Waiting for a good deal on a home?

Have you been waiting for the market to crash before you pull the trigger on your new home? If so, I’ve got great news for you. Now is your time to buy.

What? I know what you are thinking…..”John, you are crazy, these prices haven’t changed much at all!?!?”

Well dude, it’s time to stop thinking about prices and to start thinking about value.

The price of something is the number of dollar bills you must pay.

The value has to do with what those dollar bills are worth adjusted to inflation.

Inflation is a dirty word we are reading a lot about and is making us spend more of our dollars because it takes more to buy the same things it did a couple of years ago. If you think of inflation as prices on stuff going up, you’re sort looking at it wrong. That is a consequence of inflation. Inflation is really the devaluation of a dollar, which is why it takes more dollars to buy the same stuff. If we have 7% inflation this year, what that really means is the value of today’s dollar is 93 cents compared to last year so the price of everything will go up accordingly.

Now let’s apply this to houses.

Prices in the bluegrass area are about flat for this year….meaning they haven’t really gone up. Meanwhile inflation has made last year’s dollar worth about 93 cents. So inflation has devalued the dollar causing everything you buy to cost more dollars EXCEPT for real estate. If the price of something didn’t go up during an inflationary time, that really means that adjusted to inflation, the value dropped. So you don’t have to go back and read that again, I’m saying even though the price of a house is about the same as last year, it is really worth less today adjusted to inflation.

So, go out and buy today. Everything is effectively 7% cheaper than it was last year.

The #1 thing to do when picking a house

Don’t settle. There, I said it.

As the market becomes somewhat more balanced, buyers now have choices. A year ago, the choice was to buy any house available or not buy a house at all. Buyers said things like “I don’t really love it but I don’t want to loose it. How much over asking price should we go to get it?” Today’s buyer has the choice between several houses in their price range.

There was a lot of settling going on during the past year or two. I get it. You wanted to move and on Friday there were 15 new listings to be greeted by 75 buyers who were just like you.

During this time, I would always tell my clients what I thought of each house. Most of the time I would say something like “In a softer market, this house will be hard to sell. I would wait for a better one if I were you.” Most of them did.

Here are some big things to not settle on when picking a house:

  1. The location. As more houses come on the market, the houses in the preferred neighborhoods will not only sell faster, they will always hold their value better. It’s worth waiting for a preferred neighborhood, part of town, school district, etc because one day YOU will be the seller and you want to make that as profitable and easy on yourself as you can.
  2. The lot. It is easier to sell a terrible house on an amazing lot than it is to sell an amazing house on a terrible lot…..in a balanced market. In a true Buyer’s Market this is even a bigger deal. That amazing house on a terrible lot will one day be outdated and be a subpar house on a subpar lot. A good lot never goes out of style and never needs updating.
  3. Floor plan. If there is something odd about a house, chances are any buyer is going to notice it too. Don’t buy the “If Only” house. That is what I call a house where you really like it but there are one or more major flaws and you walk out the door saying “If only that 3rd bedroom was larger” or “If only that kitchen wasn’t so tiny.”

Why 6-7% interest rates won’t crash our market

If you’re like me, all you are reading in the news is how the skyrocketing interest rates are affecting the real estate market. Headlines say stuff like how the rate has nearly doubled, how sales have decreased, some even are saying the market is going to crash.

Wrong. Wrong. Wrong.

Youtubers and journalists need something exciting to get your attention. If you saw a headline or video that pretty much said everything is going to be okay, would you be interested?

I think part of this drama is also that you have people whose data is correct but how they use it is wrong, or their data doesn’t give much of a historic comparison.

Affordability seems to be the main topic today. These people are talking about how much more a mortgage payment would be today compared to the all time low we saw last year……DUH! Short term thinking I say.

Here is why I don’t think a 6 or even 7% interest rate is going to do much more than curb unsustainable appreciation and slow down people moving just because they feel like moving. To begin with, people will always have changing needs for housing. Families will grow, there will be divorces, marriages, job transfers, job losses and all the other lifestlye/life cycle changes.

But here are the main reasons I am not worried: The Debt-to-Income ratio and longer term history.

Let me take you back to the early 2000s. The real estate market was crazy. Houses were selling fast in multiple offers. Prices were going up like crazy. Know what the interest rate was back then? Barely under 6%. And back in the late 90s when the market was also booming, it was about 7.5%.

A house in the Bluegrass that was worth about $250k back in 2004ish would be worth about $425k today. The principal and interest portion of your loan at 6% on a conventional loan with 5% down would have been $1423 back then and $2420 today. Yeah, that sounds like a lot more. It is, but let’s keep going here.

So the real difference between then and now with property taxes and insurance included would be about $1200 a month. To qualify for the mortgage on that $250k house back then would require an annual income of about $73k. Today that house would be worth about $425k and would need about $126k in income. The median household income has gone up 80% over that time according to the census. The value of that same house has not gone up quite as much.

So there you have it. I think if the market has historically been very good in the past during times when rates were higher than they are today, and since household income has pretty much grown congruent to home values in the Bluegrass, we will weather this period very well.

Then why is the market so slow right now? Simple. People are in shock and upset that rates went up so fast. Once they realize they can’t go back in time, they will move forward with their plans. I predict that (short of a major economic crisis that pulls down EVERYTHING) buyers will be out in force next spring. Prices will remain stable. It will be a good market. It won’t be a market that you’ll read headlines about because remember, you only see real estate in the headlines when things are exceptionally good or exceptionally bad.

How every Buyer picks their house

I often get a Buyer who gives me a very long detailed list of all the features they want in a house. It’s usually things like how many bedrooms, bathrooms, what type of floor plan, what type of kitchen cabinets or flooring they must have.

Then they buy something totally different from what they described?

Why is that?

It is because people pick the home they ultimately purchase based on how they feel while inside a house. It’s the vibe the house gives them. It is an emotional decision.

When I work with a Buyer, I try to notice how they respond to a house. Did they tell me it was too dark inside? Did they think the yard was too bare and needed more trees? Was the backyard not private enough? Did they not like the floor plan and why? Or did they even care about any of this?

These are the type of things people use when making their decision. If a Buyer feels groovy inside the house, they can overlook items such as not having a pantry, not having the flooring they prefer, or if it is missing one of those specific features they said they could not live without. In houses they feel good about, they say things like “We could always change the counter tops later.”

All of which is why I try to create that vibe when I list a house. Buyers also respond to colors, decor, cleanliness and clutter. You can have the most amazing house but if you have wild paint choices, it is going to be harder to sell. Why is that? Truth be told, few of us have vision. We ALL think we do but trust me, there have been so many times where I have told a Buyer that all a house needs is a fresh coat of their choice of paint and they don’t see it. Or I’ll say imagine this house with the flooring you want and they can’t see it. Or maybe I’ll say “Those cabinets could be painted and that mauve counter top could easily be replaced.” And even worse is a cluttered or dirty house. Nobody can imagine what it would look like in better shape.

So the lesson here for Sellers is that you need to make your house feel a certain way for a Buyer to fall in love with it. Another important thing to keep in mind is that people who totally fall in love with your house will pay the most since it is an emotional response and not a logical one.

How can a Seller do this?

The most crucial and obvious ones are to declutter and clean. Not to your standards but to the Buyer’s standards. Then think about how your house looks. Think about how Buyers will tour your house. Ever been in a Builder’s model home? Next time you go in one, notice that there is just enough furniture to make the space feel good. You want your furnishings to compliment the space, not fill it. You will notice that the furniture often has narrow legs and you can see more of the floor. Seeing more of the floor always makes a space feel larger. There is thought about how people will walk around a space. You don’t want to block parts of the room off with furniture nor do you want to make pathways seem narrow. Those things create the vibe that the house is small. Buyers get that same vibe from this as you do when you’re stuck in a traffic jam.

Something else you do NOT want to do is have Buyers leaving the showing with a To-Do list of repairs. If you have unfinished projects, finish them. If you have a stain on your ceiling from a repaired leak, paint it. Buyers will respond to those things logically instead of emotionally. They begin to think about what it would cost to repair it, and they usually estimate high. You want your buyer to leave your house thinking only about how wonderful their lives will be in your house and how they need to rush home and sign an offer.

Good time to buy rental property?

I get asked this quite a bit. Some people want a long term rental and some are interested in airbnb-ing a property.

Here is the one single thing to know when considering any type of rental: There is no good or bad time. The numbers work or they don’t. If the numbers don’t work it, they don’t work even if it is a Buyer’s Market. If the numbers work, then you buy regardless of what the market is like.

What do I mean by this? Long story short, the house has to support itself without you having to throw in your own money every month. That is called cash flow. Positive cash flow means the house supports itself. It covers your mortgage, taxes, property insurance, maintenance and has at least a little left over for a profit. Negative cash flow is when the expenses exceed the rent.

Now, what about Long Term Rental verses Short Term Rental? I personally think Short Term Rentals are risky right now. I know, I know…..Many of you have made good money with your Airbnbs the past couple of years. I do not dispute that. My concern is that this trendy investment option will get oversaturated AND slow down drastically during tougher economic times. It is much more volatile than long term rentals. If you want a shot at huge returns and can stomach volatility, it’s easier to invest in stocks. So what I tell people when they ask me if they should get an Airbnb is to do it only IF they want to invest in real estate in general. If you do, then you can switch between short and long term rental as demand swings. Move your furniture out and you’ve got a long term rental. Best of both worlds for you.