August 24, 2022
Are prices and rates going to continue to rise?
One of the most talked about questions in the real estate market has to do with “Will prices continue to rise now that interest rates have increased dramatically this year?”
It is understandable to think that if the Federal Reserve is using interest rate increases to slow consumer demand, that it would also slow homebuyer demand to moderate prices. Unfortunately for would-be homebuyers, it isn’t the case. High inflation, strong economic growth, low unemployment, and increased wage growth have been associated with high home price appreciation.
In a recent newsletter from First American, Chief Economist, Mark Fleming stated that historically, 90% of total inventory is from existing homes and homeowners are not moving as often as in the past. Prior to 2007, the average tenure was five years. After the housing crisis, between 2008 and 2016, the length of time spent in a home went to eight years.
Lawrence Yun, Chief Economist with the National Association of REALTORS� when talking about the May 2022 statistics: “Nonetheless, homes priced appropriately are selling quickly and inventory levels still need to rise substantially … almost doubling … to cool home price appreciation and provide more options for home buyers.” Median sales price rose to a new high of $403,800, up 10.8% from July 2021, while sales are down 20% year over year and inventory increased slightly to 3.3 months from 2.6 months in July of 2021.
In the beginning of 2022, Fannie Mae, Freddie Mac and NAR predicted home price appreciation would be 7.6%, 6.2%, and 5.1% for the year. Their revised forecast has been increased to 16%, 12.8%, and 11.5%. Buyer demand still exceeds inventory levels which is driving prices higher.
While the Fed does not set mortgage rates, it does determine the Fed Funds Rate which is charged by banks to each other for overnight funds. The increases often affect the U.S. Treasury rates to increase and there is generally a reaction when the 10-year U.S. Treasury Note yields increase for the 30-year mortgage rates to increase also.
The National Association of REALTORS�, on their website, states “The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.” The Index uses the 30-year fixed rate mortgage as provided by Freddie Mac’s Primary Mortgage Market Survey (PMMS).
Mortgage rates have gone up over 2% in the first half of 2022. That dramatically affects the affordability of the home even if the price didn’t increase, which it did. A $360,000 mortgage at 3.05% in December 2021 would have a principal and interest payment of $1,528 for 30-years. At 5.22% as of August 11, 2022, the P&I payment is $1,981 or a difference of $453 dollars or a 30% increase.
As of May 2022, homeowners are now staying in their homes 10.6 years. Part of the reasons can be contributed to the pandemic, but a large degree is attributed to the lack of inventory. Existing homeowners can sell their home for premium prices and in unusually short time frames, but the problem is finding a home to replace it.
The demand for housing still exceeds the supply and price are continuing to rise, although, maybe not as the same pace as 2021. Many economists predicted that price appreciation would slow but CoreLogic reported “Home prices nationwide, including distressed sales, increased year-over-year by 20.9% in April 2022 compared with April 2021. In the same report, CoreLogic predicted “…home prices are forecast to increase on a year-over-year basis by 5.6% from April 2022 to April 2023.”
Another frequent question homeowners have is whether to wait to see if prices moderate and interest rates decline. The probability is more likely for prices to continue to increase along with mortgage rates. The consequences of waiting, in hopes of lower prices and rates, could totally price a person out of the market for the home they want.
Using a $400,000 home that could be purchased today at 5.22% on a 90%, 30-year mortgage, the P&I payments would be $1,981. If the price appreciated only 5% in the next year and the mortgage rates were to go up by 1%, the payment would increase by $339 a month. If a person stayed in the home for 7 years, the increased cost would be $28,458 and if they stayed for full term, it would cost them $121,965 more by waiting.
Increases in rates and prices have forced some people out of the market, at least temporarily. For the fortunate ones, who can still afford to buy, even with the increases, acting now could save them tens of thousands and maybe hundreds of thousands depending on the price of the home.
Make an appointment with your real estate professional to get the facts on what you home is worth, the mortgages available, and the logistics to put it together for your best advantage.
August 24, 2022
Indecision Can Be Expensive
With all that is going on in the world, a global pandemic, supply chain issues, highest inflation in 40 years, the economic effects of a war in Ukraine, it can be overwhelming to think about when the right time is to buy a home.
On a local level, there is a pent-up demand for homes that have been building for years. Builders haven’t kept up with demand for new housing for almost 15 years. Low inventory, especially in the past three years, have driven up prices nationally in 2021 by 20% and even though, the rapid appreciation seems to be moderating, in June, NAR reported that the median price home was up 13.4% from one year ago.
Then, of course, there are mortgage rates that have gone up by 2% since the beginning of 2022. Appreciation and rising interest rates are a double whammy for people looking for their first home or to move up. It is completely understandable that many people are faced with so much that they are sitting on the sidelines waiting to see if things will improve.
Let’s look at a hypothetical situation where buyers have the money for a 10% down payment on a $400,000 home but have decided to wait for three years to see if things improve. They need to park their money somewhere safe so that it will be available when they feel comfortable to buy but also earn as much as they can to ward off the effects of historically high inflation.
If they were to put the $40,000 into a certificate of deposit for three years that pays 2%, they would earn $2,448 in interest. With current inflation at 8.5%, the purchasing power of their down payment would diminish.
A slightly riskier alternative would be to invest it in the stock market or a mutual fund. Assuming they picked the right stock or fund that earned 7%, their $40,000 would grow to $49,002 in the same three-year period.
The problem is that homes are appreciating much faster and the buyers would either pay more to get the same home or to pay the same price in three years, the home would not have the same amenities.
If the buyer purchased the home today that appreciates an average of 5% per year, the equity in the home in three years would be $118,000 based on two dynamics: appreciation and amortization. The wealth position at the end of the three years in the home is almost three times what it would be with the certificate of deposit and over twice as much as the stock investment.
Homes have appreciated more than inflation over the last fifty years. The average home price appreciation from 1970 to 2020 was 7.16% compared to the average inflation for the same period which was 4.3%. In 2021, home prices were up close to 21% nationally compared to 7% inflation.
Connect with your real estate professional to find out the facts about the market, the various mortgages available, what you can expect to buy, and if you have a home, what it will sell for. Good information can make a difference in making a good decision. Download our Buyers Guide.
August 24, 2022
Good Records Can Reduce Capital Gains
Regardless of whether you’re entitled to $250,000 or $500,000 of exclusion when you sell your home, prices have gone up so much in the past two years, you may be approaching the limit where you might have to pay tax on the excess when you sell.
Any improvements you have made to the home during your ownership can be used to raise your basis in the home which will reduce your gain. It is worth the effort to start reconstructing the list, both big ticket items and lower priced items that qualify.
While repairs to your home do not count as improvements, other money which either materially adds value, appreciably prolongs the useful life of the property, or adapts a portion of the property to a new use will qualify. Hopefully, you have contracts and agreements on the major items and receipts on things over $75.
If you have photographs before and after the improvements were made, it can help serve as evidence that they were in fact made.
The best proof is to record the expenses and receipts as close to when they are made instead of having to dig through boxes and invariably, either not finding them or worse yet, forgetting what was done altogether.
August 24, 2022
Moving Down in an Up Market
Selling and buying a lower priced home in an “Up” market can be to your advantage. The advantage is to maximize the sales price on your existing home and replace it with a less expensive one.
Moving down in an “up” market may be to your advantage in multiple ways. It is possible that your present home doesn’t meet your current needs like it once did. Making a move can allow you to “re-balance” the equity in your home to better reach your future goals.
The “up” market maximizes the sales price you can expect to receive, and it will free the equity in your home. A lower priced home will result in reducing your housing costs with lower property taxes, insurance, utilities, and maintenance…while improving your liquidity position.
It is not required to reinvest the proceeds of the sale. You may decide to get an 80% loan-to-value mortgage on the replacement home to get the best interest rate and avoid private mortgage insurance. This would allow you to put the excess proceeds into an income producing or growth investment, start a business, fund an education, buy a second home, take a spectacular trip, gift a down payment to a relative, or any other different projects.
The expression “other people’s money” describes borrowing money and using it to invest with the expectations of earning more than the rate you’re paying. Mortgage interest is one of the most attractive ways to borrow money because it is generally the lowest rate compared to other types of loans while having the option to get a fixed-rate mortgage for up to 30 years. Most other borrowed funds involve short terms and floating interest rates.
Rental real estate could be a possibility to invest part of the funds. There is a shortage of available rentals which has caused rents to increase like homes have appreciated. Single family homes for rentals provide large loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with defined tax advantages and reasonable control not found in many other investments. For more information, download our Rental Income Properties Guide.
Homeowners who have owned and occupied their principal residence for two of the last five years are entitled to exclude up to $250,000 of gain for single persons and $500,000 of gain for married persons filing jointly. For more information, see IRS topic #701.
Contact your real estate professional to find out more information like potential sales price, what net proceeds you can expect to receive on a sale, available replacement homes, and the types of mortgages and rates available.
August 24, 2022
Showing How Earnest You Are
The expression “putting your money where your mouth is” demonstrates a monetary sincerity to what could be empty words. In today’s competitive market where multiple offers are common, sellers want as much assurance as possible that the buyer is sincere and will close on the sale.
The seller who accepts a contract expects the buyer to follow through but, in most cases, doesn’t know the buyer either personally or by reputation. The earnest money submitted by the buyer with the contract shows their commitment to the terms of the offer.
If the amount is relatively small, the seller could be concerned that the buyer may walk away from the contract if they change their mind before closing. The lost time could be injurious to a seller who is trying to meet a deadline.
The more earnest money a buyer deposits indicates to the seller a higher level of commitment to the contract. Except for stated contingencies in the sales contract, if the buyer fails to close on the sale, the earnest money could be forfeited. Significant earnest money makes the seller feel more secure that the contract will indeed close.
There certainly are a lot of things that can dictate how much earnest money is appropriate. Local customs, price of the home and type of mortgage can all help to determine the proper amount. In some areas, it may be common for it to be one to five percent of the purchase price. In other areas, it might be a specific amount like $1,000 to $10,000 depending on the sales price. It really comes down to whatever the buyer and seller agree is the proper amount.
Another strategy is for the buyer to put up an adequate amount initially prior to inspections or other contingencies, and then, to put up an additional amount when the contingencies have been removed.
The earnest money demonstrates the buyers’ sincerity in making the offer and proceeding according to the agreement so the seller can take their home off the market and start making plans to move and give possession of their home. A higher-than-normal amount could also help the seller to choose yours in a multiple offer situation. Ultimately, both parties want to close as anticipated according to the contract and the earnest money helps facilitate that.
Your agent can explain what is customary for your area and price range. Many times, a disinterested party, like a title company, will hold the earnest money and the sales contract will provide how to dispose of it should the contract not close.