I once heard that an Ocean Front property could have been purchased for $70,000 back in the 70’s. That property is over $4 Million dollars today. If I could turn back time…I would buy that. Not to make money on it. To own it. To enjoy it. For generations of my children’s children to enjoy.
This afternoon I will be at a home inspection of a house my clients are buying for slightly less than $300,000. The wife cried when the seller accepted their offer. It’s the kind of house some people would turn their nose up at and say “I’d rather rent”. But I can’t help but think of how my children in L.A. would celebrate being able to buy a house like this, just as my clients are. Having a yard for the kids to play in. Buying most any house for $300,000 or less is just not an attainable objective for many people who want and need to live close to where they work.
Many homes this year could be had for $100,000 to $150,000 less than in 2007-2008. This has been a great year for some of my clients who could not buy a home last year.
“Buy now or be priced out forever” is a phrase that is often joked about…but…sometimes it’s true.
Hi ARDELL – my comment disappeared…. waaa But I like this story and I had a few similar ones this year. These would be buyers are extremely appreciative! I agree with you – I wish my husband’s family in particular had held on to any of their family mansions on Queen Anne!!!!!
Hi Courtney,
Are you coming to Rhonda’s REbarcamp planning session at Latona Pub for lunch on Thursday?
Very cool story Ardell. Hope the inspection went as expected.
It is difficult not to take a home purchase, even a sale, emotionally. This evening we spent the last two hours over at a friend’s house talking over some tea and Andrea Bocelli Christmas album playing in the background. All of us were in front of the fireplace talking about everything from when we first bought homes to our kids school and favorite holiday family traditions. The traditions ranged from funny to heartbreaking situations made good and everything in between. This is what home ownership is all about. Memories. And after we left feeling great and wrapping up a great weekend, on the way home I couldn’t help but think about the four officers and their families that we will all keep in our prayers this coming Tuesday.
I have been out of it for the last couple of months so I think I better put that on my calendar. I have a prelisting appointment at 10 and it is my little one’s b day. Rhonda keeps planning these things on my kids birthdays!!! 🙂 What time? I will check facebook – I am sure it is on there – I do recall an invite…
Oh no! It’s not on purpose. 🙂 We don’t have a date set for the REBC in March–it will probably be either Monday, March 15 or Thrusday, March 18. It’s going to precede the “Pacific Northwest Real Estate Summit” and so we’re looking for a large space in Seattle (like Qwest Field or the Conv Center)…REBC is being planned around this larger event.
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$70,000 in 1970’s = $1,000,000+ in today’s inflated dollars. Not really the ‘buy of a lifetime’ as you stated..more so just the smoke and mirror effect of real estate ‘going up in price’ due to the US dollar losing value.
Dear Mr. Skeptic,
I don’t know anyone who owns one of those properties who bought it in the 70s who agrees with you. The reality is that people are buying property this year, next year and likely for at least 3 years forward, at prices that they could not buy for last year or two years ago (2007 and 2008). That is today’s reality.
“inflated dollars” is meaningless to people whose income is not so readily “inflated”.
thanks for approving my comment!
i guess what this really calls for is a raincityguide post on the future of real estate prices. i think you’re crazy to say this is a “buying opportunity of a lifetime”. That sounds like pro-sales propanganda to me.
What are you going to tell your clients when they’re house loses 10%-20% of its value in 2 years when rates go up to 6-8%? Remember, a house is really only worth the monthly payment that people in that market can afford….if rates go from 5.5% to 8%, you just effectively priced a sh$t t$n of people out of being able to afford that house.
Example: Young Seattle couple (like in your article) buy Seattle starter house for $400,000 today. They lock in a 5.5% rate with 20% down ($80,000 down).
Monthly Payment = est. $2283
Two years later (2011), couple puts house on the market for $400,000. Problem is that the rate has gone from 5.5% to 8%. Since their house is a ‘starter house’, its only going to appeal to 1st time homebuyer, which let’s assume are in the exact same income bracket as the Sellers.
With a rate of 8%, Seattle couple’s house is effectively worth whatever monthly payment 1st time homebuyer can afford, which at 8% interest rate = $311,000.
So Seattle couple loses $89,000 in principle since they bought:
A) during a period of rampant housing inflation 2000-2009
B) bought during 30 year low interest rates, which also inflated prices.
What are you and all your real estate sunshiners gonna say in 2-5 years when this happens on a grand scale? Unless Microsoft adds another 30,000 jobs or a ton of trust-fund kids move to Seattle, things will be flat or lower indefinitely.
Welcome back, Mr. Skeptic. The process of “approval” for a comment is only for a first time commenter as it is a WordPress plug in. You shouldn’t get “stuck” in moderation again.
You said, ” i think you’re crazy to say this is a “buying opportunity of a lifetime
Well Ardell we don’t agree often but we agree on this.
The house I looked at this morning is in great shape and priced at $350K. It was on the market a couple of weeks. Even if it loses 20% in value, which I doubt, it will still be worth owning and paying off. I do think it will drop in value to $300K, but with the cheap money you can make that up in lower payments.
David,
I have to say that I have more faith in appraisers not to over appraise these days and to protect buyers a lot more than they did a couple of years ago.
Plus, I’m pretty sure I would be able to tell if they over appraise it.
How do you feel about that?
so any FHA loan deal that is currently being closed in 2009 will be assumable at-sale any number of years from now? sounds like another fannie mae/freddie mac ‘too good to be true’ guarentee, that if you’re right, should blow up into the next credit/asset crash a few years from now.
can you reply with the details of this FHA program? like I said, if its true, then everyone on the face of the earth should be refi’ing with those terms. and geithner and obama will look like idiots in two years when they’re spending 100 billion+ paying off these loss spreads on FHA refi guarentees.
Real Estate Skeptic,
FHA loans have always been assumable. They were easier to assume prior to 1989, but they are still assumable as to interest rate as long as the new buyer qualifies for the loan.
It was the only way many people sold their home during double digit interest rates. Not sure why that has anything to do with refi’ing. No one is assuming a prior year rate on a refi. You lost me there.
Anyone thinking interest rates are going to go up to 8% (I do not) should be buying minimum down FHA, so the next buyer doesn’t need a huge downpayment to assume your low interest rate in the future.
when I’m working with refi clients who deciding over FHA or conv… the assumibility factor of FHA is a consideration. I caution that it’s not a guarantee that anyone can assume their mortgage (just look at all the folks trying to do the Obama refi unsuccessfully dealing with their mortgage servicer/bank)…and if they do allow their mortgage to be assumed, to make sure they get a release of liability.
8% mortgage rates wouldn’t surprise me. Right now they are artificially low thanks to the Gov’s participation in purchasing mortgage backed securities. This program is suppose to wrap up around March. This will cause rates to go higher.
Also as we see the economy improve, investors will trade their bonds (like MBS) for stocks…this will drive mortgage rates higher.
Let’s not forget inflation…with all this stimulus spending, I don’t know how we can avoid inflation…and yes, inflation will drive mortgage rates higher too.
I remember when I started my mortgage career about 10 years ago, 7-8% rates were the norm…most of my business was FHA….folks needed 10% down for conventional financing or they were going FHA or VA…and there was no subprime market–I’m sure hard money was available (I’ve never been in that market).
I have numerous friends who are very very wealthy and they have told me the same thing for 20 years. Never EVER buy your home. Always rent. You only buy real estate when you can sell it the next day for a profit.
I bought my first home in 1994 and up until 2005 I laughed at their beliefs. Now in 2009 I respect their knowledge. All have raised wonderful families in beautiful homes in Washington, California, Texas, and Nevada.
I truly wish you could have all attended the conference I did with Robert Schiller:
http://seattlebubble.com/blog/tag/spu/
If you can listen to the audio I highly suggest it. I remember the graphs indicating how real estate NEVER goes up except during periodic bubbles over the last century. If you buy during the decade before the upswing you do quite well.
I have owned a great many properties in the last 14 years and I’m so happy at all the ones I sold but going forward my perspective has changed greatly.
The mantra of homeownership has been damaged for many years and for at least the next 10 years respectability of tenancy will be common. No longer will people look at renters as inferior instead I think so many will look at renters with envy.
Hi Ray,
We were poor, but we owned our house. Thank God as I don’t think anyone would have rented to our family of nine 🙂
Happy Holidays!
Family of 9..Good Lord! We owned as well. Family of 5 and Dad is still hanging in there @ 88 and mom 80. From the Bronx, to Tucson, to San Jose, to their home in Carson City. Leaving in about 17 days to Carson as usual. I want my kids to remember my parents. My mom still has a ways to go. Dad is on borrowed time.
A wonderful Festivus to you as well.
Ray has kind of brought up a point that ties into FHA being assumable. Owning a home, or property, takes a determination. Owning property is a job, a business, that’s expensive. People assume mortgages with the intent of owning a home. The mortgage gets more valuable as time goes on. The further you go with the amortization schedule the less time it takes for a new buyer to pay the loans off.
Many of the points I have been making lately are related to owning a property free and clear, or paying cash for properties. Having that ability got lost in the past few years. What’ unfortunate is that what Ray has pointed out is that most wealthy people pay cash for properties, or work out terms that get them to a cash position quickly. Paying a mortgage is throwing money away.
Anyway I don’t want to high jack the thread, but I have always blamed the lenders for the run up in property prices. Appraisers use sales data. Properties sold for more than value because underwriters were instructed to ignore economic viability as a factor in making a loan.
Ardell — the title of your post is equivalent to “buying opportunity of a lifetime”, is it not? I mean, if its buy now or never, then it has to be your one shot at buying, i.e. the opportunity of your lifetime. So while Mr. Skeptic was technically inaccurate with his use of quotes, he was essentially right on the money.
And that leads to my point: Agents make money when people buy and sell. The more transactions, the more agents get paid in total. Certainly thats true of EVERY professional in any way affiliated with the real estate business. Agents, however, tend to make much more money on any one transaction than anyone else. Thus, they have the greatest incentive to “churn” the market. Given that reality, I’m always a little leery when a real estate agent tells me that this is a once-in-a-lifetime opportunity to buy. They have a strong personal interest in getting me (and literally everyone else) to believe the hype.
One other thought: I think everyone would agree that these remain tumultuous times in the real estate market. Nobody can accurately predict how good — or how bad — things may be over the next five years. Under those circumstances, it makes sense for buyers to reduce their transactional costs as much as possible. In doing so — if a buyer can reduce the overall price by 3% — the buyer will be able to insulate herself to at least some extent from possible further depreciation in the value of the property.
p.s. Shameless plugging? I prefer to think of it as relentless consumer education. The reality is the vast majority of people do not even know that there are alternatives to the “traditional” agent. Its my job to let them know about at least one of the options available (and, arguably, the most intriguing and least expensive).
Craig your obviously new to blogging. When I began blogging here and at Seattle Bubble I did what you did and was termed a “troll.”
“In doing so — if a buyer can reduce the overall price by 3% — the buyer will be able to insulate”
I thought people were being rude. Then I looked it up.
I still disagree and never thought I was a troll just providing education to a public that sorely needs it.
Your link has made you far more troll-like then I have been in nearly a year!
Hi Craig,
The title of the post is a phrase I see often in blog comments, and a fairly well known “phrase”. It’s a bit tongue in cheek. Any phrase with “forever” in it is obviously a bit far fetched 🙂
While I have you here, I’ve been wondering. If a buyer places 4 offers before they actually buy a home, do they pay your fee four times? Also, if they decide not to buy at all after making 4 offers, do they have to pay you for your time in preparing and presenting those offers?
Ray,
Craig is like the troll under the bridge here in Seattle…a loveable one. You have become so, as well. It just took us a little time to get to know you. I recently mentioned you in an interview I did with Jonathan Miller in NY. I didn’t mention Craig LOL!
Both of you have excellent options for people who need no help in evaluating the home or the home’s value. Most of my clients need that type of assistance, as they are more afraid of buying the lemon or overpaying these days.
I don’t think the market will move more than 5% this way or that from when I called bottom (it’s 4% up from there right now). The bigger issue today is that many homes on market are overpriced, and buying at 10% over market value is more of a concern than the simple process of escrow from contract to close. Knowing why a property is not sold is the MOST important thing clients need to know, so services that make that all the buyer’s liability are not necessarily the best for buyers in 4th quarter 2009 through 1st quarter 2010.
An insane statistic I ran across in Bellevue last week was that most homes sold (in a certain price range) sold at $315 a square foot and most homes not sold/for sale were asking $385 a square foot! OMG! Over paying for the home is the biggest fear in this market, because even if the market is flat, you lose whatever % you choose to over pay today.
Ray — As an attorney, I’m always very careful with terms like “obviously” and “clearly.” A 10 second search of RCG woud reveal posts dating back several years. So no, I am not new to blogging. I am, however, hesitant to accept the conventional wisdom that blogging should not be used to generate business, at least not directly. Sorry, but blogging is a marketing tool. Accordingly, I use to promote my business, period, egregious breaches of eitquette notwithstanding.
On the other hand, maybe I should just say, “Sure I’m a troll — a loveable one!” (THanks, Ardell!!)
What people generally fail to understand is that trolls fulfill a much needed service to internet readers, by showing more sides of the equation.
Craig, not being a member of the mls or subject to real estate licensing laws, is free to do many things (like posting fees on a multi-brokerage blog) that a licensed member of the mls cannot do.
That puts the majority of his competition at a disadvantage. Most agents are not permitted under price-fixing/anti-trust provisions to discuss what we do or should charge people in a multiple office environment, like a group blog.
It is where you both break the rules that sets you apart as being “different”. The difference is you break our rules everyday, while we must pretty much remain silent as you do that.
Whether or not either of you can blatantly advertise is against RainCityGuide rules, but that is Dustin’s problem and not mine. I think you are both loveable trolls who help me immensely in many ways.
Well, I enjoy you both and will consistently feed you both clients that don’t fit our model. Just today Trevor @ Red Fin took a transaction that we refused to deal with. Trevor asked me why and I had to explain to him due to the fear of litigation, mold, auction, and various other “issues.” It may have been a great referral for you Craig but I forgot about you.
Blogging here at RCG reminded me about your model and how important your model can be to what I perceive to as “letigious” transactions that we steer clear from. You will most certainly get our next client that wants to enter a multiple offer scenario on a property that has mold/pest issues, bank owned, and wants the offer presented STI with 10% down. When/if the appraisal gets ordered I will be astounded to watch this one get “pushed” through considering we have BECU and BAC coming in @ 5-10% less on their appraisal values compared to signed around sales price.
Blogging has been very effective for 500 Realty. Far more so then Seattle Home Shows and CNBC advertising on Comcast. However, #1 is always word-of-mouth.
Craig, I hope your model takes off and you don’t anger too many Agents like I did in the beginning. I have toned it down a bit but I’m always ready to educate the masses that 500 Realty is simply the BEST in value for Buyer and Seller in any residential real estate transaction. It should be because its the best parts of everyone: Windermere, MLS 4 Owners, Congress Realty, ZIP, and Red Fin.
If I didn’t believe this I would be back in the hospitals working for Maxim or Favorite Nurses visiting homes and clinics. Just as Ardell believes in her model and Craig believes in his we apparently all see ours as the best for the consumer. This is how it should be!
Wow–I rambled sorry.
I know you believe it, Ray. And that’s why I like you. But the reality is that NONE of my contracts for buyers have had low appraisal problems, because I value them out and get good deals. In fact one of mine with sale price of $300,000 appraised at $360,000 this year, and yes, it was B of A.
When you have property under-appraising, that means you helped someone offer too much for it. Sad, but true. I assume they pick the price and not you. Or maybe you are simply negotiating from asking price, without evaluating that asking price. Not sure. But something is not right if the price you help the buyers contract for is less than what it is “worth” by appraisal standards frequently or even 10% of the time.
“But something is not right”
Here is what is NOT RIGHT? This listing hits the market in Bellevue and multiple offers pile in. Our Buyer was the first and offered FULL PRICE on a fixer with acreage. He didn’t want to lose this home because of the dreams he has for it. “Ray I know I’m paying too much for this home but I want it.” Bammm appraisal comes in 50k less with BECU. I ask the Buyer again are you sure? Make a long story short the Buyer is now paying 25k above APPRAISAL!
This insane FED BACKED MARKET RALLY is causing people to over pay for homes no matter how much I try.
Ardell, I’m here to tell youthat you think we hit a bottom a while back. OH NO! I see a very ugly double dip coming in the next 5 years.
Well, goodness, it’s a love fest on the Rain City Guide.
Ray has has brought up another point that goes back to my comment about a house, in great condition, that just sold for $350K, in my opinion it’s a good deal.
A friend on mine told me today that a couple purchased a house, about the same size, needs work, about six blocks away for $410K. In those six blocks, in my opinion, the $350K house is in a better location.
I’m just saying that it’s a crazy market place, but there are good properties selling for fair prices for the first time in years.
Now another thing that Kary mentioned on the Seattle Bubble is that he listened in on a webinar for an attorney organization where one presenter said banks are letting properties go, or are buying properties, way below the pay off figure. That would be a log jam breaker.
We should see more realistic pricing coming up.
Ray, your story proves my point. When people are willing to pay more than appraised value, the market is definitely on the upswing. What % was that $25,000? Big difference if it was 2% or 10%.
and it’s cash out of pocket for the buyer. The loan to value (loan amount) will be based on the lower of the two: appraised value or contract sales price. I know the re pros here know this–just pointing this out for those who may not.
For example, if the sales price is $500,000 and the buyer is putting 20% down ($100k) and the appraisal comes in at $450k; the lender will view the sales price as $450k and the buyer will either need to come in with $150k to have an 80% loan to value or will have private mortgage insurance since the loan to value would be based on $450k sales price and $400k loan amount (89% loan to value)…this is assuming (as in Ray’s example) that the seller does not lower the sales price to the appraised value.
The same is true when the appraisal comes in higher than the contract sales price, the lender will still use the lower of the two figures.
Being “priced out forever” is not necessarily about the price of the home being too high or too low relative to its historic value.
Being priced out forever can simply mean you can no longer get financing to purchase on the same basis.
If FHA increases its down payment requirement
If the credit score needed to purchase increases
If FHA removes blanket approval from a condo complex you want to buy
If many buyers are kicking in the cash difference between sale price and appraised value, and you cannot afford to do that
If interest rates rise and others can buy (so prices don’t dip) but you cannot
Anyone who is currently buying a “starter’ home at the lowest available price, who is also barely qualifying for a mortgage via today’s standards, could be priced out forever even if home values drop 3%, if interest rates rise to the same degree.
Many home buyers in the over $700,000 category are already priced out forever, compared to the qualifications needed to purchase those homes in 2006, even though the home prices are now lower. If you can no longer get a mortgage to buy that $800,000 home that used to be a million dollars, you are effectively “priced out forever”, even with the price dip.
David,
I think we will see some fallout come May 1, 2010 and through the remaining year, unless (God Forbid) the credit is extended again. I don’t expect the credit to be extended in any meaningful way. They could wean it out by halving it rather than doing it cold turkey.
I don’t think that change will bring us below the bottom of early 2009, but could bring us back to it. 3% movement this way or that is not really a movement.
Sorry I can’t pull you into the RCG lovefest. You’re not a loveable troll like Craig and Ray 🙂 Maybe someday.
factor in the Fed ending their support of keeping mortgage rates artifically low in March 2010 with the end of the tax credit…I think it will be an interesting spring.
It was 5%. In 16 years I have NEVER had a Buyer pay ABOVE appraisal price. I told this to my client but it doesn’t seem to matter. He wants to live in this home the rest of his life and assures me he is OK with it.
All-the-while the listing Agent reminds me of all the people chompin at the bit for this home. My Buyers have been very patient and looking for over a year.
The need for another appraisal was not necessary but welcomed by the Listing Agent. He states thats what happens when we get appraisers from areas other then the Eastside. “They don’t know the market area.” This maybe so but they must surely know the comps! The Buyer is placing almost 200k down on it (37%).
Ray,
It is ALWAYS the case when the market falls and trends up for buyers to pay OVER appraised value. That is how the market goes up.
If buyers would only pay the equivalent of 3 prior sales, there would never be any appreciation after a market decline. It’s standard, it’s normal, and it’s a strong sign that we are past bottom.
Ray…you mention “the comps”. Did you review the appraisal? Wasn’t it based on “the comps”? I’m sure it was.
Ardell, Watch this………never bet against Meredith Whitney!
http://www.cnbc.com/id/34325134
Yes, the appraiser had great difficulty with the comps because of the acreage on the Eastside and the deferred maintenance.
You see, I was trying to be nice over here, and you have to make a snide comment and throw in the bottom call to boot.
Ray,
The appraisal simply limits the amount a lender is willing to be invested in a given property. When the market moves up, it has to be because the buyer is ready, willing and able to supplement the difference between price and the price the lender is willing to finance.
wow – didn’t think bringing up the fact that we might not be at the bottom would generate such a string. if rates go to 8% in two years how much up/down/sideways will puget sound proper be? you should do a poll, then compare with the actual results 2 years from now…maybe you even generate new interest in this blog in the process.
David,
You really aren’t a troll, so you can’t be a loveable one. As to the bottom call, it made front page news and so far is holding as to having been accurate, so you shouldn’t be upset about it.
We don’t understand each other well for some reason, so our communication level just never reached the point for you and I as it has with Craig and Ray. Plus I’ve met them both in person. That helps a lot.
Real Estate Skeptic,
I called the bottom back in February:
http://www.seattlepi.com/local/399422_housesales10.html
and I base my information on my own data tracking and on the street experiences. I wouldn’t poll public opinion, though I do read blog comments on other blogs and poll agents as to their experiences to get a well rounded opinion.
There isn’t a true concensus because not all areas react the same to market conditions. My data is primarily North Seattle and within a five mile radius of Microsoft. Not Pierce County or the islands or even many areas south of Downtown Seattle. Also condos are in a kind of limbo and will be subject to more problems caused by FHA changing their condo guidelines.
For the $500,000 and under single family home market, the tide is turning, but will stay pretty flat for some time. The market goes down a lot faster than it goes up, because appraisals will limit appreciation on the way up. Not many people are willing to kick in the extra cash as Ray’s client did.
Interest rates have nothing to do with the value of Real Estate. there is no top or bottom. It’s not a discussion or debate. The core value of real estate is what it will rent for, the return on investment. There are intrinsic values such as view, location, or market appeal, but Real Estate is very basic.
The rental income, value, is tied to, but not a part of the Consumer Price Index. It’s the price of housing which rises at the rate of inflation, but is not inflationary in itself. Employment, and the cost of goods is a much bigger driving force of inflation than housing.
Rising interest rates are a common tool for stifling inflation so that’s why there is a correlation to falling housing unit prices. Inflation raises all boats in the cost of goods, housing included.
Housing just happens to be the largest purchase most people make in their lives so it gets noticed. A gallon of gas can go up and down all the time with little attention paid.
“The core value of real estate is what it will rent for…”
I have not found that to be generally the case in areas I have worked over the last 20 years. The value of the land under the house was elevated by waterfront, view, good schools, and many site considerations. Rental prices did not reflect those enhanced property values.
In fact many best places to live with enhanced property values have very few rental properties, with most being owner occupied.
As to interest rates, interest rates change the number of buyers who can buy at that price. It isn’t the change in the rate itself that causes values to change, it is supply and demand. When the # of people who can buy in that price range diminishes, the people wanting to sell have to dip down to where people can buy them. That’s why the seller with an assumable mortgage gets a better price for the home when interest rates rise.
That’s intrinsic value.
Every property on earth is for sale at all times. It’s price and motivation.
On that, we agree, David. Every property is potentially for sale…for the right price.
you guys are clueless if you understand the inpact of higher mortgage rates on real estate…look at my mortgage rate vs. historical nominal house prices and tell me you don’t see a BIG gaping correlation..:)
http://culturalcapitalism.com/2009/12/09/historical-usa-house-prices-vs-mortgage-interest-rate/
Real Estate Skeptic,
Read your own graph. Do you see a huge home price decline during double digit days? Do you see a HUGE run up in pricing after double digit days? Your graph proves my point. Your expectation of the future is not backed up by your representation of the past. PLUS we all know that the rates can and will likely be kept low, if and as needed. So your presumption of the future, does not reflect past history.
Resorting to calling us “clueless” simply because we do not totally agree with you is, well…
I don’t think mortgage rates are going to be 8%, so I can’t buy into your theory. When was the last time interest rates were 8% and why haven’t they been so since then? Clearly rates should have risen to 7% – 8% after 911…but they didn’t because the government stepped in and made sure they were kept artificially low.
I don’t think a government that is spendng billions in handouts is going to sit idly by and watch rates go to 8%. Your thoughts may vary. That doesn’t make either of us “clueless”.
Were you around to witness what happened when mortgage rates jumped into the double digits? I was. The world did not come to an end. In fact the sub-prime crisis was likely more damaging than double digit interest rates.
P.S. to Mr. Skeptic,
Home buyers are much more worried that they won’t be able to buy a home if rates go to 8%, than they are worried about the value of the home they buy today, if that happens. If they plan to stay in the home, they would rather have it now vs. never having it at all.
Ardell, something else I’ve been thinking of along these lines… with all the low interest rates right now, when I’m doing a purchase or refinance transaction, I know it may be the last time I ever work with these clients again unless they decide to move or “life happens” (divorce, job transfer, etc.).
If rates are 7-8%, I think it would be challenging for someone with a rate in the 4’s to accept that much of higher rate…potentially reducing inventory again.
I looked at the graph and it doesn’t have a correlation to interest rates as much as lending policy. Nice try, nice site, keep asking questions.
The thing about all property being for sale is one of the things that has been in the back of my mind about web 2.0 consumer information.
Tim at the Seattle Bubble asked how you get the best value and I replied it’s by driving a neighborhood. I never have a problem stopping the car, going up to some one’s door and ask if they are getting ready to sell. I did it as a contractor when I was a kid and now it’s just a habit.
Two years ago I had 167 expired listings in my cart on the NWMLS site. When people sign as a buyer with an agent, I would think they would be hiring some one who could access, and present, all viable properties in an area.
That’s some thing that people looking on line at homes for sale are missing.
Rhonda,
As I recall that was not the case. Inventory has already dropped to pretty much “only people who have to sell are on market”. The number of people who have to sell during high interest rate periods doesn’t change much. So inventory may stay at current levels.
You of course will have zero refi business…or close to zero. Home equity loans will become more popular than refinances. The rate will be higher, but only on the added portion vs, the full mortgage amount.
What we should see if interest rates increase while home values stay down are much bigger relo packages. So far I am not seeing that. The relo packages were mega in the early 90s. Some covered the loss on the sale of the house. Why would someone transfer or move to a new job if they have to take a $50,000 loss on the sale of their home AND get into a higher mortgage payment due to increased interest rates? We won’t see that until the economy is picking up…but that is generally the expectation, and sign that we are just behind a full recovery as to home prices. Keep your eye on signing bonuses and relo packages.
Depressing but true with the refi’s… and those who will be refinancing will most likely be for hardship reasons (like divorce).
I remember the first time I closed a refi under 5% following 9-11; I thanked the couple for their business and told them I would probably never see them again. I was actually kind of sad about it because I really enjoyed working with them. They recently referred me their kids.
David,
Wouldn’t it likely be the case that the expired listings are the sellers who want too much for their homes? Why would buyers want to chase that?
Real Estate Skeptic,
Note in your graph the period in the early 80s when rates were triple what you expect them to now become. Now look at your graph as to home values during that same time. No huge dip in prices to correspond with that insane increase in interest rates. Also the biggest upswing in home price does not correspond with interest rates being much lower than they were in 1992 and 2000. So the graph indicates that rates and home prices do not directly impact one another to a significant degree.
Are we missing something? Would you like me to drag your graph over here to a post and see if we can get other opinion on it?
I bought my first home in the late 80s… I didn’t think twice about my interest rate of 11% on our FHA loan… of course, that wasn’t following our very low manipulated rates which I’m afraid may have many folks spoiled. 😉
You chase an expired for the same reason all agents chase an expired. They were motivated to sign a listing agreement.
A listing agent will chase them, they will sign up for less than original asking price. Being a buyer with an offer in hand is a great motivator. The same goes for the vacant house on the corner. I know an agent who bought a house from an elderly woman and gave her a life estate. The woman was there for ten years.
There are rules in Real estate that are meant to be broken.
David,
1) I do not (nor have I ever in 20 years) “chase” expireds. Not all agents do that.
2) If the price was too high to garner even a lowball offer and bring it to fruition, the new “lower price” will not likely be good enough
3)Most buyers are not interested in giving the owner a “life estate”
There is no good reason at present for buyers to chase after sellers who have been proven to be unmotivated while on market and are now expired.
Even if a buyer went in alone with no commission and got 6% off the previous inflated price, that likely would not be a good deal. More likely the price was not within 5% of market value for it to be expired. Maybe…and that’s a big maybe, the buyer can get it at current fair market value. But with so many better deals on market…why chase the expireds? Makes more sense to chase the soon to be foreclosed on than the expireds.
wish i had read about your “meredith whitney calls the bottom” moment in real time. some good comments on that one! my last comment to this string is….don’t blame anyone when rates are 8%+ and no one can get “what they think their house is worth” for an sale price.
LOL! Real Esate Skeptic! How would that be a change? Do you think people are getting “what they think their house is worth” these days? Too funny. You would be hard pressed to find 10 sellers in 2009 who got “what they think their house is worth”.
Why don’t you simply answer the question why did home prices not go down significantly in your own posted graph during the period when interest rates skyrocketed in the early 80’s? If prices fall when rates rise to 8%, why isn’t there a HUGE dip in prices when interest rates went to 18%?
If I have the money now to buy enough house for a big family, I would buy now. Because as the years go by the prices increases.
Scott, congradulations on your good fortune and blog. I’ll look at it this afternoon when I have more time. You started at the right time in 1996 to be able to leverage your way into passive income. You’ll find that home prices between 1998 and 2008 far exceeded the values of the properties. Most of that was because of a false economy based on credit, the very credit that allowed you to create your wealth.
It’s good thing for millions of American, but going forward we’ll have a steady decline in prices until they come back in line with economic basics. The good news about that is you will be able to afford that big house for your family because that is the real reason to own a family home.
For the skeptics, let’s say you are right that sales will stop when interest rates tick up, but it will be because of the herd mantality rather than the action of the interest rates. Doctor Schiller, in my opinion is very correct that perception drives the Real Estate market.
Real estate is, however, a transaction between two people. You never know how the “deal” will work itself out. I have bought, not one, but two expired listings. One where I was using a Real Estate agent who remembered the house, it was a style I was looking for, and the second by driving a neighborhood and spotting an old Real Estate sign.
The driving factor (the missing piece in the interest rate chart) is wages. Wages ultimately determine how much people can pay for “stuff”, especially housing. (How big a loan you can get is more or less tied to your wages.)
If I recall correctly, wage inflation was just as high as price inflation in those double digit interest rate periods. For example, if interest rates go to 12%, it doesn’t have much impact if your wages increase 50%. The new house payment is still consuming a similar proportion of your income as before, with the lower interest rate and lower wages. Affordability remained the same.
However, anyone expecting similar wage inflation today is going to be sorely disappointed. Wages have remained fairly flat for the last 10 years, and current indication is wage deflation. (Lots of evidence of people taking pay cuts just to keep their current job, or losing their job and taking whatever job they can get, usually a lower paying one).
Government intervention and manipulation of the bond market has resulted in artificially low mortgage rates. But this too cannot continue indefinitely. The MBS market is far larger than the amount of money our government has at its command, and printing more money to meet this market will have disastrous consequences even worse than our current economic situation.
Interloper,
Yes, thank you and spot on. Absolutely wages were running in double digit increases along with the interest rate increases (speaking from first hand experience).
Another factor I consider is that volume is very low, and somewhat artificially low (lower than pre-subprime volume). So I don’t see higher rates bringing volume down below what it was before the tax credit became a credit vs. a 15 year interest free loan.
I think the minor recent price gains will disappear once the tax credit disappears. What I don’t know is where prices would have gone if there had been no credit, and if prices will go there vs. where they were before it.
Clearly there has to come a day when interest rates have to get up to 7%…but we’ve been saying that since 911 and it hasn’t happened yet. When it does, I don’t think it will be the huge crisis some are predicting it will be. If it is going to be a crisis then it won’t happen…someone won’t let it.
I remember the last time I saw a 7% rate, and my ex-husband screaming “rates will NEVER be this LOW again!”…now we’re screaming that 7% is too high. Life is funny that way.