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.

Always think about selling in a Buyer’s Market

I am always sad when I see a house sell that has been sitting on the market forever.

Sometimes a house will stay on the market for a long time because the initial listing price was too high, or the house didn’t show well.  Both of those can happen to perfectly good homes.  The reason those don’t sell is because of the seller, not the house.  Often these houses sell once the list price gets reduced into the realm of reality, or the seller does some cosmetic repairs that make it easier for a buyer to want the house.

Any time I show a house like this, my client usually asks me why the house hasn’t sold yet.  If I check the listing history and see that they started out asking a crazy high price and have reduced it, I tell them it is okay to buy it.  If I look through old pictures or see fresh paint, new flooring, etc, I tell them it is okay to buy the house.  Sometimes sellers just need to learn how the market works at the expense of their days on market.

Then there are those houses that don’t sell because of the property itself.  Those are the ones that I advise my clients to not buy.  These houses usually have some odd feature like a crazy floor plan, a poorly done addition, a neighbor whose yard is full of junk or has a dozen dog kennels in their backyard, the house backs to commercial or industrial zoned properties, etc.  These houses eventually sell to somebody who doesn’t mind that particular negative.  Whenever I show one of these houses, I like to tell my client that while they might not mind the negative feature that has kept the house from selling, it will be extremely difficult for them to sell it when it is their turn.   The past 8 years have been a pretty strong Seller’s Market.  If a house took a long time to sell in a hot market, can you imagine how long it would take in a Buyer’s Market?

I have lived through lots of markets.  I have seen seller’s who paid too much in a hot market lose money when they needed to sell.  I have seen people get their dream job and move out of town, only to have to make two mortgage payments until their old house sells.  I have seen people who felt lucky to have gotten their house in multiple offers struggle to sell it in a Buyer’s Market.

I don’t want to see any of my clients go through any of this.  In real estate, you often don’t see the consequences of a mistake until years later when you go to sell.  Helping people avoid this mess is one of the greatest joys of my career.

5 crazy realtor experiences

Since real estate is slowing down a bit due to, well, you know why, I thought I would tell you about some of my adventures in real estate.

 

WHY I HAD TO WASH MY CAR WHEN I DROPPED OFF THIS CLIENT

I was working with this couple many years ago.  I would meet them at my office and then we would go see houses.  The strangest thing to me was that both of them would always ride in the backseat together.  So there I am up front all alone.  Front passenger seat empty like I am a chauffeur.  One day I picked them up.  The wife wasn’t feeling too good.  We left my office.  As I was coming to the first stop light, I hear the back door open.  She puked.  Since I had not come to a stop yet, the wind blew her uh, discharge, down the side of my car.  They decided to hold off on buying a house after that.  I found out later that they bought with another realtor, probably because she was too embarrassed to see me again.  So I lost a sale and had to wash somebody else’s puke off my car.  Nice.

TALKING THROUGH THE WALLS

My client told me they were going to be a little late.  I had consumed several cups of coffee that morning and really had to use the restroom.  I saw an opportunity since my client would be late.  I went inside the house, right at the time of the appointment.  As I was using the restroom, I hear a voice asking if somebody is in the house.  LOL, it was the seller.  He had not left yet.  He was in the bathroom on the other side of the wall.  He got done and left.  I never saw him.  Heck, I didn’t WANT to see him.  Minutes later my client showed up.

WEARING DIFFERENT SHOES

For a while, I had two of the same pair of sandals.  One was leather and the other was suede.  I kept them both in the hall closet at my house.  On my way to show a house to a client, I put my feet in the closet and put a shoe on each foot.  It wasn’t until I got to the house that I realized that I had on one leather one and one suede sandal.  I no longer buy different types of sandals.

THE TOOTING SHOES

Probably back in about 2009ish, I had a really comfortable pair of sandals that I loved.  The only thing I didn’t love about them is that every once in a while, at what always seemed like the most inopportune time, I would take a step and they would make a tooting (okay, farting) sound.  I think it was the sound of my heel coming off of the sole of the sandal as I walked.  I never knew what to do when this happened.  The first several times I would try to make it do it again, as if somehow that would proof that I didn’t…..you know.  It would never do it twice in a row.  It didn’t take too many of those embarrassing moments before I decided to throw them away and get a new pair.

NO THANKS ON THE COFFEE

When I was a newer agent, I had this great idea to go after for sale by owner listings.  I dropped off hundreds of fliers and only got one response.  I went to the house to meet the lady.  Her dog almost bit me.  She offered me some coffee.  I told her I loved coffee.  It was the most terrible, sour tasting coffee I have ever had.  I think she kept using old grounds to make new coffee.  Well, she of course decided to let me list her house.  When I came back for her to sign the documents (this was before we did it electronically), her dog almost bit me again.  As soon as we sat down, she says “I remembered you said you loved coffee, so I made you a pot.”  To this day she probably wonders how she saw me drink it but emptied a full cup when I left.  It was because I was just putting my lips on the rim of the cup.  We finally sold her house.  I could dedicate an entire post just to that sale.

Honorable mentions are all the times I have gone to closings or shown houses with my zipper down.  I think I once had a T-Shirt on inside out.

I have others of course, but I hope this takes your mind off of the state of the world and puts a smile on your face.

What’s this doing to the market?

Not a lot so far.

Everything is a bit slower, but my listings are still getting shown and there seem to still be houses getting listed and selling every day.

Some of my buyers are laying low to see how this goes and for how long it lasts.

I’ve been reading a few articles that have said this could be like the Great Recession where real estate prices fell.  It won’t be.  Why?  We still have a shortage of houses for sale.  That will keep prices where they are.  Think of it this way:  If there are 1000 houses for sale and 1100 buyers, it is really the same as having 100 houses for sale and 110 buyers.  Supply and demand are the same.  As long as there are more buyers than sellers, prices will stay stable.

If you are a Buyer:

Don’t be afraid to buy.  Take advantage of great interest rates.  Negotiate the best price you can.  As I have always recommended, buy a house that will be easy to sell in any market.  That means a good location, a good floor plan, as flat of a yard as possible, average or better than average performing schools.  Don’t buy the biggest or smallest house in the neighborhood.  Don’t buy one that doesn’t fit in with the others such as having a one car garage when every other house in the neighborhood has a two car garage.

If you are a Seller:

I would put my house on the market as soon as possible.  In uncertain times, taking action now to prepare for the worst is always good.  I think I might put a new listing on the market on a Friday afternoon and only allow showings on the weekends.  That way you get the most people in all at once and can then clean things like your door handles, counter tops, faucet handles, garage door opener button afterwards and feel good about being home again…..and take your toilet paper with you when you leave for showings, lol.

When people pick the wrong house for the right reasons

It happens.  More than you’d think.

I showed a house about a month ago to a client.  There was a line to see it.  It got multiple offers that same day.

My client didn’t like it.  I didn’t like it.

Why?  The floor plan sucked.  It had a big two story foyer as soon as you walked in.  The living/dining/kitchen area was open.  All this sounds great, but the issue was that this was a 1733 square feet home that had no more usable space than a 1300 square foot home.  The upstairs hall was wide.  The hall from the front door to the living room was wide.  The dining area was small but nobody could tell since it was vacant.  All the rest of the rooms were equal to what you’d find in a 1300 square foot house.

It made a good first impression though.  You walk in that foyer and see space.  You walk down that wide hall and see the open living/dining/kitchen.  You go upstairs and see that wide hall.  The house felt bigger than it was just because when you are viewing a house, you are going through every room in about 15 minutes.

It sold for over $6k more than the list price.

It closed today.  The new owners are probably moving in and glad it quit raining.  Once they live there for a while, they will probably realize that much of their square footage isn’t usable.  They will realize that what they have is a 1300 square foot home with 400 extra square feet of hallways and foyer.