor very well.  Neil did his homework and helped me price the house right.  Three days later I was under contract.  From the first handshake to the closing of the sale, Neil made my home selling experience a pleasant one.”

Shaun Tomkins 

 

“Neil Kearney is a great realtor and we highly recommend him!  Neil’s knowledge, skill and personal qualities make him a highly successful realtor which made our real estate transaction smooth and enjoyable.

Neil recently helped us purchase a home in Broomfield.  He is very knowledgeable about real estate in Boulder County, Longmont, Broomfield and other neighboring areas.  We looked at houses in all of these areas and his manner of quiet, patient, competent service made it a smooth process to find the right house.  As individuals returning to the Boulder area from out of state, it took us a while to determine the right location at the right price for us.  We also were unsure about the type of housing we wanted and thought we wanted to downsize.  After looking at smaller properties, we realized that we wanted a home that was similar in size to the one we had most recently.  Using his strong knowledge of the communities and how they related to our housing needs and desires, he guided us through the process of finding the house that suits us perfectly.  His provision of the on-line search capability was also very helpful.   In addition, he has a ready sense of humor and it is fun to work with him.

Neil quickly and efficiently made our offer for the house.  He monitored all of the steps of the purchase with ease including recommending potential inspectors and working with the title company.  It made it very simple for us.  It was a pleasure to work with Neil and if the opportunity arises, we would anticipate using his services in the future.”

Kent and Jan B.

 

To see more testimonials go here.