Inventory continues to be tight

It seems that the market remains very tight on inventory anywhere near the median price. It looks like one has to get to 150% of median before inventory starts to push beyond 2 months. With rates creeping up and buyers scrambling it is still a tough go for the under $400k buyers.

I seem to be unusually busy for the dark and wet season. There is also some indication that we may see some inventory levels swell a bit as spring approaches. I welcome a little bit of moderation in the market.

Right now rates have been slow to move, but they are definitely headed north on the chart. This is just a year to date chart so it is only four weeks, but this could be an ongoing trend. For buyers this means time is of the essence. Even if inventory doesn't open up in the spring, rising rates will thin the herd of buyers and that will result in a softening of appreciation. Most analysts are still counting on modest home price gains for 2018.

I have said it many times before on this blog, rate is a much bigger killer of deals than price. For conventional loans the benchmark for house payment to income is 28%. Of course there are things in a buyer's profile that can create a variance. To push that number higher the borrower might have exceptional credit, extra large cash down payment, large savings, or any combination thereof. Government loans often have a housing ratio that can approach 40%. But if we use the standby rule of housing payment at 33% or 1/3 of income that means every dollar the payment increases the income must be $3 higher.

A borrower approved for a $300,000 loan at 4% will have a payment of roughly $1800 a month including taxes and insurance and this assumes no mortgage insurance. That typically requires a gross income of $5400 per month. Of course I have seen lenders under the right circumstance allow much more than 1/3 housing ratio, but a third is a solid baseline. If rates increase to 4.5% then the buyer is looking at an $80 per month increase in payment and thus will need $5640 per month in income. Don't forget that over a five year period the home owner will pay $4800 more in house payments at 4.5% than at 4%. Over the full thirty years... are you sure you want to hear this? You need to! $28,800 That is all interest for the bank and its investors that could have been in YOUR pocket.

Interest rates will need to rise all the way up to 6% just to get to the 50 year average so don't fret higher rates, just understand that if this trend continues, you will pay more even if prices were to drop in say 2019 or 2020.

Home ownership is mostly about equity investment. You own the property and you gain equity as you pay down the loan and prices rise. Rates and prices and all the drama, isn't worth diddly squat if you don't take advantage and buy your own home while you still can.

2018 off to a good start

OK I'll admit that title is anecdotal. But I am seeing a nice flow of listings and buyers poking around, finding homes, and making offers. Many analysts feel that 2018 will slow the crazy pace in the real estate market to a more healthy and normal 4-5% price appreciation over the course of the year. This is fine by me.

I think the fact that the "threat" of higher rates is now the reality of higher rates, people that we dangling their feet over the fence are starting to jump in. I have made the point time and again that rates are far more important the price. Most people will pay far more in interest than any price deal they might negotiate.

The federal tax revisions that take effect this tax year (2018) many middle income earners will no longer need to itemize and as such the mortgage deduction will no longer benefit them. A married couple paying less than $20,000 a year in mortgage interest may not have enough itemized deductions to exceed the new and improved standard deduction of $24,000 for a family.

As I always state my standard disclosure anytime taxation is discussed: always consult a professional tax prepared or CPA when making decisions based on taxation. That out of the way, the new tax law increased the standard deduction for a married couple from $12,000 to a whopping $24,000. W2 wage earners are those who have a job and the boss cuts a paycheck, withholding money for taxes. W2 wage earners will receive a standard deduction of $24,000 for a married couples and $12,000 for single filers. This is nearly double from previous years! In general this is a good thing. But in order for it to matter you must have more than $24,000 in deductions for a couple or $12,000 for single. That may be a problem for some.

Lets look at a hypothetical taxpayer for a moment, we shall call her Sally.

Sally made $40,000 in 2017 and has a mortgage of $200,000 on her home. She paid $8,700 in interest last year. The standard deduction for 2017 was $6,350. Her mortgage interest exceeds that so filing the "long form" IRS 1040 with a schedule A for itemized deductions makes sense. Why take the standard $6,350 when you have $8,700 in mortgage interest alone. Now Sally can also write off other job related and business expenses. Here is where talking to the tax pro is CRITICAL. Sally needs to make sure that she doesn't take deductions that are not supported by the IRS. OK Sally is smart and she has a trusted tax pro handling her filing each year and he helped her find an additional $2,200 in legit tax deductions. No Sally can't write off those coffee break lattes ;)

Now two 'problems' will arise for Sally this year. First the amount of interest paid on a mortgages drops each year as the balance is reduced. Let's say Sally will pay $8,500 in interest in 2018. She will likely have a similar amount of other deductions. So at the end of the year she has $10,700 in deductions which is now less than the new standard deduction of $12,000. The good news is, Sally will get a larger deduction and save the extra expenses of having to file the schedule A. Her tax guy is not happy, but Sally is. But now for many the extra bonus value of home ownership that was an effective tax break, has been eliminated for those with smaller mortgages.

This could have a net effect of slowing down some of the pressure on entry level homes and first time home buyers. Of course the idea of home ownership should not revolve around tax deductions, but rather the idea of owning real property, gaining equity by reducing the balance on the loan and enjoying appreciation in price over time. These are really the hallmarks of home ownership. It's all about the equity asset and the lack of a landlord that can kick you out or raise your rent.

Over all the new tax system will be a bonus, but it could lead to some minor softening mostly near the bottom of the market. Frankly the bottom needs a little price relief anyway. 2018 is looking good.

Clark County Continues its Strong Growth

The Columbian recently had an article outlining the recent growth projections and cited a number of sources including Washington State Department of Finance. Our county is expected to reach a population of around 640,000 by 2040. That may seem far off but its only 22 years away! 640,000 may not seem like a huge number but Clark County is a very small county in terms of physical area. With just 628 square miles of land within our boundaries we are the smallest in size other than the tiny island counties in the Puget Sound and Wahkiakum county near the mouth of the Columbia River.

Comparatively Clark County has a high population density with 750 persons per square mile. Only King County has a higher density although Kitsap is very close. That means Clark County is an urban county. Yes we can still drive out into the countryside and see horses, cattle, orchards, and vineyards. But we are still packing them in tight, particularly along the Columbia River. Our 471,000 residents rank us at 5th by population among Washington's 39 counties and we are the fifth smallest by area.

Measured against our Portland Metro neighbors we are slightly less dense than Washington County which has a density of 808 per square mile and well behind Multnomah and her 1839 per square mile. Multnomah County is nearly fully built out, so it has little room to grow. Washington County is trending at 17% per decade on pace with us.

Growth tends to act as a regulator in real estate. Strong population growth is fueled by both an attraction as a place to live and a community willing to provide the space. Clark County has both. The willingness to provide the space keeps real estate prices manageable. Once an area loses the ability or desire to provide space in the form of development, real estate prices can skyrocket until the demand or desirability wanes. Skyrocketing prices are not nearly as good economically as modestly increasing values. Like the fable of the Tortoise and the Hare, skyrocketing pricing leads to strong corrections. The hare rockets ahead only to be "distracted" by downturns as the tortoise passes by.

Many areas in California have had harsh boom-bust cycles. Clark County is poised to enjoy a strong balanced real estate profile over the next several decades. Sure there will be some market adjustments along the way, but this area continues to attract residents and local governments continue to provide development opportunities. 

Real estate in Clark County is a strong bet for the future.

All Eyes on Interest Rates

Happy New Year!

Interest rates are the biggest single influence on the real estate market. There are many 'barometers' for the industry, but interest rates are the one that really can make a market move or stall. The feds have been using all of their influence to keep rates artificially low. The reason is that the real estate market was very fragile from 2009-2013. But as the market heated up the interest rates should have been allowed to creep up. The feds continued exercising their pressure to keep them down. I believe the economy was dependent on strong housing.

Buyer and sellers need to pay close attention to how increasing rates will effect them. Rising rates will make a house more expensive to buy.

For sellers that means a shrinking number of buyers that can afford the house. This will hurt the middle pricing the most. Wealthy people at the very top buying seven figure properties are less impacted. Although the max mortgage interest deduction for taxes was recently reduced so that may have a bigger impact than rates in the high end.

The bottom of the market will always have the most buyers. Even as rates rise the demand for entry level housing will remain stronger. People that once qualified for a 2000 foot 10 year old house may have to settle for a 1500 foot 20 year old house if rates are 2 points higher.

The middle takes the biggest hit in a rising rate market. 120% to 200% of median suffers when rates rise too fast for wages. Locally that means homes priced from $400k to $700k.

Buyers need to understand that waiting for a "better price" in a rising rate market is often counter productive. Most analysts are suggesting a slow rise, but a quick rise will lead to falling real estate prices. The higher rate is far more likely to kill a buyer than high price. I have written on this blog about the effects of high rates against high prices. Read here: Why Interest Rate is more Important than Purchase Price.

Cash buyers win big when rates move up but loan dependent buyers have to thread the needle of value trying to get a good price without paying the bank too much. Sellers have to consider the next home they will buy when selling the current house. Are they moving up to a larger house? Downsizing? Moving up could be a problem if rates are rising as the qualifying income needs to be higher to support higher rates the new house may soften in price but the higher rate could push the payment out of reach. Downsizing is less of an issue as the seller could come in  with a large down payment and a much lower principal balance.

Higher interest rates however are not all doom and gloom. Historically speaking the average rate on a mortgage over the last fifty years has been in the low to mid sixes! We have been in an extended period of sub 5%. So long has it been since rates were at 6 percent I would think millennial buyers can't remember ever seeing them that high.

When the stock market is roaring and mortgage rates are only at 4% investors that might otherwise buy mortgage backed securities may seek their fortune elsewhere. This makes underwriting tight as banks must lure investors to the mortgages through the prism of low risk. As rates flex up towards the 5-6% range the returns are better and investors get pretty excited. Guide lines can soften, making the mortgages a little easier to obtain for buyers. That helps keep the prices on existing homes moving up rather than flattening out. It's about keeping buyers in the market. This is only effective to a point. Back in the eighties when mortgage rates were in double figures the real estate market was brutal. Funny thing though, people still bought houses!

Rates ought to be around 5-6% right now, and the fed is moving away from its tinkering so we will starting creeping up towards that in 2018. We should see rates settle in at market values in that range over the next 12-18 months. Buyers shouldn't fret as that is a very "normal" range and still slightly lower than the historical average.

2018 should be a solid year for real estate. The out of control seller's market should soften into the near neutral market and that will be a welcome sight for me. I have never liked it when the market is too heavily tilted in one direction. Either a mild seller's market or a neutral market is typically best for all parties to a real estate transaction.