Sarah Jarvis Team at One South Realty

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Financing

So When Will Interest Rates Rise (and does it matter if they do)?

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For what it is worth, the 2017 real estate season was a blur. And we began 2017 on the heels of what we thought was a blur of a season in 2016. Ditto 2015, and 2014 before that.

All About 2017

For each of the past several years, the market has pushed itself upwards at ever increasing rates in terms of both pricing and sales volume.

So what did we see in 2017?

  • we saw prices rise in most markets rather substantially
  • we saw transactional volume climb
  • we saw inventory continue to be at historic lows
  • we saw new housing starts continue to lag
  • we saw multiple offers and bidding wars in increasing numbers

But do you know what we didn’t see? We did not see interest rates climb.

As a matter of a fact, they actually fell.

Wait, what?!?

Rates Remained in the 3’s for Much of 2017

30 year mortgage pricing actually declined by about 1/2 point from January through November.

Yes, rates DECLINED over the course of 2017.

Despite Janet Yellen’s imminent departure as Chair of the Federal Reserve, the North Korean nuclear threat, BREXIT, Russian election meddling, pending changes in the tax code, low unemployment and a booming stock market, 30 year mortgage pricing actually declined by about 1/2 point from January through November.

Go figure.

See the chart below to see how 30 year mortgage rates tracked over the past 5 years.

You can see the trend — and (at least for now) it isn’t up.

So When Will They Go Up?

inflation (or the expectation of it) is what drives pricing for the long term interest rates.

Good question and no one really knows — and that includes the Federal Reserve.

Despite the fact that the US economy is on increasingly solid footing with low unemployment and a robust stock market, there is little inflation on the horizon. And for those who maybe slept through their economic classes, inflation (or the expectation of it) is what drives pricing for the long term interest rates.

The chart below shows the inflation expectation in the market and as you can see, it is not on an upward trajectory.

So until the numbers show inflation creeping in, interest rates will stay well below historical norms.

But more on that in a moment.

What Happens When Rates Rise?

As a matter of a fact, rising rates might mean housing prices rise, too.

So what will happen when rates do rise? Will rising rates stem the tide of price increases? Or will home prices actually begin to decline? Or even worse, will it be 2008 all over again?

No, not likely at all. As a matter of a fact, rising rates might mean housing prices rise, too.

WHAT?!?

Inflation generally occurs when two things happen — the economy is growing AND wages are rising. Right now, despite an economy that is doing fairly well, wages are stagnant, and have been so for some time.

So if the market begins to experience inflation, it means that wages are likely rising, too, and the economy is really starting to heat up. So any negative impact rising rates will be offset by rising wages. Stated differently, the home buying public will not only have the income necessary to cover the rising cost of the mortgage, they are likely to have income in excess of what is required and buy bigger, better and newer housing.

Take a look at the chart below to see how much we are spending on our housing and you can see how much more (in theory) we could be spending on housing before it becomes an issue.

Does that make you feel any better?

Remember the ARM?

why would you pay to have a mortgage rate for 30 years when you are only going to be in the home for a fraction of the time?

Another very important factor is the type of mortgage buyers will choose.

When 30 year mortgage rates rise, buyers tend to migrate into the adjustable rate mortgage products like the 7/23, 3/1, 5/1 and 7/1 ARM’s. ARM products (aka Adjustable Rate Mortgages) offer a mortgage with a fixed rate for a shorter time frame (typically 3, 5 or 7 years) and then begin to adjust based on a predetermined index.

See the chart below to compare. Would you take a 20-25% lower mortgage payment for 5 years of mortgage certainty? Many would, especially if they expect to stay in the home for 5 to 10 years. Think of it this way — why would you pay to have a mortgage rate for 30 years when you are only going to be in the home for a fraction of the time?

In more normal interest rate markets, ARM products can be anywhere from 1 to 3 rate points better, and that is a big enough spread to make people change from the 30 year fixed rate to one of the hybrid products.

So when rates start to climb into the 6’s and 7’s, you can rest assured that many buyers will elect ARM’s that will have start rates in the 4’s and 5’s — keeping affordability similar to where it is now.

Don’t Worry About Rates

so interest rates can effectively double before buyers will change behavior.

Am I saying that prices will continue to climb unabated? No, I am not. Any number of factors could cause an adjustment — but interest rates rising into the 6’s won’t be the cause. As a matter of a fact, most experts feel that house pricing is immune to interest rates even into the middle 7’s — so interest rates can nearly double before buyers will change behavior.

Take a look below at interest rates over the past 50 years to get a sense of how rare this interest rate environment actually is. For those who entered the housing market after the 2008 crash, then all you know is rates below 5%. But for those who have owned housing as far back as the 1980’s or 1990’s, today’s rates seem laughably low.

So if you want to find something to worry about, keep you eye on the economy, tax reform, housing inventory, construction starts, and rent levels (ok, and North Korea) and stop worrying about rising interest rates changing housing’s trajectory.

 

Its the Agent’s Job

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As an agent, I have a lot of jobs – driving, opening doors, research, scheduling, negotiation, problem solving, advising, management, coordinating, supporting, talking – and on most days, I usually do a little bit of each.

It is part of the job.

We Do a Lot of Things

Insights color wheel
The Insights model is one of the most helpful methods of identifying how each person wants to be related to.

At the end of the day, an agent’s job is not really definable, as we do so many different things. Each transaction is unique, as are the buyers, sellers, and other service providers that play a part in a property changing hands. What each individual transaction requires is really what defines the role(s) I play.


But all of things I can do for you doesn’t matter one iota if I can’t relate.

Interpersonal Relations

In its simplest form, people tend to be either introverted or extraverted and people tend to either analyze or feel their way through life.

Call it Meyers Briggs, DISC, Insights, or any of the other personality profiling techniques out there, but each of us has a preference for how we interact with the people, information, and world around us. And thus, we all make decisions differently.

Help Me Help You

It is also my job to recognize how you want to receive and interact with the world around you.

  • If you’re one of those people that likes to talk through all of the possibilities — and then talk through them again — then let’s chat until you feel comfortable.
  • If you like to process silently and then sleep on it, and then analyze some more, then by all means, let’s do that.
  • If you want me to do the research, put it summary form, and then run a series of ‘what-if’s then you tell me what you want to see and I will do it.
  • And if you just need some time to reflect on how the decision will impact you and the ones you care about, then I will do my best to give you the space to make the decision that feels right.

You see, I need to move to the space where you feel the most comfortable. When I do my job, your stress level decreases and the confidence you feel that you made the best decision possible skyrockets.

And, yes, it is my job.

So You Bought in 2007 …

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bubble popingSo you bought a home in 2007, eh?

Don’t worry as you are not alone. Many others bought in at or near the top of the market, just like you did, only to watch the value crumble by anywhere from 20% to as much as 50% in only a few short years.

No one was immune.

Pricing is Back — Mostly

But we are here to deliver good news — the time to sell may be now.

One of the takeaways from the post crash recovery is that each sub-market in the Richmond area has recovered differently.

Shifting demographics, shifting preferences, and the ability to add new inventory have all dramatically impacted the speed of the recovery in each of the regions of Richmond.

Take a look at below — the average ‘per foot’ price broken down by county — and you will a trend that shows the market has largely recovered in most of the areas of Richmond.

The Loss of Equity

most underwater homeowners simply stayed put and waited it out.

Just because property values drop, the money owed on the properties does not. So when the market shifted and values fell, many owners found the mortgage debt on their property to be higher than the actual values.

When the debt is greater than the value on a home that is sold, an owner has to make up the difference — in cash — to pay off the mortgage. And in the darkest economic days post-crash, few were willing to part with any of their savings. What happened was that most underwater homeowners simply stayed put and waited it out.

But now that pricing has retuned (or seems to be close to 2008 levels), owners can walk away with cash when they sell — and use it to move to the next home.

The Mortgage Market Shift

people tended to stay put in lieu of sinking cash into large down payments.

When equity took a nose dive, the loan products that offered higher leverage (i.e. lower down payments) also went away. Very few 5% down payment loans were available during the collapse and thus, even if you could sell your home, you needed a tremendous amount of cash to be able to buy the next one.

And again, people tended to stay put in lieu of sinking cash into large down payments.

As 2008 – 2011 gets further and further into the rearview mirror, more and more low down payment loans are becoming available again. And while the merits of buying a home with 5% down probably deserves an entire post on its own, it does tend to make housing within reach of the first time buyer — and that is not all bad.

Pricing is Rising

remember that the pricing of the housing you are looking to buy is also rising; and in many cases at a faster rate.

So the takeaway is this — if you bought in 2008 and have been holding out until you could get out, remember that the pricing of the housing you are looking to buy is also rising; and in many cases at a faster rate. Stated differently, if you bought a newer home in the far suburbs in 2007 and you are looking to downsize back into the City, do it now. The pricing in the city is rising faster than in the ‘burbs and everyday that you wait just makes the next home that much more expensive.

In almost every case, selling a home means buying another one. Make sure you are not holding onto a home that is appreciating at 2% per year to buy one appreciating at 5% per year. The longer you do, the further you fall behind.

Summary

A good agent can help you determine not only the price of your home, but also give you a sense of how the market conditions of where you want to go. The best way to make back your money is by owning the asset that is appreciating the fastest.

What is Going On With Inventory?!?

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So in case you haven’t heard, inventory is down.

Like WAAAAY down.
Like really WAAAAAY down.
Like never before this low in the history of housing low.

I mean low.

And while we can sit here with our clients and lament the conditions (which we do — trust me), I thought it might be interesting to ask why this shift has taken place.

The Urban Inventory Crisis

The rarity of this condition is up there with seeing Bigfoot riding a unicorn while talking to Elvis.

To give you a sense of how much the market has changed, take a look at the inventory chart below.

The chart shows the inventory of available listings in the City of Richmond.

Pretty scary, huh?

It can be argued that the level of inventory in some of the City’s sub-markets (Fan/Museum District/Byrd Park) has dropped 75 to 90% from where it was a few years ago. The rarity of this condition is up there with seeing Bigfoot riding a unicorn while talking to Elvis.

Think of it this way: You’re standing in the coffee aisle of a grocery store with two others and there are 10 total bags of coffee. No real pressure, right? Now imagine there are 10 of you and only 1 bag and you haven’t had your morning cup yet. Yeah, there is going to be a brawl. [ If you would like to learn more about how to best buy housing in this market, check out our article on Winning in the Spring Market here. ]

The real estate market feels a lot like that.

Renters Saved the City

All of the urban neighborhoods have momentum like I’ve never seen before.

I am a lifelong Richmonder and I have never seen the city in better overall condition. Been on Broad Street lately? The transformation is amazing. Manchester? Ditto. Scotts Addition? Unreal. Main and Cary Streets? Battery Park? Brookland Park? Fulton Hill? Church Hill? Woodland Heights? They are all rolling right now.

All of the urban neighborhoods have momentum like I’ve never seen before.

The bevy of apartments that were developed in Shockoe, Manchester, Jackson Ward, and the other neighborhoods of Downtown fundamentally changed Richmond by introducing a base of residents to neighborhoods that had not existed before. The vacant warehouses came alive, underutilized office spaces were converted to living spaces and vacant parking lots were built upon. In the past five years, some estimate 10,000 new apartment units have come on line — with many many more on the way.

This net new residential base then spawned new restaurants, cafes, startups, pop ups, and other retail that had previously not existed. Furthermore, the development of new creative offices and shared work spaces allowed suburban businesses to relocate into urban properties that better suited them in both style and location. Being in city the became an ‘it’ thing and the new urbanite didn’t want to drive to Innsbrook every day. Live, play, work became a reality and with it, more and more who craved the lifestyle.

The urban core is no longer a collection of vacant warehouses, an ever-changing club scene, and surface parking lots. It is now a vibrant community supported by a thriving and independent neighborhood economy.

And with it, a growing population that now needs housing.

The chart below supports the assertion:

The Richmond Public School System is on the Rise

and, most importantly, the overall Richmond region seems to recognize the need to help the schools, rather than ignore them.

Have you taken a look at the RPS lately? It would surprise you quite a bit.

The older generation of Richmond has a totally different relationship with the school system than the next generation does. For decades, city schools faced a host of issues that the county schools never could have imagined dealing with. Without getting too deep into the uncomfortable history of Richmond’s slow decline beginning in the 1970’s, suffice it to say that the crushing poverty that existed within the city limits manifested itself in a public school system that was overwhelmed by the issues it faced.

Fast forward to today and the budgets are fuller, City Hall is less dysfunctional, poverty is less prevalent and, most importantly, the overall Richmond region seems to recognize the need to help the schools rather than ignore them.

Is the RPS now without issues? Hardly. But I truly believe that each and every day, the RPS improves its position, allowing the population the City has attracted to stay longer and support the rapidly growing economy.

The 4% Mortgage

It has been nearly 20 years since 30 year mortgage rates were consistently above 7%.

Do you remember 7% interest rates?
5%?
4.5%?

It has been nearly 20 years since 30 year mortgage rates were consistently above 7%.

Take a look at this chart.

If you are a homeowner with a mortgage rate above 5%, then you have been asleep at the wheel. The mortgage environment has never been better and if you have not refinanced into a stupidly low mortgage rate, then you need to run, not walk, to your local mortgage representative and refinance.

The large majority of homeowners have secured long term financing that is as favorable as it has ever been. And when you have a 3.5% interest rate locked in for 30 years and your equity is rising daily, buying a new home doesn’t feel like a great decision.

I Hate Applebee’s

Empty nesters crave the walkable lifestyle and inherent amenities that urban living provides

Hate is a strong word, but given the choice of where to eat, I would take just about any individually owned restaurant in the city over a chain on Midlothian Turnpike any day of the week.

For years, the empty-nester population, when faced with the downsizing decision, typically elected to purchase a one level/maintenance free home somewhere near where they had lived for the last 20 years. Most planned neighborhoods included a section of ‘villas’ that targeted the 55+ crowd — and for years, they sold incredibly well.

But as the City has reinvented itself, many suburbanites who would have previously purchased the retirement villa in Glen Allen or Midlothian are instead electing to call the city their new home. They crave the walkable lifestyle and inherent amenities that urban living provides and being close to Carytown, the River, museums, and restaurants seems far more appealing than being close to Applebee’s, Outback, and another dying strip mall.

Damn You, HGTV

Admit it, you love to watch.

Rehab Addict, Fixer-Upper, Property Brothers — all of the shows on HGTV dealing with renovation have helped us fall in love with the idea of finding the diamond in the rough and making it our own.

These shows, along with incentives like tax abatement and Historic Tax Credits, have spawned a new generation of urban homebuilder; the professional renovator. These individuals and teams who buy, renovate, and sell have also helped raise the profiles of the long ignored neighborhoods of Richmond which has in turn, helped increase demand in the city. [ And if you want to read our article about the renovation community, you can find it here ]

Has it helped bring life back to some formerly blighted neighborhoods? Of course.
Has it created a set of newly renovated houses? A few, but not enough.
But has it also created even more pressure on an already stressed supply? Again, yes it has.

Renovation alone will not solve the problem.

Summary

Unlike Chesterfield, Henrico, or Hanover, the City of Richmond has no ability to build its way out of the problem

So …

— apartment dwellers want to stay
— current owners don’t want to leave
— empty nesters want to come back in

… and thus we find ourselves in the environment we are in with home prices shooting up, multiple bids on everything worth buying, and the existing population staying longer with better schools, sub 4% mortgages, and their equity growing at incredible rates.

And I don’t see it changing.

Unlike Chesterfield, Henrico, or Hanover, the City of Richmond has no ability to build its way out of the problem. There are not thousands of acres of land available for development of planned neighborhoods 3 minutes from Carytown. It would be great if we could build another Ginter Park right next to Ginter Park, but, obviously, it cannot be done.

The supply is fixed and as long as the demand continues to increase, you will see the same conditions exist and exist for the foreseeable future. So as long as the city continues to improve, the pressure on the existing housing will become even more intense.

If you are thinking about coming, you should get here now. The trends that are driving the appeal of the city are not about to change and each day you wait means higher pricing and fewer choices.

Opportunity in the Condo Market

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'If you were in our shoes, what would you do?' is one of my favorite questions...’

It was the latter part of 2011 when we got a call from a couple living in New Hampshire. They had a child who was coming to Richmond to attend VCU and they wanted to purchase a small home or condo (no maintenance is a good thing for a college student).

They were betting that the market was at its bottom (which it probably was) and they were looking for upside.

One of the questions they was asked was, ‘If you were in our shoes, what would you do?’

It is one of my favorite questions.

What Drives the Market?

I have a personal theory that, as an agent, my primary job is to help clients understand the factors that drive the market. Clients who understand why values are what they are make confident and empowered decisions.

Summit Lofts in Scotts Addition
The Summit Lofts in Scotts Addition is now tucked in amongst cafes, several breweries, and new retail spaces. All of the development ceased in the years immediately following the crash and began again in 2013 and 2014.

Clients who understand why values are what they are make confident and empowered decisions.

Larger market conditions — interest rates, employment, taxes — are all largely held constant and are beyond anyone’s control. Market values in the aggregate ebb and flow due to factors well beyond any individual’s ability to impact them. But if you make a good decision about your specific property, when the market rises, the value of your home rises more quickly. Conversely, when the overall market falls, your home’s value does not fall as quickly.

By focusing on hyper-local market conditions like nearby development, incentives, supply, and demand we help our clients acquire properties that are more likely to outperform the market, regardless of the direction it is moving.

All of these factors are easily recognizable to the trained eye. And while they can vary wildly from neighborhood to neighborhood and project to project, the key is understanding how these are likely to impact values moving forward.

Looking for Clues

Maybe it is our experience in project representation and development, but seeing upside in specific condo projects is relatively easy.

Keeping an eye on development, historic designation, the city’s Enterprise Zones, or zoning changes in a specific area is critical in spotting opportunity.

When you follow the development market, seeing areas poised for price spikes becomes second nature.

Furthermore, condominium values tend to fluctuate more than single family, largely due to the impact of mortgage financing. Mortgage financing is more impactful than any other factor in condo values.

So when you see a) a condo project who recently regained its ‘warrantability’ (which is the industry term meaning ‘available for conventional finance’) or b) a project in a district experiencing intense development, it is a great buying opportunity.

Case Study — The Summit Lofts

Temporary factors had depressed values in the project and, once removed, values were likely to rise more quickly than the market as a whole.

In the mid 2000’s, the partners at Monument Construction, bought a small warehouse and converted it into 14 loft-styled 2 bedroom condos. The units were a good size — roughly 1,300 to 1,400 SF — and were nicely appointed. When they sold initially, most sold in excess of $200,000.

The neighborhood, Scotts Addition, had just been named a ‘historic neighborhood’ by the Department of Historic Resources, meaning that many incentives were now available to developers that made projects far more feasible. The historic designation is the number one accelerant for new development and once an area becomes designated, it is in very short order that a transformation begins.

Then 2008 happened.

Prices fell substantially in the Summit Lofts as several units were foreclosed upon and others became rental properties.

The condo lending rules changed substantially in the years following 2008’s crash. When conventional mortgage financing is no longer available, alternative forms of financing are required that are far less attractive (i.e. — higher rates, shorter terms, higher down payments). This suppresses values.

The Summit Lofts values suffered from both a lack of conventional financing and the loss of development momentum in Scotts Addition — but the fact remained that it was a nice property with good floor plans, nice finishes, and a soon-to-be phenomenal location. In other words, temporary factors had depressed values int he project and, once removed, values were likely to rise more quickly than the market as a whole.

So when our clients were looking for a place for their son, we talked about Summit and why it was a good bet. The development momentum was beginning again and the mortgage financing rules were being relaxed — meaning Summit Lofts now qualified for conventional mortgages.

Our clients made a purchase in April of 2012 and held the property until their child graduated in the summer of 2015.

  • The condo was purchased for $143,000 in April of 2012 and sold for $169,000 in September of 2015. Its value increased by 18.2% (7.8% annually) during the time it was owned by our client. Not too shabby.
  • The condo market overall in Richmond had a median sales price of $175,000 in the second quarter of 2012 and a median sales price of $189,000 in the third quarter of 2015. The market rose 7.6% (3.2% annually) during the same time.

And as you can see, their return on their investment was nearly 250% better than the overall market.

Why? Because they understood why the pricing was lower than it should have been and why it was likely to rise more quickly than the rest of the market.

Summary

We can tell many more stories about how we have helped clients acquire properties with upside as well as helped them avoid properties whose fundamentals are poor and values are likely to stay depressed.

Condos can be tricky animals and you need to understand the additional factors that underpin their market. As city markets tend to shift more rapidly as well, understanding how incentives can help drive values is also critical in making good decisions.

When you can spot fundamental changes in the inputs that drive values (financing, incentives, nearby development), you can find opportunities to out-earn the market.

If you want to do a deep dive on condos, check out our Ultimate Guide to RVA Condos here…

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