Your home: Only two months left until the rate hike

With the Federal Open Market Committee scheduled to meet on Sept. 16 and 17, they seem to be poised to announce an increase in the federal funds rate. This would be the first interest rate increase by the Fed in nine years. An increase has been a long time coming. It feels like the real estate community has been anticipating an increase for years now. Not because of any facts that support an increase. Simply because we all could not believe that rates could stay so low for so long. But they have. Until now.

At the June meeting, the committee confirmed that they are on track to raise rates based on the improving economy. Janet Yellen, the Federal Reserve Chair, is maintaining her mysterious position as it pertains to when exactly rates will increase. “It would be wrong if we were to provide you a road map,” Yellen said following the June meeting.

I was curious what the word on the street was in the lending world, so I had a conversation with Mike Miles of Fountain Mortgage here in Prairie Village. I asked Mike if his sources were telling him that rates are going up this year. He said, “It is well known that the Fed will raise rates in 2015. Once the increase is announced, the bump in rates that we feel could be smaller or larger depending upon how individuals and institutions respond to the news and to what degree they react.”

We discussed Greece and other international turmoil and if he felt that could delay an increase in rates. “I would choose to base my decisions on information from domestic sources. Waiting to see if economic turmoil overseas could have an effect on a rate increase is a huge risk.”

So let’s back into this for a minute. If rates are going to increase in mid-September and here it is mid-July, then we only have two more months of historically low interest rates. That is not much time. With the average real estate transaction taking approximately 45 days from contract to closing day, there is not much time to find a home first.

And what if you need to sell your current home first? You have even less time. If you need to sell before you buy, you are on borrowed time at this point. Not only might you have to pay a higher interest rate when you turn around and purchase a home, you may also have the size of your buyer pool affected by an increase in interest rates. Historically when rates increase, it can cause a stall in the market. Some buyers, who are currently renting, may choose to stay in their rental as opposed to purchasing a home. This stall cannot only have an affect on the size of your buyer pool, it can also cause downward pressure on pricing. Talk about a one-two punch. Not only might you have to pay a higher interest rate on your purchase, but you may have to sell for less as well.

When asked what interest rates might look like in the foreseeable future, Miles had this to share from the Mortgage Bankers Association. Here is their forecast for the rest of 2015 and the first half of 2016.

30 year fixed mortgages
Q3 in 2015 = 4.1%
Q4 in 2015 = 4.4%
Q1 in 2016 = 4.6%
Q2 in 2016 = 4.8%

The moral of the story is that whether you are considering a home purchase in the near future or perhaps a refinance, now is the time to act. Based on the MBA’s predictions, almost 10 percent of your buying power could be eroded by the second quarter of 2016. Don’t wait. Act now.

Your home: The 2015 housing forecast

2015

Happy New Year to you all!

I am really excited about the real estate market to come in 2015. And for numerous reasons. Of course, when I say housing forecast I must provide the proviso that I don’t have a crystal ball. My forecast is based on current local trends. However, trends can shift. The real estate market is like the stock market. It’s just not as quick to tell you what it is thinking. If investors in the stock market are fearful, the market can drop 300 points in one day. If the real estate market is getting fearful, it could take months for the trends to tell the story.

So what story is the market telling for 2015 you ask?

Here are the high points:

1. Interest rates. As I shared in last week’s columns, historically low interest rates are on their way out. As soon as summer to be more specific. The forecast of higher interest rates could cause the first quarter to heat up early. Honestly, that is my hope. I would like to see buyers today capitalize on the best housing affordability that the market will offer for many years to come. Additionally, if rates spike much, we could see buyers lowering their price ranges to keep their expenses in line or possibly dropping out of the home buying market altogether. Interest rates will undoubtedly have the biggest impact on the real estate market this year.

2. Inventory. The number of homes for sale is on the rise and should continue to increase into the summer months. I welcome this increase. Buyers out there need more options and sellers out there need a reality check on home values. I have seen our market get a little too cocky when it comes to pricing and now the buyers are responding. They are responding by not writing offers on homes. Today’s buyer is not willing to overpay for a home just two years out of a recession. That message is clear. And when interest rates increase, the absorption rate (the number of homes selling each month) will slow down, thus causing an increase in inventory. We may be back in a balanced market (six months of inventory) before you know it. A balanced market is neither a buyer’s market nor a seller’s market. It is a level playing field.

3. Ready for HGTV. As inventory rises, a buyer finds himself with more options. More options for the buyer means higher expectations when it comes to condition. A common complaint out there from buyers and their agents is that the current inventory is not that great. The homes that are in great condition and priced right are currently under contract. And then you have the rest. Of course, the holiday season does have some effect on the market. But it is a new year now. And this year looks to be a price war and a beauty contest at the same time.

4. Pricing. Most predictions are that we should see slow and steady appreciation for the foreseeable future, maybe 2-4 percent each year. Homes that received multiple offers in 2013 and 2014 may only see one offer in 2015 due to increased inventory. We are already seeing that this is the case. I currently have homes listed at prices that would have received multiple offers in June, yet have not received one offer in December. We WILL get them sold. I have no concern of that. I share this with you to show that in less than six months, the perception of value to the buyer has shifted. And with it, prices in most areas have dropped. The number of price adjustments that I am seeing in MLS has increased significantly. At the end of the day, you must price your home at or slightly below market value to accomplish an offer. The tricky part is knowing what fair market value is, and where it is headed. Pricing slightly below market value allows you to stay ahead of the market as inventory increases. You don’t want to chase the market after having over-priced your home. That is a hard race to win.

Photo Credit:

Glas. Alleen.

Martin Fisch

Your home: Pending home sales boom in May!

Sold Sign

The National Association of Realtors just recently announced that the pending home sales index saw a significant increase of 6.1 percent in May compared to the previous month. NAR attributes the notable increase to low interest rates and the availability of new inventory. Whatever the cause, the pace of the national market is moving at a very favorable pace.

NAR chief economist Lawrence Yun expects improving home sales in the second half of the year. “Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation,” he said. “However, second-half sales growth won’t be enough to compensate for the sluggish first quarter and will likely fall below last year’s total.”

Our Kansas City market is seeing even stronger gains in the pending homes sales arena. According to Heartland MLS, our pending home sales increased almost 10 percent in the month of May. Yes, the May market was a fun one. And honestly, the June market was a blast too.

So what about July?

So far, July has pretty much followed our normal seasonal pattern. Due to the Fourth of July holiday, the month started out at a slower pace. We did not see very many homes go under contract, nor did we see much new inventory. But just yesterday, we saw 11 new listings come on in Prairie Village alone. That is three times what we typically see. If that trend continues, we will probably have some happy buyers because their options will improve substantially. Conversely, the sellers out there who have had very little competition up until now may suffer a rude awakening.

Seasonally in KC, we see a slow but steady increase in inventory from July through the end of the year. If this seasonal pattern holds true this year, then time is of the essence for you sellers out there. Every new listing on the market increases our supply and unless the demand increases as well (which seasonally it usually does not), our values will stabilize for the year and in some years have slipped a little going into the winter months.

As the new school year approaches quickly, we may see a resurgence of homes going under contract as families try to make a last minute purchase before the school year starts. So take advantage of this time, Mr. and Mrs. Seller. Get your home on the market!

In some areas of town we are still seeing historically low inventory, and yes, interest rates are as low as 4.125 percent on a 30 year mortgage. Most homeowners are primed for the perfect “move up” scenario. If you sell now while your competition is minimal, you are almost guaranteed to get top market value for your home and have the benefit of an unbelievably low interest rate on your purchase.

Rates will not and cannot stay this low forever. As the unemployment rate continues to drop and the country continues to add jobs, the Fed will most certainly continue tapering its purchases of mortgage backed securities. The “taper” as it is famously known has resulted in higher interest rates each time the Fed has announced a reduction in its purchases. Don’t allow the taper to taper your buying power by paying higher interest rates on a home loan.

Remember, every percent of increase in the interest rate will reduce your buying power by 10 percent. If you are pre-approved to purchase a $250,000 home based on an affordable mortgage payment and rates increase by only 1 percent, to keep the payment at that same amount you could only purchase a $225,000 home. Ten percent of the value of your future home can make a huge difference in how that future home improves your quality of life.

Photo Credit: Mark Moz on Flickr.com

Girls in Hoodies

Your home: Say goodbye to historically low interest rates

Interest Rates - scrabbleFinally, after much anticipation, the Fed announced last Wednesday that they would begin tapering the governments purchases of treasuries and mortgage backed securities. And when they say taper, they mean a slight taper. The purchases are set to go from $85 billion to $75 billion per month. Although it is not a huge change, the stock market clearly interpreted the move as a vote of confidence for the US economy and ended on a record high.

So what does this mean to the consumer?

Chairman (for a few more days) Ben Bernanke also shared during his announcement Wednesday that rates would not go up until 2015. That is almost comical. Especially considering that rates jumped up 3/4 percent right before the announcement. Almost as if the markets were anticipating the taper. Now will we see a huge jump in rates in 2014? Probably not. But will rates go up? Most experts say “yes.”

I have shared before that on average for every 1 percent that rates increase, a buyer will lose 10 percent of his or her buying power. So let’s not underestimate even a 3/4 point jump. Every little bit counts. Therefore, if a home purchase is on your calendar for 2014, perhaps you should start sooner than you think. You will have less buyer competition in January than in April.

On a side note, housing starts in November were up 22.7 percent — much higher than expected. It was also the highest level for starts in more than five years. It is great to see new construction moving along at such a pace. Housing starts are typically one of the last signs of a true housing recovery.

For you sellers out there, fast-paced new construction means two things: more competition and a higher standard of updates. As these new homes are popping up in all directions, buyers will have more options. Some buyers will choose new over resale. And some may still choose resale but will be exposed to all of the newest trends in decor and finish work. New construction always sets the bar for the resale market. Granite counter tops were unheard of in the resale market until they became commonplace in the new home communities. So resale sellers beware. Your buyer pool might be reduced by this new competition or at least raise the bar for housing updates and what today’s buyer will come to expect.

Overall, I am very encouraged by our market conditions right now. 2014 looks to be an exciting year in real estate and we are looking forward to sharing more information with you in the new year. As always, thank you for supporting the PV Post and our column. If you have any topics that you would like to see discussed in 2014, please email me.

The Taylor-Made Team wishes you all a very Happy New Year!

Photo Credit: LendingMemo on Flickr.com

Your Home: When is the best time to sell a home?

Question: When is the best time to sell my home?

Oh, how I wish that I had a crystal ball to predict the real estate market. I would certainly be a wealthy man — and quite popular, I might add. Unfortunately, no such crystal ball exists. And I say that all of the time. People always ask me, “What do you think the market will be like in the fall?” or, “If we wait a year, will be able to sell for more?”

My typical response is that I don’t have the power to predict the real estate future. Sure, I can acknowledge current trends and speak to seasonal trends of the past, but as we have learned through the shift in the market, values are a moving target.

So let’s talk about timing. The first contributing factor to affect the timing of selling a home is seasonality. Here in beautiful Kansas City, we have a pretty predictable pattern when it comes to home sales. January starts the year out timidly. Typically the homes sales increase by about 20-25 percent from January to February. Then maybe another 15 percent from February to March. As most of you would predict, April and May are really strong months. This is the heart of the spring market. Flowers are blooming and home buyers are hitting the streets. At the same time, home sellers are doing some spring cleaning and listing their homes. Over the last six years, the inventory coming on in the spring has far exceeded the number of active buyers. As a result, the market stalled and we would have a short spring season.

Not this year. This year the inventory cannot keep up. Homes that are priced right and in great condition are being gobbled up. The average days on market in the Prairie Village area right now is 67 days. This same month last year it was 92 days. And the supply of homes is down over 38 percent Unbelievable! The number of homes that sold in March is up 32 percent compared to 2012. Sounds like a good time to sell to me.

The next factor when it comes to timing is affordability. I recently shared with you that affordability at the end of 2012 was at 12.9 percent (an all-time low). Several things affect affordability, but let’s focus on one for this column: interest rates.

Some sellers don’t realize the impact that interest rates have on their chances of selling. Let me give you an example. When we consult our buyer clients, we teach them that for every 1 percent interest rates go up, a buyer will lose on average 10 percent of their buying power. So if a buyer’s max purchase price at 3 percent was 250K, then at 4 percent their max purchase price would be 225K. So if your home is listed at 250K, the market just took away a potential buyer.

Don’t underestimate the power of interest rates. Additionally, please don’t fool yourself into believing that the investors behind our mortgage industry are going to allow rates to stay so low. After all, they are in business to make money. Last week we talked about the strong signs of our housing recovery. These signs are not a secret. Rates will go up. Mark my words. Please don’t wait it out.

To tie it up with a pretty little bow, it is always a great time to sell a home that is priced competitively in relation to its competition and its condition. The only real estate market that we interpret with 100 percent accuracy is the market of today.