What’s a first time buyer to do today?

You’ve probably read all the articles saying how much more per month the average house payment is today with the increase in interest rates. I have too.

While I don’t dispute their findings, I don’t really find them helpful. Yes, had somebody bought the same house sooner, they could have had a cheaper mortgage payment. Those rates don’t exist anymore. Why not tell first time buyers what they should do rather than making them focus on the wrong thing.

Let me tell you the biggest way these higher rates are costing you. If you are sitting on the sidelines, holding out for a year or so before re-entering the market, you’re paying a steep price in a lot of ways:

  1. You are not building equity.
  2. You are not getting the tax deductions homeowners get.
  3. You are not making money from the rising value of your home.
  4. You are deferring the date when you will have whatever home you own paid off.

All of that seems to me to be much more costly than paying a few hundred extra bucks a month to own a home. If you don’t have the extra money that today’s mortgage would be, I suggest buying a cheaper house. Buy what you can afford. Owning any home is a better investment than renting.

I have always said the best time to buy a house was yesterday and that the second best time is today. That is because homeownership is the best way to create wealth for the average person. It’s more than just owning where you live. It is about investing in yourself. You do that by leveraging time. The sooner you start, the sooner the benefits begin and the quicker they compound.

Things to remember in a slowing market

Yea, the market is slowing down. Everybody knows that. No big deal. That crazy roller coaster market couldn’t last forever and I’m sort of glad really. It will still be a good market for years to come, but it will seem like a let down compared to the last couple of years.

Here are some things to remember as you process the Doom and Gloom news cycle real estate is in at the moment.

  1. The “Average Days on Market” will be going up. Don’t be alarmed. Usually the way that works is that the worst houses that nobody wants stay on the market longer and bring down that average. Also, keep in mind that average is usually for all residential property types in all price ranges. If you have a $350k house, do you really care about what the market is like for a million dollar home? Or a townhouse at any price?
  2. The “Average Sale Price” is another one that can confuse people. An average is just that-it’s an average of all sales. If house sales over $500k slow down a lot, it will drag down the average sale price. This does NOT mean your house is worth less when you read silly headlines that say stuff like “The average sale price dropped by 2% last month.” When rates got super low, I saw more houses selling for $1,000,000 or more than I have ever seen. Now that rates are much higher, I totally expect to see sales at that price point slow way down, bringing down the average sale price.
  3. Values may stay flat after going crazy for the past two years, but prices will still go up. I know this sounds crazy, but hear me out. Let’s say you bought a house a year ago for $400k and we have had 8% inflation since then. Your house needs to sell for $432k today for you to have effectively broken even. That’s because it takes 432,000 of today’s deflated dollars to equal 400,000 of dollars a year ago. In other words, the price of your house has to be higher even if it got zero percent appreciation just because the value of the dollar has eroded. (This is a whole other post, but one reason prices have risen so much over the past year is because we saw massive appreciation and massive inflation. If prices went up 15% and inflation was 8% of that, then that means the real appreciation was 7%.)

I started my career just as the Great Recession began. I saw most houses in our area drop in value by 15-20%. I know to a lot of people, this market seems scary. Trust me, it isn’t. All that’s going to happen is that we have a more balanced market. It will be a good, but not the greatest time in history, to be a seller. It will also be good to be a buyer because you will be able to get a house that should be a stable investment for your future.

Being a realtor isn’t about houses

You’d think being a realtor would mostly be about houses, but it is really about relationships.

One of the things I am the most proud of is how many of my clients have used me multiple times. I always look forward to working with them over and over again. Since I have become friends with most of my clients, it doesn’t even feel like work.

Part of this relationship can sometimes be about keeping secrets. People often move when their life changes. I am often the first to know about a marriage proposal, job promotion, pregnancy. I am also sometimes the first to know about the less fun life events like a job loss, divorce and even a death.

I get lots of texts or calls about renovations. I’ve had people standing in the flooring isle at Lowe’s and asking me which floor will add the most value to their home. If you’re wondering, I usually tell people that if you think you’ll be in your house for more than 5 years, get whatever you want since styles will change and it won’t be brand new by then. If you think you might be there for less than 5 years, lets go with something buyers will like.

I get asked for contractor referrals a lot. This has gotten harder and harder to do since nobody seems to want to work any more. I recently had somebody who seemed promising at first and turned out to be a total loser. I am thankful that I have found a great handyman who was actually referred to me from a client. That doesn’t happen often! My HVAC person has faithfully been serving my clients and me for 13 years. Everybody loves him.

I get asked “What’s my house worth?” Sometimes people want to move. Sometimes they are considering refinancing and need to first know a number to see if it is worth it. Sometimes people just want to know how much equity they have in their house. Occasionally people have me over just to see their home after a renovation. It is always nice to get to see them, their home and have a cup of coffee with them.

Being a realtor is really a lifestyle. Yeah, its a business. It’s a job. But it is really about getting to know people and helping them any time they need something. I couldn’t imagine doing anything else.

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!