Mortgage Lending

Back on the Market

February 1, 2019 By Rick Jarvis

Agent: Congratulations! You are under contract!

Client: Great! So we are done, right?

Agent: Not exactly. Anywhere from 10% to as high as 20% of contracts fall apart for one reason or another.

Client: Wait, what?!? There is as much as a 20% chance that the contract I have on (or for) my house will fall apart?!? How can I make any plans going forward with that much uncertainty?!?

Agent: Let’s talk about why.

The Back on Market Statistic in MLS

First, let’s talk about where we get the data.

The Multiple Listing Service tracks a lot of statistics –– one of which is called ‘BACK ON MARKET’ (or BOM).

BOM measures the number of homes whose status changes from ‘PENDING’ (meaning under contract) back to ‘ACTIVE’ (meaning ‘available for sale.’)

This is the home screen of MLS that shows agents a quick update of the day’s (or week’s) activities.

Computing the Failure Rate

A random sample of a week in middle January yielded the following results:

569 homes went PENDING
65 came BACK ON MARKET
65/569 = 11.4% contract failure rate

(A quick note –– a week later, the number of ’Back On Market’ properties, jumped to nearly 14% with 40 of 295 coming back to Active status from Pending –– so this metric will change week to week.)

Released and Temporarily Withdrawn

Now if you note the screenshot, you will see where RELEASED and TEMP(orarily) WITHDRAWN are also highlighted:

RELEASED –– meaning that the listing agent and owner have agreed to part ways.
TEMP WITHDRAWN –– meaning probably what you think, the home has been removed from the market for an unspecified period of time per the seller’s request.

Both of these status changes (66 Released + 38 Temp Withdrawn = 104) often come on the heels of a failed contract –– and thus the count of the Back on Market is most likely higher.

Between 10% and 20%

So, yes, somewhere between 10% and 20% is the correct number.

This number will vary based on what time of year you examine, what price point you are in, and what geography you study and of course, what percentage of the Released and Temp Withdrawn homes you assume were the result of a failed contract.

Why Don’t Homes Close?

A 10% fallout rate is a big number. A 20% fallout rate is even bigger.

When you are making irrevocable (and expensive) commitments that depend on a successful settlement, 80% certainty doesn’t feel great, does it?

It shouldn’t.

Let’s discuss the reasons.

The Primary Reasons

Homes don’t go to settlement for any variety of reasons –– but they generally fall into one of the following categories:

Lender incompetence
Appraisal less than the sales price
Inspection issue
Agent incompetence
Cold feet

Let’s discuss each.

Lender Incompetence

I cannot stress this enough –– work with a lender with the following characteristics:

They are local (not Quicken, USAA, or some other internet lender)
They are tied to a bank (meaning they have ‘shelf loans’ or other specialty products)
They do a lot of business with the agent (you will be on the top of the pile and receive favorable treatment when positive underwriting interpretations are required)
They have a full range of products (many lenders only have a limited product menu and will try to place you in the wrong product because they don’t have the correct option)
They have a ‘Lock and Drop’ feature (meaning that if rates drop during the lock period, you receive the lower rate)
They are not your Credit Union (contrary to common belief, CU’s do NOT give better rates and their representatives are typically not licensed)

Furthermore, when it comes to niche purchases (condos, rehabs, multi-family) or complex underwriting (divorce, business owner, commission income) using a mortgage company with specialists in the specific loan type is critical.

Alas, few borrowers (or agents) know how to find those who specialize in the specific niche required.

The Dreaded Internet Lender

To the Sellers –– if you are a seller and you receive a contract from a purchaser who plans to use an internet/non-local lender, accept the contract at your own risk and do not be surprised when, at the 11th hour, you get the dreaded ‘we have a problem’ message.

To the Buyers –– if you are a buyer and in a multi-offer scenario, using Quicken (or USAA) is an almost near guarantee that you will not be the winning bid. Why? Because listing agents know how difficult and unreliable internet lenders are.

Internet lenders can be decent for refinancing (mostly because a missed closing date isn’t overly penal,) but for purchasing a home, they just carry too much risk.

Cheaper Isn’t Better, It Isn’t Anything

A rate that is ½ point lower that closes late (or not at all), is not a better rate –– it is actually more expensive!

Late closings trigger penalties, loss of deposits, and a handful of other emergency decisions (hotel stays, storage units) that eat up any savings that the rate promised.

The bottom line is that the local lender puts their reputation and well-being on the line every time they issue a pre-qualification letter. If their organization can’t perform as promised, they don’t just lose the current deal, they lose the rest of them.

An Appraisal Issue

When prices are accelerating rapidly (especially in the spring), comparable sales lag where the market is.

Looking at past sales is like driving while looking out of your rearview mirror.

In other words, when you are trying to establish the fair market value of a home in March of 2020 –– and the sales comps are from the fall of 2019 –– you will not find the sales from yesterday you need to justify the price today.

But unfortunately, that is how the appraised value is determined –– via PAST sales.

We like to say that using comparable PAST sales to establish value TODAY is like driving while looking out of the rearview mirror –– it tells you where you were, but not where you are going.

When you, as a seller, have accepted a contract on a home where there were multiple bids, odds are, the sales price has been pushed above the value at which the home will appraise. When a loan is subject to appraisal (as many loans are), an appraisal below the sales price places the loan in jeopardy.

Appraisal Math

Applying some numbers –– if the purchaser is putting 10% down on a $300,000 sales price and the appraisal comes in at $290,000, the seller is responsible to make up the difference –– in other words, they have to find an additional $10,000 in down payment.

If the purchaser has no excess cash (or is unwilling to access it), then the seller is forced to either:

lower the price to the appraised amount
accept the loan denial and put their home back on the market

The bottom line is, as a seller, you have to look at the type of financing the purchaser is using –– and specifically how the appraisal contingency is worded –– to properly judge how susceptible you are to the appraisal causing the contract to not move forward.

A good agent knows how to assess the risk.

Inspection Issues

Inspections are the bane of almost every agent’s existence.

Essentially, you have buyers who feel like they overpaid (and feel entitled to a perfect home,) sellers who see every issue as cosmetic, and inspectors who feel it necessary to point out every flaw, including that the doorbell is not at the correct height (not kidding.)

On the other end of the inspection report are agents who know very little about construction and contractors who both disagree with the inspector’s assessments and cost estimates, and are trying to generate even more business for themselves by spooking the clients –– all trying to decide if a $100 piece of siding is rotten or just soft.

It is maddening.

Call it pride, call it short-sightedness, or simply stupidity, but way too often we see $500 worth of inspection items torpedo $300,000+ sales

($500 / $300,000 = .0016, in case you wanted to see how inconsequential that amount actually is.)

No Home is Perfect

At the end of the day, as a buyer, be prepared to take the home with a few issues –– especially given the market conditions. Are we saying that a cracked foundation, a failing 50 year old roof, and radon readings in the 100’s are not issues? Of course not. But when minor carpentry issues, a few questionable double taps on your main circuit panel, and wobbly toilet are found, it is ok. Don’t freak out.

And a final note for sellers –– I have yet to see a house that comes back on the market get a better offer. Digging in to save yourself $1,000 only to cause your buyer to flee is a poor strategy. You are almost always better off to work with the offer in hand, even if it means swallowing your pride and working out a deal that feels one-sided.

Agent Incompetence

My first broker was fond of saying that, as an agent, when you have a willing buyer and a willing seller, get out of the way.

It is one of the truest statements he ever uttered.

Far too often, in an effort to either feed an ego or justify the commission, agents will engage in activities that complicate or sabotage the transaction. Speaking too much, introducing doubt, blaming the other side, making mountains out of molehills –– all of these actions put unnecessary pressure on a transaction when there needn’t be.

The net result is it exhausts everyone’s emotional energy to such a point that the sides oftentimes become unable to work through an issue that normally would not derail the transaction.

It happens far more than it should.

Cold Feet

And yes, every once in a while, a simple case of cold feet (i.e. –– Buyer’s Remorse) is the culprit.

Typically, buyer’s remorse occurs when a) the deal is too one-sided, or b) the purchaser didn’t fully do their homework before finding themselves under contract to purchase a home.

Agents and Uncertainty

As an agent, it is absolutely your responsibility to make sure the buyer understands their decision:

Educated and confident buyers make decisions that stick
Buyers who never developed a true understanding of market conditions tend to walk away

Agents –– if you want your deals to stay together, empower and involve your clients.

Summary

So yes, not all deals go to settlement.

Statistically speaking, somewhere between 10% and 20% will fall apart for one reason or another. And thus, some percentage of sellers will have to go ‘Back on the Market’ after experiencing the frustration of a contract that did not stick.

So, as a seller, how in the world do you defend against being left at the altar?

Well, that is Part II of the series …

2019 and the Return to Normalcy

December 30, 2018 By Rick Jarvis

2019 is going to be a transitional year.

In the same way that you might take your foot off of the gas when you see a yellow light in the distance, 2019 will likely be a year where we see some segments of the real estate market lose a bit of their momentum.

‘A Return to Normalcy’ was a phrase used by Warren Harding during his presidential campaign in the 1920’s to define the period of recovery after WWI …

For many, a slower pace will feel extremely odd. All we have known for the past 5+ seasons is rampant price increases and bidding wars. That said, 2019 is likely the year that the frothiest behaviors will subside –– at least in some segments (which we will touch on in a few paragraphs.)

In reality, what we are beginning to see is not a market in decline, but rather <gasp> the leading edge of a normal market.

Disclaimers

First, I need to disclaim a few things.

Nothing in this post is guaranteed to happen tomorrow, or probably even the next day –– most of the observations are longer-term in nature and represent a shift in direction, but not a bootlegger’s u-turn.
Also, recognize that an individual house value behaves differently than a set (or segment) of houses. Colors, condition, architectural style, yard, appliances –– they all matter to individual buyers and sellers and can impact the value of an individual home. But the behaviors being discussed below refer more to how groups of homes behave in the aggregate.
And lastly, any number of unforeseen events could change things –– and fast. Politics, trade wars, real wars, oil prices, and/or natural disasters all have massive impacts on our economy as a whole. And corporate acquisitions, sales, and/or relocations can all have impacts on our region, specifically.

So with that bit of throat clearing, I proudly bring you the ‘What is Going to Happen in 2019’ prediction post (and if you want to see how I did in prior years, you can find 2018’s post here.)

A Return to Comparative Normalcy

What is normal, anyway? Well, we wrote about that very question at the end of 2018. But the takeaway is that ‘what is normal’ is more of a relative question than an absolute one.

via GIPHY

If you asked ‘1993 Rick’ what I thought of a 5% interest rates and 5% appreciation, I would have been giddy with the excitement of how many properties we were about to sell. But when you ask ‘2019 Rick’ the same question, I think, ‘Yeah, 5% rates and 5% appreciation is sure going to be slower than the 4% rates and 10% appreciation of 2016.

The lesson –– it’s all relative.

Does Anyone Remember?

To give you an idea of what a historic version of normal will look like, imagine a market with the following metrics:

6 to 8% mortgage rates (instead of 3.5%)
3 to 4% annual appreciation (instead of 8 to 10%)
45 to 60 day marketing times (instead of 7 to 14 days)
2 to 4% seller discounts (instead of multiple buyers with escalator clauses)

You see, the period from 1990 to 2005 looked a lot different than 2005 to 2018.

If you asked 1993 me what I thought of a 5% interest rates and 5% appreciation, I would have been giddy with the excitement of how many properties we were about to sell…

And, yes, I get it that many of the inputs are different (demographics, population trends, preferences, architecture, inventory, regulation, materials), but the period of 2005 to 2018 was about as unprecedented as one could imagine.

Honestly, I think a little more stability in housing is a good thing. NASDAQ levels of volatility in housing just isn’t healthy for anyone.

Segments Matter

So in our end of the year meeting at One South, we spent a lot of time on the idea of market segments. Segmenting (stated differently) is nothing more than looking at smaller samples of how connected sales behave, and not aggregating all housing into one analysis.

Pro Tip here –– If you ask an agent, ‘How’s the market?’ and they don’t ask a qualifying statement like ‘Which segment?’ or ‘What area are you referring to?’ then you need to find a new source of your information.

In the same way that New York’s housing market behaves differently than Orlando’s, the new construction market in western Chesterfield should behave differently than Bellevue does –– and this will be key in understanding the new market.

Segments and the Impact of Population

For years, the City of Richmond’s population was in decline. Chesterfield and Henrico were experiencing explosive growth, but the City was not.

Around 2000, the City population trend officially reversed.

In the latter 1990’s, you could feel it starting to happen. VCU was gobbling up properties by the handful and many of the long ignored Downtown neighborhoods began to see construction activity and new businesses popping up.

The population of Henrico and Chesterfield now need to compete with the City for residents and can no longer sustain their growth based on the City’s exodus.

When the 1990’s gave way to the 2000’s, the City’s population began to stabilize at just below 200,000 residents. As we now enter 2019, the population of the City is approaching 230,000, and (by most studies I have seen) is projected to continue to grow.

The Impact of Growth

For the last 5 years, extremely tight City inventory levels and incredibly competitive bidding wars (the worst we saw in 2018 was 18 offers on one house near Carytown, no joke!), especially at the lower price points, has been the norm.

What do you get when your supply is fixed and demand increases? Price appreciation, that’s what.

The growth rate within the City has not only equaled the growth rates of the surrounding counties, but might have actually exceeded them. Any agent who works the more urban markets will tell you that the impact of the growth has been dramatic.

So as long as this trend continues, if you own property in the City, you are probably sitting pretty.

The Behavior of Various Segments

Now when we compare pricing for various segments, what we tend to see is the areas where pricing is the most affordable and closer to the urban core have appreciated the most dramatically. Areas that are further out and/or more highly priced are the ones where pricing has gone up at a slower rate.

Now, with all general statements, there are going to be exceptions, but overall, the statement holds true. Take a look below at 5-year appreciation rates in different areas of the Metro.

Appreciation_Rates_ — These figures only include resale properties, not new ones.

As you can see, the appreciation rate differs greatly.

Does that mean that you have made a mistake or are subject to deflation in the coming years if you live in a suburban area with new construction? Not at all. It just means that you shouldn’t expect that your neighborhood will behave the same as the one with a lower price point or on the other side of town.

And the Reasons, Please?

What do Fox Hall, the Deep Run High School District, and Hallsley all have in common? Fairly high prices to begin with and a great deal of new construction nearby.

What do the Museum District, Bon Air, and Church Hill have in common? Relative affordability and great difficulty in building new homes on any sort of scale.

Simply put, we can’t build houses where we need them most AND we can’t build them at the prices that the market can easily afford.

As we have stated many times before, the ability to provide housing is easiest where land is plentiful. So in areas south and west of Route 288, as well as points east in Henrico, where large tracts of undeveloped land are available, it is far easier to create new communities of scale.

Building is Getting Harder

But as any builder will tell you, not only are they being forced to build further away from the urban core, their costs are skyrocketing (both materials and labor) and the mandates placed on them by the counties are increasingly burdensome.

Take a look at the chart showing what has happened to the cost of construction (labor + materials). The builders aren’t lying when they tell you how much their costs have increased.

Furthermore, the arrival of several national builders is going to change the way new homes are sold in Richmond. DR Horton, Schell Brothers, and Stanley Martin each have the financial backing to build more homes in a quarter than most of the local builders could hope build in a year. The big national builders can gobble up lot inventory, they have their own sales force, and have the capital to build new models for each section of the communities in which they sell.

The Return of Strategic Mortgage Decisions

Let’s shift from home prices to borrowing money.

For the better part of a decade, choosing a mortgage product has been pretty much a no-brainer:

What mortgage product do you choose when 30-year fixed rates are at 3.5%? You take the 30-year fixed rate because of the 30-year guarantee.
What mortgage product do you choose when 30-year fixed rates are at 4.5%? You take the 30-year fixed rate because of the 30-year guarantee.
What mortgage product do you choose when 30-year fixed rates are at 5.0%? You probably still take the 30-year fixed rate because of the 30-year guarantee.

But what happens when 30-year fixed rates are at 6.25% but a 5 year adjustable is at 5% and you only plan on being in your home for 5 to 7 years? The question becomes trickier, doesn’t it?

Welcome to the new (ok, old) world of mortgage finance.

In the 1990’s, we saw clients make the fixed vs adjustable mortgage decision all of the time.

But since rates cracked the 5% floor in 2010, taking the risk of an adjustable mortgage seemed unnecessary.

Where are we currently? We enter into 2019 with rates hovering around the 5% mark. And while no one can claim to be a master of perfectly predicting interest rates, the majority of industry experts feel that 30-year rates between 5.3 and 5.8% (or even as high as 6%) by year’s end are a real likelihood.

So as the spring market emerges and the demand for money increases, the shrewd buyers will keep an eye on the mortgage products OTHER than the 30 year fixed rate mortgage to see how large the spread is.

At some point, the spread between fixed and adjustable mortgages may justify selecting shorter term mortgage products –– especially when the expected hold period is less than 10 years.

Cue the ARM (the Adjustable Rate Mortgage)

Wait, did you just say that ARM’s are good?!? I thought that ARM’s were the thing that caused the financial crisis in 2008?!?

Well, if you don’t underwrite an ARM properly, then yeah, an ARM is not a good product. But no mortgage is safe if it isn’t underwritten correctly –– ARM or otherwise.

So let’s not blame the ARM, let’s blame the true culprit –– shoddy underwriting.

The blue is the percentage of loans underwritten in each year since 2001 that were considered Sub Prime. As you can see, the percentage of Sub Prime is far lower than in the years preceding the crash in 2008.

In the financial crisis of 2008, a great deal of focus of was placed on the Sub Prime mortgage industry. And there was no more abused loan product by the Sub Prime industry than the ARM.

Today’s Arms are Actually Underwritten

The difference today is that the ARMs issued by Fannie Mae, Freddie Mac, and FHA are underwritten properly and also contain caps on the adjustments so that extreme swings in interest rates do not dramatically increase the risk of default. The Sub Prime ARM’s were neither underwritten with any rigor, nor were they capped in such a way as to minimize risk. (And in many cases, they were designed to fail, but that is another topic for another day.)

As an example, a 5/5 adjustable with a 2% cap means a mortgage with a fixed rate for 5 years with a maximum adjustment of 2% at then end of year 5, with another 5 years of the new rate before another adjustment. Is that overly risky? Not when applied correctly it isn’t.

What makes an adjustable mortgage product appealing? The rates tend to be lower –– especially the higher that the 30-year fixed rate becomes.

And while the spread between fixed-rate and adjustable rate products is not quite to levels that justify the switch, it might not be too far off in the future.

So if your loan officer suggests you take a look at an ARM, don’t reject the idea simply out your memory of 2008. An ARM, like a screwdriver or a shovel, is simply a tool. When you use a tool appropriately, they tend to work quite well.

Since 1991

So we (Sarah and Rick) have been in real estate –– as agents, brokers, lenders, developers, owners, and rehabbers –– for longer than we would like to admit. And consequently, we have had front-row season tickets to the booms, several busts, and each subsequent recovery.

We have had front-row season tickets to the booms, several busts, and each subsequent recovery…

What does that mean? It means our advice is based on experience that dates back to the early 1990’s.

In 1991, the median sales price of a home in the US was $120,000. It is now $315,600
In January of 1991, 30 year mortgage rates were 9.56%. They are now 4.75%
In 1991, the average rent was $649. It is now $1,450.
In 1991, there was no Zillow and no Trulia. As a matter of a fact, there was not even an online MLS

What else does it mean? It means our team is extremely excited to see times ahead where good decisions will rule the day, and not just momentum.

We love the fact that strategic decisions about mortgage are required, and not just blindly electing a 30-year mortgage, regardless of the situation
We love the fact that the need to make purchase decisions under multi-offer pressure will likely subside
And we love the fact that the data now exists to really help demonstrate the best course of action, and decisions are made based on information, not conjecture

Welcome to 2019, the leading edge of normal.

Frogs Rent

November 28, 2018 By Rick Jarvis

For most homeowners, I think it is going to be difficult to let go of the last few years.

‘Our house appreciated $75,000 in 5 years!’
‘Really? Our house went from $300,000 to 400,000 in 4 years!’
‘Not bad, but ours went from $150,000 to $400,000 in 3 years!’

Unfortunately, we won’t be saying that as often as we used to anymore.

A Return to Normal Appreciation

Being a homeowner, especially a first-time homeowner, has been a lot of fun for the past 5 years. The rate of appreciation has been substantial for most everyone in the post-bubble market. No matter where you live or what you bought, if you signed the closing statement in 2012, you are up anywhere from 20 to 40% in the years since.

But as we approach the end of 2018, we can expect to see future appreciation rates on housing return to the norms of the 1990’s and early 2000’s. And for those who know nothing about the good old days, I am talking about 2 to 4% in any given year (and yes, I realize how boring that sounds.)

That said, imagine if all of this topsy-turvey upsidedown-ness hadn’t happened, or even if prices had fallen over the last five years. Would you have been better off if you hadn’t bought at all?

The answer is simply –– nope.

Why? Because renters always lose in the long run.

Boiling a Frog

There is an old adage about boiling a frog (and no, I have not done this before so don’t call PETA). But it goes like this: If you put a frog in a pot of boiling water, it will immediately hop out. But if you put a frog in a pot of cool water and then put it on the stove, the temperature change is so gradual that the frog will stay in until it is too late.

And for this reason, frogs rent.

If you’re a renter feeling upset because I just compared you to a frog, don’t. For many, renting does make sense. Temporary situations, an uncertain future, recovery from a financial catastrophe, etc –– these reasons all make sense.

But if you are going to be here for a while, are trying to make a smart investment, or are otherwise in a position where you could own but don’t, then you are exhibiting frog-esque characteristics.

Tracking Rents

Zillow, for all of its warts (see what I did there?), has managed to aggregate a lot of really good data and they make it available if you know where to look. And besides tracking housing values (for which they are primarily known), they also track rents.

Take a look at this (use the drop down menu to find RVA, or to look at other markets):

Since 2011, rents in Richmond VA have gone up from an average of $1,179 per month to $1,391 per month. That’s nearly an 18% increase if you are scoring at home. And that chart is for the Richmond region as a whole. Areas such as Shockoe, Manchester, and Scott’s Addition are up by a much larger percentage.

Now, let’s think about the other side of the equation. Do you know how much of your mortgage you would have paid off in the same time period? If you had a 30-year mortgage at 4.5%, you would have paid off anywhere from 10 to 12% of your mortgage in the same time frame.

So even if your home had not grown in value by a single percentage point, owning would mean your payment would have remained the same, your debt would be 10 to 12% lower, and you would have also picked up a nice little tax write-off for the interest you had paid (but please consult your tax advisor to find out how much the Mortgage Interest Deduction would have saved you.)

It doesn’t take a math major to figure out that a fixed payment, lower debt, a nifty tax break, and the potential to eventually not have a house payment once your mortgage is paid off are all pretty good things.

Ribbit.

Elective Renting is a Poor Strategy

The housing market is rapidly putting the finishing touches on its post-bubble recovery and is approaching a time where housing appreciation will revert to the more normal rates of the 1990’s and early 2000’s. The promise of steep appreciation will not be what makes housing the sole reason for ownership as we move into the next decade.

Instead, the reason that housing will be one of the best assets you can own will be related to the reason it has always been a great asset –– its long-term value as a part of your portfolio will dwarf the short-term savings associated with renting.

So don’t fall for the ‘well, I should have bought 5 years ago so I should wait for the next bubble to pop’ logic. You will be far worse off.

Don’t believe me? Ask your landlord.

Getting Out of the Pot in 2019

So as 2018 comes to a close, be thinking about the fact that you will soon be getting a note from your management company notifying you of your new water temperature … errrr … rental rate for the coming year. If the landlord does their job right, the increase won’t make you leave –– it will be just enough to make you grumble, but stay.

Interest rates are beginning to edge up after years of staying below trend and house prices are still creeping upwards, too, albeit at a slower pace. Waiting for prices and rates to drop to 2012 levels again is simply not a winning strategy.

Is it getting a bit warm in here? Or is it just me …

The Inventory Divide, and Why it Matters

May 17, 2018 By Rick Jarvis

A Home is an Asset

For those who know me, I’m not about the ‘house of your dreams’ narrative – I am pretty objective in my approach. I want my clients to understand the underlying value of what they are purchasing and not allow emotion to override logic.

Statue of Liberty — America is the land of opportunity, right?

That said, I fully acknowledge there is a powerful emotional aspect to buying a home. Regardless of whether it is your first, third, or even the twentieth home, each connect you to a specific period in your life. Selling a home feels like closing a chapter, and when you buy one, a new chapter begins.

Sticks, Bricks, and a Vehicle for Wealth Creation

In the simplest sense, a home is nothing more than a stack of sticks and bricks on some dirt that keeps your stuff dry …

Yet despite the emotional attachment, in the simplest sense, a home is nothing more than a stack of sticks and bricks on some dirt that keeps your stuff dry. While we want to attach value to the colors of our walls, the shape of our exterior, and the brand of our appliances, in the grand scheme of things, housing is no different that any other asset whose value goes up or down given economic conditions.

And 2007 through 2011 notwithstanding, owning a home has created more wealth for the masses than any other asset class in history.

This is what has me worried.

No Crash on the Horizon

To begin, I am not worried about another crash. I have lived through two of them (1987 – 1992 and 2007 – 2011), and the current market looks nothing like the last two that crashed.

The current market looks nothing like the last two that crashed …

In both of the prior crashes, the economy was overheated and there was a tremendous oversupply that had been created to try to keep pace with a dizzying demand.

Currently, the economy is solid, employment is high, inflation is still shockingly low, and while the world is never fully at peace, there is relatively little global unrest (at least compared to prior periods) – and inventory is at all time lows.

Is there a correction coming? I think that some are beginning to predict a slight pullback at certain price points in 24 to 36 months. But I firmly believe that a crash is not imminent.

The Housing Divide

A home is quickly becoming an asset that only the wealthy can afford …

No, my worry is as follows — the price of housing is at the precipice of exceeding affordability for the average American, preventing an entire segment of the population from ever having access to home ownership.

[ And this recent article in The Atlantic seems to back the same narrative – especially Section 6 ]

In effect, a home is quickly becoming an asset that only the wealthy can afford, and, over time, will lead to a deepening of the divide between the ‘haves’ and the ‘have nots.’

Take a look at this chart.

Never has the discrepancy been greater, and I think that is a tragedy.

The blue line represents home ownership levels. In other words, what percentage of the population owns their own home.
The green line represents the median price of a new home.

Notice a trend??

Pricing is accelerating despite historically low ownership levels. The obvious implication is that as prices rise, fewer people will be able to buy – and we can see this playing out right before our eyes. Right now, due to a host of factors which we will touch on below, housing prices are increasing at a rate that is pushing ownership beyond the reach of far too many people.

Never has the discrepancy been greater, and I think that is a tragedy.

Time to Build More, Right?

An economist would argue that the problem will solve itself: As prices rise, more producers will be attracted to the market and supply will increase.

But that simply isn’t happening.

Take a look at this chart showing the number of new homes being built:

Again, notice a problem?

Despite the fact that housing is undersupplied and pricing is accelerating, we are still drastically under-supplying a market that desperately needs relief.

The Problem is Systemic

The problem is about price AND location …

Perhaps the underlying problems were already manifesting themselves as early as 2000 and we simply didn’t see it as the rapid price increases were masked by a insanely lax lending standards. But the issues are more than visible now.

Effectively, the problem is about price AND location. We cannot add supply at anything approaching a reasonable cost, and we absolutely cannot do so in areas where the populous wants to buy.

Issue One – Construction Costs are at an all time high

Building costs are through the roof (no pun intended.) Construction material costs have skyrocketed and the construction labor market pool simply isn’t there, causing extreme wage pressure.

When your material costs are up 30% and your labor pool down 50%, costs spike. And I don’t see an quick solution.

Issue Two – Governmental Mandates Mean Higher Costs

The collective increases become substantial – and the end user ends up footing the bill!

Each bill that is passed to make housing better is done so with good intentions – I honestly believe that. No one wants the US to build substandard and inefficient housing – AND no one wants to see another financial crisis, either.

However, each time Congress, the state legislature, or our local board of supervisors adds another layer of regulation, the cost to build a home goes up.

Each increase in the building code or protection baked into the financial markets is done so with the aim of increasing the quality, safety, accessibility, and energy efficiency of our housing stock. But with each mandate comes increased expense. A percentage point here and an increased fee there never seems like a lot on its own, but over time, the collective increases become substantial – and the end user ends up footing the bill!

Issue Three – Demographic Shifts

Demographics show a population that increasingly wants to live in cities. Urban schools are getting more funding, the commutes are shorter, public transportation is expanding its reach, and the entertainment districts are improving. But yet, the city is the hardest place to build houses.

An incredible 20,000 people came to Richmond in 5 years – and we built a mere 854 houses for them

To give you a sense of the problem – per the 2010 census:

The population in the city of Richmond increased 9.3% from 2010 to 2016, or by roughly 20,000 residents.
In the same time frame, MLS tracked 854 new home sales within the City of Richmond.
- Stated differently, 854 new homes / 20,000 new people = 4.2%
For comparison’s sake, Chesterfield built just under 5,000 new homes in the same frame, or closer to 17% of their need.

Somehow, I don’t think 4.2% of the overall need being satisfied by new housing is going to fix the problem.

Issue Four – Gentrification

If you really want to see a mind-blowing statistic, look at these screenshots straight from the Richmond MLS.

The northeast section of the City of Richmond (Highland Park, North Church Hill, Union Hill) is in the midst of one of the most rapid price increases in the history of the city.

Inside of this zone:

This happened to prices in 5 years:

While that benefits some owners, it leaves many others wanting.

The New Normal

It is easy to build another million dollar home on a cul-de-sac in the latest community 10 minutes further out than the last one – but that is not the cure.

Am I saying that everyone should own a home? Hardly. We tried that once (2007) and it didn’t seem to work out very well.

But I do believe that a housing model in which ownership is reserved for only the elite is an equally dangerous model. America is the land of opportunity and when the idea of owning a home becomes an unattainable pipe dream, that is not a good answer either.

Look, it is easy to build another million dollar home on a cul-de-sac in the latest community 10 minutes further out than the last one – but that is not the cure. We have got to solve the need for reasonably affordable / attainable housing in neighborhoods that aren’t 45 minutes from the urban core.

The next generation of potential homeowners deserves the same opportunity as prior generations did to use housing as a fundamental way of building wealth. Everyone wins when our population has the ability to determine their own financial destiny.

Rates are Rising – Here’s What it Means

March 28, 2018 By Rick Jarvis

Jarvis Grandchildren: ‘Grandpa, please tell us a story about the way real estate used to be!’

Grandpa Jarvis: ‘Let me tell you a story about 3.5% 30 year fixed mortgage rates …’

Jarvis Grandchildren: ‘Ooooooooo, 3.5% 30 year fixed mortgage rates?!?’

Grandpa Jarvis: ‘Yep. 3.5%. Some people even got 2.9%.’

Rates are Headed Up – For Good

As I write this in the spring of 2018, the recent job report states that the economy not only added 200,000 jobs, but wages rose at their fastest rate in 8 years.

And just so you realize:

Low unemployment tends to lead to wage increases
Wage increases tend to lead to more disposable income
More disposable income tends to lead to more money to spend
More money to spend tends to lead to inflation
Inflation tends to lead to higher long term mortgage rates

Take a look at the correlation:

As you can see, even as the unemployment rate (the blue line) began to fall in the years following the collapse, wages (red line) didn’t really begin to trend upwards until the latter part of 2015, and even then, only negligibly. The most recent jobs report indicates that wages are starting to rise, a trend that is predicted to continue for some time.

So What Does it Mean for Housing?

Not much … yet. And as a matter of a fact, I am not unhappy to see the rise happening.

Why? Because it means the economy is healthy and people see positive things on the horizon. Trust me, I would rather be in a world with healthy economies and 6 to 7% long term rates than one teetering on the brink of collapse with 3.5% rates.

As we discussed in our 2018 Predictions only a few months back, we predicted a rate rise in 2018 and went into some detail about the implications. Effectively, if we are all making more money, then a slight rise in the cost of borrowing is not something that will cause the market to collapse. And furthermore, as long as credit standards remain reasonable (and consistent) then the risk of a ‘2008, The Sequel’ is quite low.

Home Prices Will Still Rise

Expect housing values to continue to rise, especially urban and affordable, due to a complete, thorough, absolute, and total lack of inventory. As the millennial generation begins to exit their downtown rentals and enter the buying market, affordable urban markets will continue to be starved for inventory.

Expect some of the upper end suburban markets to see slowing price gains due to the fact that homebuilding is finally cranked up again, mitigating some of this inventory shortage.

Think ‘Strategic Finance’

Remember, it is the long term rates that are the ones that have more room to rise. The 3, 5, and 7 year adjustable rate mortgages will still give buyers options a point or two below the long term rates, offsetting any rate increases.

But that said, it is time to get a little more strategic about how you finance your home. Gone are the days of just taking a 30 year mortgage at 3.5% simply because it is a no-brainer to do so. Thinking long and hard about how long you expect to stay in the home will become a key ingredient to making the correct mortgage decision.

But it does feel like we have come to the end of an economic era – the end of the 4% 30 year mortgage. And while I will be a little sad to see it go, it indicates much better times are on the horizon.