Don’t believe the Chicken Littles in the media

I love YouTubers. Always a good laugh. Always predicting the market is going to crash.

They get a little nugget of data, like that the number of people refinancing their mortgages has dropped and draw the craziest conclusions. Well, when rates were between 2 and 3%, everybody rushed out to refi. Even if the rates had not gone up, eventually everybody who would have refinanced would have done so. That statistic was bound to decrease on it’s own eventually.

My favorite ones are those that predict a major housing crisis. It is just not going to happen, especially in Lexington.

Why?

The number one reason is that Lexington is almost out of land. Lexington cannot grow any more. The surrounding communities will of course grow. Lexington will always be the most desirable town in the Bluegrass and prices will remain higher than anywhere else around us due to that. (FYI-we will see a whole lot more remodeling in the future than we see building in Lexington.)

What else do I see in the near future? A slowing market, mainly due to interest rates and nothing being for sale. Right now everybody is complaining that 5% interest rates are the worst thing to happen to the market. I disagree. While rates being low were nice, it is the low rates that spoiled all of us and are affecting the market right now. We currently act like rates in the 2-3% range were normal and 5% seems excessively high. However, I don’t see prices dropping though. That’s because all those sellers who refinanced their mortgages when rates were under 3% are not going to move until they have a need. We need sellers in the market. When sellers are scarce, that means more demand than supply. People will likely only move when they outgrow their home, lose a job, get transferred, their family grows, Grandma needs to move in, or a divorce. You’re not going to give up a 3% mortgage on a cheaper house to get a 5% mortgage on a more expensive house unless you really need to move.

So, in Lexington at least, we have little room to build more houses, sellers who are less likely to move just because they want a nicer home, and higher interest rates. All of which means less supply at a time when we have Gen Z trying to get their first home and millenials needing to move up.

I guess if I had a YouTube channel, it would be pretty boring because you don’t get much attention by saying prices will remain at least stable and the market will stay slightly tipped in the seller’s favor.

Price of new construction driving up “Used” home prices

Used to be that new construction in your area held back the value of your house. The “Used” houses needed to sell for much less than a new one would. Even in a mildly appreciating market, your newer home didn’t really go up in value until that last brand new house sold. It was like the thought was “Why wouldn’t I just get a brand new one instead of buying a ‘Used’ home?” I know this is hard to believe for those of you new to the real estate market, but you used to be able to be the only offer on a completed new home and if you had time, you could pick your lot and pick your floor plan and have your house built. Today, builders like to finish the house and put it on the market to see how much they can get for it. Construction times have gone from 6-8 months to 10-12 months. Builders don’t want to be locked into a sale price where they won’t get paid for 10-12 months in inflationary times and with supply chain issues.

While an existing home will still sell for less than a brand new one in the same neighborhood, I am seeing something that hasn’t happened before. Since new construction is sooooo expensive these days, I am seeing the value of existing homes being boosted by the sticker shock of new construction homes. Yeah, the market is good and inflation is driving the prices of everything up, but prices are rising even faster than I expected in some neighborhoods with a lot of brand new homes going up, such as Masterson Station and The Home Place.

A brand new 2000 square foot home in Masterson is about $325k and the same size in The Home Place is about $440k. Now, instead of saying “Why wouldn’t I just get a brand new home instead of a used one?” buyers are saying “This existing home is a bargain compared to what the brand new homes are!

Are we in 2005? Yes and No

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.

“If you were me, would you (fill in the blank)?”

I get asked what I would do if I was in my client’s situation an awful lot. So much so that I thought maybe I’d write a little about the most common times this is asked.

  1. Would you buy a house right now if you were me? My answer is always yes. Not because I want to make a sale, but because I am old enough to know that the sooner you buy a house, the sooner you start building equity. You are leveraging time when you buy real estate. Rates go up and down. Prices generally increase consistently over time. You can always refinance later if rates drop. One thing you can never do is go back in time to get a lower price or a lower interest rate…..NOW is always the best time to buy.
  2. Would you still buy this house knowing what we now know after the home inspection?” My general thought is that no house is perfect. I’ve read probably 600 or more home inspection reports. Most houses seem to have 90% of the same issues as other houses of a similar age. I am rarely shocked at anything a home inspector finds since I’ve seen it all before. I personally think there are only a few times to walk away from a house after the home inspection: When the sum of it’s major immediate needs are just too much for you to handle financially or if there is something found such as structural damage that can make the house harder to sell when you want to part with it. I would not worry about the usual 20-30 minor items that any inspector will surely find on any house.
  3. I’m only going to be in town for 3 years, would you rent of buy if you were me?” For 3 years or more, I would buy. You should be able to net enough from the sale to cover selling it and your own closing costs. I would look for a house that will not need anything major like a roof or HVAC units replaced because that could wipe out any gain. For 2 years or less, I would definitely just rent.
  4. Would you move to a town surrounding Lexington to save money if you were me?” I usually tell people to live in whatever town their lives are in. If you work in Lexington and your social life is in Lexington, then you need to stay in Lexington. My first house was in Winchester. My business and all my friends were in Lexington. I felt like I lived on I-64 since I spent most of my time driving between both places. You won’t really save any money doing this even if you buy a cheaper house. Trust me. What you spend extra on gas, tires, extra oil changes and depreciation on your car costs more than you’d save by living in a cheaper town.
  5. I can’t find a house in my price range, would you buy a townhouse or condo if you were me?” The condo/townhouse market has generally been about 10% of the whole residential real estate market. That means that only 1 out of 10 buyers will consider purchasing your place when it is your turn to sell. I usually tell people to buy a condo or townhouse if that is really what they want. It needs to be mostly about your lifestyle. If you want a low maintenance lifestyle, then it is a good choice. I also suggest getting a condo or townhouse for buyers with a super low budget. If your choice is continue renting, buy a worn out house that needs everything in a sketchy part of town, or buy a decent condo/townhouse in a decent neighborhood…..then buy a condo or townhouse. I have sold several to first time buyers with super low budgets. It was a great way for them to start building equity verses waiting until they could afford more.

The neighborhood that influenced 12 year old me

When I was a kid, I had a paper route. It was everyday after school and Sunday mornings. Other than about 3 houses in my blue collar neighborhood, my route was in a neighboring upscale neighborhood called Inverness.

It was during this time that I started noticing differences between neighborhoods, lots, houses, and everything that makes me The LEXpert today.

I got bullied a lot as a kid. I didn’t really like many of the kids in my own neighborhood. This was back in the days before the internet and cell phones so kids went outside. Even people with cable TV only had like 12 channels, 10 really since one was the weather and another just scrolled what was on the other channels. I remember always dreading delivering papers to the 3-4 houses in my neighborhood. Once I got those done and Inverness was in sight, I always felt relieved and would take a deep breath.

Inverness was a very peaceful and calm neighborhood. It had maybe 50 houses in it? All the lots were very large. There were no street lights or side walks. Most of the houses were built in the late 60s and 1970s. It is very much like Greenbrier in Lexington but it did not have a golf course. I loved this neighborhood and always wanted to live here. I eventually ended up living in a 1980s house in Greenbrier, which I now see was the fruition of this desire.

The people that lived in Inverness were mostly middle aged since you often have to work many years to be able to afford such nice houses. They were all very polite to me. I got to know several of them. Many knew I was into houses and neighborhoods and would let me see inside their homes. It wasn’t until last week that I realized the impact this neighborhood had on my whole life. I was early for a showing that wasn’t too far from this area so I thought I would drive around for old times sake.

I started to remember the people, their homes and my thoughts as I would pedal my bicycle through my route, with my bag full of newspapers getting lighter with each one I delivered.

There was one woman who wanted me to leave the paper in a small tin garbage pail by her back door. Once or twice a week, I would open the pail and there would be a bag with a few cookies in it. Another resident had a new 280ZX that I drooled over. I saw my first Audi 5000 with the then new flush windows. There was one contemporary house owned by some big-wig in his political party that I absolutely loved. I became fairly close to one older couple who wanted to move to Florida. I told them all about the community where my Grandparents lived and arranged for my Grandparents to meet them and give them a tour of the area……probably the first realtor like thing I’d ever do.

I would privately critique each house in the neighborhood. My clients will probably laugh when they hear that I would say much of the same things they have heard me say like:

“That’s going to be a difficult driveway to get out of in the winter.”

The columns on the front porch are too far apart and don’t really match the style of the house.”

“This house looks like it was designed on a napkin by somebody who just won the lottery while meeting with their builder at Waffle House.”

“This house is right by the only entrance and exit to this neighborhood and that means EVERYBODY driving in and out of here has to pass your house each time.”

I don’t recall when or why I quit doing this paper route, probably when we moved to Lexington. It sure was a special and influential part of my life.