Buying Advice

Worried about the real estate market crashing? This will help

by John Rice

We are living in the first tough economy since the Great Recession. Naturally there are people that worry about the real estate market crashing again. The memory of half the houses on any street being for sale and owing more on your house than it is worth is all too fresh.

While I don’t see any need to be concerned about that happening again, I got to thinking about what that would look like if it were to happen.

Let’s look at a huge difference between 2005 and today. Both are times when the real estate market was on fire.

Back in 2005, the interest rates I was seeing were around 5.5%. The market was good. Values were high. Then when the 2006 season kicked off, it wasn’t as good. The following years until 2012 got worse and worse. Fewer buyers. More sellers. More foreclosures. Unlike stocks, real estate values usually rise gradually and fall even more gradually. Short of a landfill being built behind your house, you are not going to wake up one day and find your house is worth 20% less than it was the day prior. Remember this because I will bring it up later.

That person who paid $300k for a house in 2005. Let’s say they did a 30 year mortgage at 5.5%. One year into their mortgage, they owed about $296k still. After five years, they still owed about $277,500. This is why many of them had to BRING money to a closing when they needed to move in 2010. Back then, one of the first things you would ask a potential seller was “How much do you owe on it?” Many were upside down on their houses, which is why many chose to walk away and let the house get foreclosed.

Today, a buyer can get a 2.875% interest rate for the same $300k house. That is just over half what it was 15 years ago. After one year, they owe about $293,500. After five years, they owe around $266k.

Okay, now it’s time to remember I said real estate values, when they drop, don’t drop fast. It took about 5 years for values in the Lexington area to drop about 15% from the 2005 peak values. Some houses didn’t even loose that much. Picking a good house with a good floor plan, on a good lot, in a desirable neighborhood for the price range and with average or better performing schools is the best way to protect yourself from a bad market. If you look at the math on today’s buyer getting a super low interest rate, you will see that in five years, they have paid off about 12% of their balance. If they get a couple years of appreciation before a decline, the numbers are even better!

I know I got a little nerdy there with the math. Sorry. In the end, my point is that should the market crash again, today’s buyer is going to be in much much much better shape due to low interest rates. If the value of your house drops at the same rate that you are paying down your mortgage, then the worst thing that can happen is you just aren’t building equity in the house. It’s effectively like you’ve been renting where you pay to live there and walk away with nothing when you sell…..and this is the worst case scenario. The best case scenario is that the market stays good and you build a ton of equity. I just don’t see much risk in buying a house right now thanks to low rates.

Low interest rates could be the WORST thing to happen to the market

by John Rice

Yep. I know. It doesn’t make sense at first. How could these incredibly low interest rates possibly be a bad thing? They are a very good thing right now for people buying or refinancing their existing house. The problem is in the future.

Let’s take the average person who has probably refinanced their old mortgage recently. Let’s say they paid $160k for their 1700 square foot home in Masterson Station in 2013. They put 5% down on a conventional loan. Their interest rate was 3.875%, which seemed stupid low at the time since rates had been about 5% just a few years earlier. Their payment, excluding taxes, insurance and PMI, would have been about $714 a month. They decide they want to refi. Their house is now worth about $210k. They owe about $126k on their old mortgage. They get a 3% interest rate and now their payment is about $531. They are saving around $180 per month. They are happy.

Now lets look 5 years out from now. They want to move up to a $300k house. (Let’s keep the value of their current house and the one they want to buy based on today’s values since both should appreciate about the same….it just makes it easier for me to do the math!) They have close to $100k in equity, so they are effectively only going to finance an amount that is about equal to the value of their current house. This is really sounding good. But wait, maybe the interest rates are 5%? If so, their payment will more than double. That’s right. They have close to $100k down and are borrowing an amount equal to the current value of their existing home. Their new payment for principal and interest would be just over $1100 a month. People who need mortgages shop by their mortgage payment. They find out what they can afford per month and then figure out how much house it buys. These people won’t move. They will upgrade their existing house instead.

The same holds true for the people buying a house today. They won’t want to see their mortgage payment double if interest rates go up, so they will stay as long as they can stand it.

This is why, unless interest rates stay very low for a very long time, eventually there will be even fewer houses for sale. This will of course keep prices high since there will be less of a supply and demand will not decrease. We are not building enough new houses and the next generation of buyers will be bigger than previous generations.

So, what’s the take away here? If you can see yourself staying in your current house for 7-10 years, refi now. If you are a buyer, buy a house big enough to stay in for a long time. The last thing you want to do is outgrow your current house in 3-5 years and possibly not be able to afford a larger one.

“You should have bought my house”

by John Rice

I just sold a house to a past client that reminded me of something that happened almost 20 years ago.

The house this client bought was a good solid house. The current owner built the house and took good care of it. It really just needs some updating, fresh paint and new flooring. The seller sold the house for less than they could have gotten had they done these improvements. They passed on the savings they had to the buyer who was happy to get a good deal on a good house and use the savings to update to his own taste. This really worked out well for both of them.

There was a little gap between what the seller wanted and what the buyer wanted to pay. Not a huge gap. I told the buyer that I knew he would end up renovating any house he bought. He enjoys working on houses and has improved every house he has owned. I told him the story of two houses right across the street from each other that were essentially the same house.

Back in the early 2000s, there were two houses for sale on the same street. Both were split levels of similar size and floor plan. One was pretty nice and was $150k…..which would be like $250k today. The house across the street was $118k and needed everything.

I bought the $118k house because that was all I could afford at the time, but I secretly wished I could have bought the one across the street for $150k because I liked the yard better.

I bought my house for $118k and over the course of several years, ripped out all the old, tired, worn out finishes and replaced them with new materials.

The house across the street that sold for $150k closed shortly after I closed my house. I met the new owners. Great people. Over the course of the next couple years, I saw them rip out and haul off everything that made that house worth $32k more than my house. They ripped up perfectly good carpet because they wanted hardwood. Understandable. They didn’t like the looks of the kitchen counter top even though it was in excellent shape. This continued for quite a while.

One day I was talking to the husband and I finally said what had been on my mind for quite some time. I said “You should have bought my house instead. You have thrown away everything that made your house worth $32k more than my house.” He paused for a second and had a deep thought look on his face. Then he said he had never thought of it that way. He saw materials he didn’t like and was excited about fixing up his house. I saw $32k going in a dumpster.

He probably walked in to my house when both were for sale and was turned off by everything being worn out. That is understandable too. But if you know you are going to renovate a house to your taste, it is better to start with one where you are paying less and ripping out worn out materials.

I can’t wait to see what this buyer does with his new house. And I would have never guessed something I learned that long ago would still be benefiting my clients today!

The one thing this agent did that got his buyer my listing

by John Rice

He called me.

That’s all it took.

I put a listing on the market yesterday that I knew would get a ton of showings. It was priced at $155k and there just isn’t much for sale in that price range.

The agent called me before his showing and asked what type of terms my seller was looking to have. He also told me that his buyer had tried unsuccessfully two times to buy a house in this particular neighborhood. He has friends/family in the neighborhood and really wants to be there. I really wanted to hear that because I knew that his buyer would not walk away after a home inspection since he not only needs a house in a tight market but really wants to be in that neighborhood. His only option would be to wait for the next house to come up in that neighborhood. This buyer was committed. I asked who the buyer was using for his mortgage. It was a local company that is well respected. Icing on the cake to me.

Some of you might wonder why an agent would tell me this? Isn’t it compromising his buyer’s position? In today’s market, everybody assumes they will have to pay full price. Everybody is electing to do the inspection type where you will have an inspection but not ask for any repairs. Since everybody is doing pretty much the same thing, the decision on who gets the house often comes down to minor things such as what type of financing the buyer is doing, if they are using a local lender who can be trusted to get the loan to a closing…..and even to little things like letting the listing agent know the buyer really wants to be in the neighborhood.

Being a buyer’s agent today is not about negotiating since buyer’s have no power right now. It is about advocating for your clients. It is about finding out what is appealing to a seller and what will make them pick your client. That is exactly what this agent did. In an era where you get a random text from an agent that they are sending you an offer, making a quick phone call can really make a buyer stand out. The actions of this agent is what got his client the house.

7 houses sold in 6 days!

by John Rice

It’s been a busy few weeks. After sitting on the couch for most of March and April, the market really came back strong. I knew it would happen, I just didn’t think it would happen so fast. I now have 14 pending sales. I sold 7 houses in 6 days last week…..which is why I haven’t blogged in a while. LOL, I went from having nothing to blog about to having no time to blog.

As expected, most of those sales were in multiple offer situations so I thought I would tell you how I won some of them for my clients.

These buyers were friends of mine who had been living out of the country for several years and were coming back home. Typical thing where the house had just come on the market. I knew the listing agent well. We have worked together multiple times. My buyer was preapproved with a local lender that the listing agent also knew. I was familiar with the house since I own one that is the exact same model. I don’t claim to be a home inspector, but I have been on probably 400+ home inspections and own enough houses that I can usually spot any deal breakers. I told my buyers, who REALLY wanted this house, that I was sure a home inspector would find the usual laundry list of items found in any house. I also told them that most sellers these days will only spend $500-1000 for repairs. I suggested we buy the house totally “AS-IS” without a home inspection. I know that can be scary for a lot of buyers but these clients were good friends who knew I wouldn’t steer them wrong. Since there was no huge issue that would cause somebody to walk away, all they were risking was losing out on the $500-1000 in repairs that a seller would do. We got the house!

Another buying family was referred to me by a past client who had used me twice before. I knew that listing agent too. An art that seems to be lost on younger realtors is calling the listing agent and letting them know some things that aren’t on the offer. I told that listing agent that I had been working with my Buyers for a while and how sensible and reasonable they are. I also pointed out that they would be doing a Conventional loan and had 20% down and would not be asking for the seller to pay any of their closing costs. I did this because I was sure the price point of this house probably meant that the other offers were FHA/VA with little money down and asked the seller to pay some of their closing costs. Get this, the listing agent countered our offer because we did not have the highest price. He said if we could match the highest price, my people would get the house because their loan type and huge down payment seemed more of a sure thing than the other offers. We got the house!

I sold a really amazing townhouse downtown to a friend. That was not in multiple offers since it was under construction. Another buyer who was referred to me from a friend bought 5 acres in Jessamine County. We did an escalation clause on that one to get it. The rest were listings.

It has been a busy two weeks but it felt good and overwhelming to be thrown back in the deep end of the pool after the COVID-19 Staycation.