interest rate

Nailed it! See how my predictions turned out

by John Rice

I’ll try to remain humble here, but I called exactly what is happening in the market today.

I have always said there will always be a market. There will always be demand. Some times the demand will be pent up with people sitting on the sidelines, but they are there, waiting to feel comfortable about making a move. (Typically these people wait until enough other people dive in and effectively end up jumping into a hot market, which is what they were hoping to avoid.)

I have been saying for months that I thought the market could still be very good with interest rates around 6% or less because historically, the past several super hot markets we have seen in our area had those rates and adjusted to average income, real estate values in our area are similar. I’ve said that rates over 7% won’t last forever. I’ve also been saying for years that once rates start going up again, people would be reluctant to give up their super low rates which would create a shortage of listings and would keep prices stable regardless of the market conditions.

I’ve suggested people buy real estate as soon as they are able regardless of the rate since you can always refinance when/if rates go down but you can’t go back in time to get yesterday’s home prices.

And now you know what stories are making the headlines? That mortgage applications are up recently due to rates dropping below 6%. That refinancing applications are up too. That rates are down. That prices aren’t really dropping in areas that didn’t see crazy stupid price increases.

I am seeing all this myself with my clients. I had two listings that went on the market right around Thanksgiving. One of them was modestly priced, totally updated and in a desirable neighborhood. I really thought it would go fast even though that time of year is usually slow. It hardly got any showings, which is very strange. Then once rates went down we had 5-6 showings in a matter of days and it sold. When I go to show listings to my buyers lately, most of the time there is another realtor showing the house when I arrive or one that shows up as I am leaving, sometimes both!

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

by John Rice

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.

Are we in 2005? Yes and No

by John Rice

17 years. That’s how long I’ve been in real estate. Man, have I seen a lot!

When I got into this in the spring of 2005, here is what it was like:

  1. No realtor wanted to work with buyers.

2. It took no real skill to list a house and sell it since they were selling so fast.

3. We all thought the market would be like this forever.

4. Affordability was an issue and people were considering moving outside of Lexington to find cheaper housing……until gas shot up to $3 a gallon.

Here we are in 2022 and all that is still the same at the moment:

  1. No realtor wants to work with buyers now since all you do is write offer after offer on every new listing in any buyer’s price range.
  2. It takes even less skill to list and sell a house today since you don’t even need to know what the house is worth. Today you could list the house at 9:AM for $1 and by 5:PM the same day you’ve got 5 offers all at market value. The moment being a realtor gets a little tough, you will see 25% of all realtors get out of the business……starting with the ones who suck at being a realtor but are brilliant at self promotion.
  3. We still think it will stay this way forever. It won’t. While I think the market will stay strong short of a major economic catastrophe, it will slow down. Houses still sold in the late 70s and early 80s when interest rates were the highest they have ever been. Don’t think for a minute that 5% or even 7% will kill the market. Don’t think that inflation will kill it either. Wages will rise. They have in every inflationary time. Right now they haven’t caught up to inflation but they will. If you made $1600 a month in the 80s and your mortgage was $400, that is the same percentage as if you make $6400 a month now and have a mortgage of $1600.
  4. Affordability is still an issue. Used to be finding a first home under $100k was hard. Now it is hard to find anything decent for less than $200k. Many people that work in Lexington have been shopping in surrounding towns for cheaper prices. I have always discouraged that for a couple of reasons. I did the same in the late 90s with my first house. I was driving back and forth between Lexington and Winchester all the time and hated it. What I saved on the mortgage I spent on gas, tires and maintenance for my car. I encourage people to live where their life is. If work and your social life are in Lexington, well, you should live in Lexington. Also, I remembered what gas hitting $3 a gallon did to the market back then. It killed the first time buyers interest in buying outside of Lexington. Now $5 a gallon seems to be the magic price that keep people from doing this.

Should I buy if I know I won’t keep the place for long?

by John Rice

Back when the market was bad, I would always tell people not to buy a house unless they did not know exactly how long they would own it. If they knew they would only be in town for 2-3 years max, my advice was to rent. Same for “Kiddie Condos” too where a parent buys a condo verses renting an apartment or paying for a dorm for 4 years.

Back then the only variable was the housing market. Inflation was flat. Today is a LOT different. The value of the property AND inflation are both variables that are poised to benefit you in this situation. All the major players are predicting both housing prices to continue to rise and inflation to rise in the near future. That’s a double bonus for you and really for anybody buying any asset right now. Buy now at today’s lower price and pay it back with deflated dollars through a mortgage. It doesn’t get any better than that.

Many people seemed to enjoy my last two posts about my weight loss journey. I’m thinking I might include a little bit more stuff that’s going through my mind these days. I’ve gone through a lot of changes and unfortunately I’m now old enough to want to share my experiences and wisdom gained along the way.

Growing up, I always had a lot of anxieties. Sometimes they would be really debilitating. Couple anxiety with a mind that never turns off and it gets worse. I know a lot of people with what is now called high functioning anxiety. I am hoping this helps them.

I think two things helped me out the most.

The first was that I was able to train my mind to separate my perception of reality FROM reality. When I would get anxious about something, I would tell myself “Okay John, this is what you FEEL is happening but this is what is REALLY happening.” It sort of switched my response from being emotional to logical.

Then I realized that most things that make you anxious are either things in the past or the future. We all tend to dwell on either since I sort of feel in general, humans suck at being in the present. If I was anxious about something in the past. Maybe dwelling on some awkward social situation where I worried if I said the wrong thing, I would just try to learn from it and go on, making the next awkward situation easier……because guess what, I can’t undo the past! For future anxiety, I would just try to focus on the present and remind myself again that how I feel about it is totally different than reality and reality always wins. If it was some sort of performance anxiety, I would make whatever I needed to do as basic as possible. That seemed to make it a manageable task. I still do this if I have a super stressful day ahead of me. If I wake up and have to take 3 different clients out to see houses, negotiate a repair list, write an offer, have a closing and otherwise have a crazy busy day, I might just tell myself “All you need to do John is drive around with people and look at houses, make a few calls and do some paperwork.”

I really think like any obstacle in your life, you need to realize YOU can train yourself to control your mind and your responses to things. It isn’t easy and it isn’t quick because you are basically battling yourself. Just slowly do these two thing and you will find your anxiety level decreases.

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.