Moving this Summer?

Summertime is here and many people find themselves engaged in buying or selling a house. This is the busiest time of year for most of the real estate industry. Interest rates are on the rise as I indicated last week (see article). Buyers are jumping in to the market and that means people are moving.  If you are moving this year here are some helpful tips from the National Association of Realtors ®

17 Tips for Packing Like a Pro

Moving to a new home can be stressful, to say the least. Make it easy on yourself by planning far in advance and making sure you’ve covered all the bases.

1. Plan ahead by organizing and budgeting. Develop a master “to do” list so you won’t forget something critical on moving day, and create an estimate of moving costs. (A moving calculator is available at REALTOR.com)
2. Sort and get rid of things you no longer want or need. Have a garage sale, donate to a charity, or recycle.
3. But don’t throw out everything. If your inclination is to just toss it, you're probably right. However, it's possible to go overboard in the heat of the moment. Ask yourself how frequently you use an item and how you’d feel if you no longer had it. That will eliminate regrets after the move.
4. Pack similar items together. Put toys with toys, kitchen utensils with kitchen utensils. It will make your life easier when it's time to unpack.
5. Decide what, if anything, you plan to move on your own. Precious items such as family photos, valuable breakables, or must-haves during the move should probably stay with you. Don't forget to keep a "necessities" bag with tissues, snacks, and other items you'll need that day.
6. Remember, most movers won’t take plants. If you don't want to leave them behind, you should plan on moving them yourself.
7. Use the right box for the item. Loose items are prone to breakage.
8. Put heavy items in small boxes so they’re easier to lift. Keep the weight of each box under 50 pounds, if possible.
9. Don’t over-pack boxes. It increases the likelihood that items inside the box will break.
10. Wrap every fragile item separately and pad bottom and sides of boxes. If necessary, purchase bubble-wrap or other packing materials from moving stores.
11. Label every box on all sides. You never know how they’ll be stacked and you don’t want to have to move other boxes aside to find out what’s there.
12. Use color-coded labels to indicate which room each item should go in. Color-code a floor plan for your new house to help movers.
13. Keep your moving documents together in a file. Include important phone numbers, driver’s name, and moving van number. Also keep your address book handy.
14. Print out a map and directions for movers. Make several copies, and highlight the route. Include your cell phone number on the map. You don’t want movers to get lost! Also make copies for friends or family who are lending a hand on moving day.
15. Back up your computer files before moving your computer. Keep the backup in a safe place, preferably at an off-site location.
16. Inspect each box and all furniture for damage as soon as it arrives.
17. Make arrangements for small children and pets. Moving can be stressful and emotional. Kids can help organize their things and pack boxes ahead of time, but, if possible, it might be best to spare them from the moving-day madness.

Good luck this summer and enjoy the weather and your new home.

Higher rates create problems for entry level buyers.

Rates have been on the steady increase for the last six to eight weeks. This creates trouble for entry level buyers that may find themselves priced out on payment.  Homes in Clark County under $165,000 are few and far between. Those that are priced as such often will not qualify for FHA or VA financing.

As rates go up the monthly payment for the same priced home goes up. Banks typically require approximately three times more monthly income than the full payment on the loan. Different loan programs vary and credit profile is a factor as well. This is just a general rule. Whether or not income is three times, four times or double, the premise regarding affordability remains the same. When rates go up buyers lose purchasing power even if prices remain flat. Prices however are not flat they have been rising all year as well. That spells double jeopardy for buyers who hold out too long.

The chart above shows the payment difference on the same $200,000 home with rates ranging from a rock bottom 3.5% to 6% which is still below the 40 year average. The minimum income to qualify is based on the standard three times the payment rule. Notice how the 3.5% loan allows a person with much less income buy the same house that requires $60,000 a year at 6%

The federal government is keeping rates low partly by directing Fannie Mae and Freddie Mac to purchase loans well below the actual market rate for a 30 year mortgage.  Other fed maneuvers are used to push the cost of money down as well.  As the government begins to tighten up on the money supply, rates will rise and 6% is not unrealistic based on the disposition of investors for mortgage paper.  

Notice how a rate change of just 1/2% translates to an FHA payment nearly $60.00 a month higher on the $200,000 home in the example. 1% higher equals a payment well over $100 more each month. That is $1200 a year or $12,000 over a ten year period of ownership.

I am seeing too many buyers hesitate on home purchases and some may hesitate themselves into a rental unit. Inventory is tight and buyers need to step up and pull the trigger before the rates price them out of the market.

In the current climate that has both rates and prices going up the cost to own a home rapidly increases.

In the chart above the same three bedroom two bath home that sold last year for $150,000 may cost $175,000 this summer and $200,000 next summer. The same house! With rates on the rise the payment is amplified twice, once by the larger loan amount and again by the higher rate of interest.

No one knows for sure what rates will do over the next twelve months nor do they know what home prices will do.  The uncertainty about next year however, does not stop what's happening right now. Many people buy homes with the idea that they will someday pay it off and have no payment or that they will use the equity in the home to purchase a bigger or better home in the future.  Every day that goes by without owning that home is another day added to the day you are free and clear, or the day you move up to the dream home.

Think about it.

Will rising rates create a run on real estate?

Interest rates have continued their upward march towards the heavens this month. Make no mistake about it, they could rise another full point and still be considered historically low. But buyers lose purchasing power and find themselves making larger payments for less house as the rate creeps up ever higher. I still believe we have quite a few "fence sitters" out there that have been waiting on real estate.

Waiting for what? Who knows, but they may be waiting to be certain that the market is really stable before they jump in. Many of those who wait much longer may end up with the classic "goose egg". I harp on interest rates allot on this blog but I cannot overvalue how critical they are for the majority of home buyers.

Last year a garden variety three bedroom two bath home say a 1970s ranch with 1200 square feet and 7000 foot lot would have sold in an average quality neighborhood for $140,000. So let's compare an FHA buyer for that house last may, this May and projected for next year in May.

Payment difference estimated (consult mortgage professional), click to enlarge 

You will see that the monthly payment rises dramatically when you have both higher interest and higher prices. We have been enjoying record low rates while sitting at the bottom of the pricing market for several years.  Now as people start to buy up homes, prices begin to rise and as that happens the interest rates also rise.  A ten percent rise in price coupled with a 5% interest rate (historically still a low rate) yields a payment nearly $300 a month more.  That will likely require an extra $10,000 a year in income to qualify.  Do you think you will be getting a $10k raise this year?

The federal government has been buying mortgages at low rates in an effort to spur the real estate market back from the severe beating it took in 2007-2011.  Now that the market is showing strength in its recovery, the fed is poised to ease back on the rate subsidy.  I am seeing more and more economists predicting significant increases in mortgage rates over the next eighteen months.

If you were waiting for the bottom of the market, you waited a little too long, now you are chasing it uphill.  Don't let it get away from you.  Now is the time to secure your dream home while it is still affordable.

Here is data for our metro area:

Portland-Vancouver-Beaverton, OR-WA
Updated May 9

First Quarter 2013
Median Home Price
$246,500
Yr. Change: 18.2%
All Metropolitan Median Prices

Short Sales, The Good the Bad and the Ugly

Short sales are still a real part of the real estate scene.  There are many opinions about them some good some poor and others filled with language I won't post on this blog.

First of all a question lingers; What is a short sale?  A short sale occurs when the property has a market value less than the amount owed and the seller is unable to cover the difference.  In this case the seller must get the lien holder(s) (usually a bank) to agree to sell the house and accept less than the amount owed to clear title.

The seller may need to move or may simply be squatting in the house and not making payments.  This is an important differential.  If the seller is in the latter position he may not be cooperative with the process since the free rent is too enticing.  Getting involved in a short sale like this could be very frustrating for the buyer.  The former scenario however is much better.  The seller may be eager to move and eager to cooperate because he wishes to have a minimal negative impact on his credit profile.  This is the better type of short sale to consider.

Short sales are always going to have additional challenges associated with them and as such the reason a buyer might be willing to engage in one is that often the price can be negotiated below local market value.  There are many listing agents that advertise prices that are well below any realistic price the bank might accept and buyers should consult their favorite Realtor for opinions on whether the advertised price is within reason.  The seller is trying to get an offer, often almost any offer will do because the seller wants to get the bank engaged.  The bank will rarely do anything at all until a signed around offer is on the table.  The seller has little to lose by accepting a low price since there is no equity for the seller to receive at closing.  The bank is a third party to the transaction and they seem to relish the role of commander of the universe in these transactions, making demands on the seller and buyer as if they were a third world dictator.

It is very unusual to close a short sale in less than ninety days and often they drag on longer than that.  The problem is that there are too many cooks in the kitchen and the listing agent has to be constantly on the ball in dealing with the endless stream of demands from the bank.  The buyers agent is at the mercy of the listing team.  If that listing team has it together the short sale may go fairly smooth, if not, then it can be a big waste of time.  Some listing agents and sellers hire professionals to negotiate the short sale.  Sometimes these are law firms and often they do a good job of keeping the transaction moving forward.  

The biggest concern I have right now regarding short sales is the interest rate volatility.  Rates drive the purchasing power of buyers and we have been in a long cycle of low rates.  They have been on the rise lately.  A buyer that is offering on a short sale that is near the top of his price range could be priced out of the sale during the long wait of bank approval if rates continue their upward movement.  Meanwhile the prices in most markets are on the rise as well and that means if the short sale fails, prices may have risen enough that the buyer must settle for less house than he could have right now in a traditional sale.

The buyer's agent can be invaluable by providing an analysis of the listing team and the specific situation before suggesting the buyer make an offer.  If you really love the house or if you think you can "steal it" then enduring the process may well be worth it.  If not, then look for a bank owned or traditional sale that you can close promptly.