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

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.

How do houses go up in value?

Ever wonder HOW prices rise for houses?

Before I got into real estate, I didn’t really think about it. You’d read stuff like the average price went up something like 4.6% last year…I assumed it was like a rising tide and affected every house the same way at the same time.

But it doesn’t work like that. It works more like traffic taking off after a stop light. The first car goes, then the second car see the first car moving and goes, then the third car sees the second car moving and goes, and so on. As much as I wished they would all move at the exact same time, they don’t. And that is exactly how prices go up in real estate.

There are lots of factors impacting value: Supply/demand, location, price range, condition, etc. No surprise here, but when prices are going up, the neighborhoods that are the most desirable and have the least supply go up first. Once there is enough of a price gap between those neighborhoods and the next best neighborhood, the prices of the second best neighborhood start to rise as buyers see a bargain and move in that direction. Then when the prices are up on the second best neighborhood, that does two things: It makes the prices go up on the first choice neighborhood since it is better, and it also drives bargain shoppers to the third best neighborhood. This process ends up going through ALL the neighborhoods in town as long as the market remains hot.

I sold two houses in one particular neighborhood several years ago to some friends wanting to rent them out. I was telling my friends that I thought the prices in the neighborhood were about to go up since there was a big gap between what an identical house was selling for in other neighborhoods. Since I tend to Geek out on this type of stuff, I don’t think they were as into it as I was…..but now their houses are each worth $35-45k more in just a few short years.

So, next time you are stuck in traffic, forgive me if it makes you think of real estate.

“You should have bought my house”

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

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!

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.