The Hot Real Estate Market Is Going, Going, But Not Yet Gone...

Back in February, I wrote a post about how interest rates affect a buyer's purchasing power and in turn the value of a seller's home. The takeaway of that article was this:

   Higher Interest Rates ⇒ Less Purchasing Power ⇒ Less Qualified Buyers ⇒ Lower Home Value

I warned that as the Fed raised interest rates, buyers would be priced out of homes that they could qualify for now, and that as those buyers got priced out of certain homes, sellers with higher-end homes would lose value and not be able to capture top dollar for their homes.

I wrote that article 8 months ago, and now it's starting to happen. While there's no arguing that this summer was one of the hottest real estate markets in recent history, the hot real estate market now appears to be going, going, but not quite gone yet.

There are still some hot areas, and you will still hear some stories of multiple-offer situations or homes selling in a matter of days, but the feeding frenzy that everyone witnessed this past year is done.

Interest rates are now around 5% (yes, you will still see quotes for 4.75% on 30-yr fixed, if you are putting 20% down and have sterling credit), and that rise from 4% this time last year to 5% today has cost buyers over $50,000 - a buyer last fall at a 4% interest rate could afford to finance $50,000 more than a buyer today at 5%. 

A $50,000 reduction in purchasing power puts a buyer a completely different house bracket and possibly a different area. Home values in our area tend to be segmented in $25,000 increments according to their features and location. Losing the ability to finance an additional $50K in house price may mean that buyer is no longer going to get that basement he wanted or the 3-car garage is now off the wishlist or a particular area or neighborhood is now out of reach.

If you're a seller, that means your house has lost value too. The value of a home is directly tied to what you can sell it for, and that is directly tied to what a buyer can pay for it.

I have encountered a lot of high-end sellers lately that are struggling with the loss of value of their homes that less than a year ago were worth $50,000 or $75,000 or $100,000 more than they are today. I consulted with a doctor last month about selling his beautiful home after he and his wife had relocated to Florida. He thought their home was worth about $800K - and it probably was - last year. I had to break the bad news to him that his house was now probably only worth $725K. He didn't like hearing that and has decided to try to sell it himself on Zillow.

I wished him luck and gently reminded him that with every quarter point rise in interest rates, he was going to lose more value, not including the cost of carrying and maintaining two homes and trying to sell a home from 1800 miles away. We parted on good terms, but as our conversation ended, I couldn't help feeling sorry for the guy. It's always hard to accept when you've missed out on the market - whether it's a hot stock that you didn't buy, an investment opportunity that you passed on, etc.

But as I tell my clients, both buyers and sellers, it's not too late. Fall and winter are great times to pick up a deal for buyers, and a great time to sell your home because there is less competition in the marketplace. And interest rates are still hovering around 5%. So, please, if you are thinking of selling or buying, get in NOW.

As a mentor of mine used to say, "A good plan today is better than the perfect plan tomorrow." And I promise, the deal you cut today on buying or selling a home WILL be better than the deal you cut tomorrow.

 

 

Chris Camperelli has been in real estate in the Indianapolis area for over 25 years, representing buyers, sellers, developers and builders. He and his team have been in the top 1% of realtors nationwide since 2010. Chris is married with two children and considers his family to be his greatest achievement. When Chris isn't selling real estate, he is playing with his kids and helping his wife with her start-up vineyard and winery.

 

Chris can be reached at chris@theeliterealtypros.com or 317-710-5019.

 

You can get the value of your home or search for homes by signing up at www.theeliterealtypros.com.

 

The Most Valuable Commodity I Know Of Is Information, Wouldn't You Agree?

One of the most memorable lines in the movie "Wall Street" comes from Gordon Gekko, and it goes something (exactly) like this: "The most valuable commodity I know of is information, wouldn't you agree?"

It's a great line from a great movie, but more importantly, it's the absolute truth. I could write page after page citing examples throughout history to back up this assertion, but my blog is about real estate, not history, so let's just go with the premise that it's the truth.

Right now, there is a lot of conflicting data circulating out there about the state of the real estate market. Average sales prices rise and then they dip. Mortgage interest rates climb and then they retreat. Buyer demand peaks and then it wanes. Housing starts skyrocket and then they plateau. So what is a buyer or seller to make of this market and all of the information swirling around out there? 

First of all, buyers and sellers need to block out all of the noise and focus on getting the information that is most important to them. If you are a buyer, what you want to know (as it relates to the dollars) is whether you will recoup your purchase price (and hopefully make money) when you go to sell your home. If you are a seller, what you want to know (again, as it relates to the dollars) is whether you got top dollar for your home at the point in time in which you decided to sell. 

However, before you can even get to those questions, a very basic question has to be answered first: Is now a good time to buy or sell a home?

While sales comps, housing starts and interest rates do factor into the advice I give my clients, there is one market indicator that I have relied upon for the last twenty-five years to help predict where housing is headed in general. It's the manufactured housing (aka mobile home) industry. Why? Because manufactured housing buyers and sellers are more sensitive to shifts in the market (i.e. tightening credit, rising prices, increases in unemployment, etc.) than just about any other buyer or seller. They are the proverbial canaries in the coal mine - they feel the changes in our economy much faster and stronger than buyers or sellers of single-family housing do and react more quickly and drastically to any ups or downs in the economy.  

There are several indices tied to the manufactured housing industry that I track, and they all show consistent, significant growth in shipments of manufactured housing and increases in average sales prices, in some cases double-digit growth, over the last twelve months and more importantly, over the last ninety days. What does that tell me? It tells me that, despite all of the fluctuations in the single-family housing market, now is a good time to buy or sell a home. 

Average sales prices are still strong, interest rates are still historically low and housing inventory is still relatively tight. Any of these factors can change significantly at any time, and when they do, they will affect buyers and sellers negatively. Interest rates shoot up - buyers instantly lose purchasing power. Inventory loosens up, and sellers' average sales price decreases and their days on market increases. 

But right now, these factors on the whole are holding steady, The data confirms that buyers and sellers of manufactured housing know this and aren't choosing to sit on the sidelines. Instead, they are gettin' after it. And if there's one thing I've learned after twenty-five years in this business, it's that you gotta get while the gettin' is good.

**Chris Camperelli is the Team Leader for Elite Realty Pros Powered by eXp Realty. If you have any questions about the state of the housing market today or are interested in selling or buying a home, you can reach him at chris@theeliterealtypros.com or at 317-710-5019.**

When Getting Ready to List Your Home, Avoid Extreme Makeovers

In keeping with the recurring theme of this blog, I am going to start off with yet another scene from the movie "Wall Street":

Bud Fox has just closed on a penthouse on the Upper East Side, and he has hired his girlfriend (played by Darryl Hannah) to decorate it. After a montage sequence showing the extensive transformation of Bud's place, Darryl's character proudly announces that she's going to have House and Garden come up and photograph it before it gets lived in. Fast forward 20 minutes in the movie, and Bud is having an argument with his realtor about the value of his penthouse - apparently all that interior decorating didn't increase the value of his investment one cent - and Bud concludes the argument by telling his realtor to just dump the place.

More than one homeowner has played out a version of this scene with his or her agent, and as a broker, I have never enjoyed having to tell a client that all the money he or she has poured into renovations isn't going to translate into a higher sales price. Often times, I encounter clients who say, "Well, I just put $20K into my home, so my home should be worth $20K more than what I paid for it." I always hate to have to be the one to break the news to them, but there are very few small improvements ($25K or less) that homeowners can make that are going to increase the value of their home significantly.

So if you're getting ready to list your home and think you need to spruce it up before going to market, let me break down which improvements will get you the BEST RETURN on your investment - not a dollar-for-dollar return in every case, but at least a return:

1)  Repainting the interior walls to a neutral color if you currently have lots of bold colors, murals or distinctive decorating styles in your home. In order for buyers to fall in love with your home, they have to be able to imagine themselves living in your home. And buyers can't do that if they have to block out all of the decorating that you've done. Painting the interior in neutral colors at least allows buyers to visualize what they could do with your place. Painting the interior walls is also a good idea if the walls have taken a beating from your kids. Lots of scuffs, dings and dents in the walls and trim send a signal to buyers that the home has been neglected - that may not be the case - and covering up the wear and tear with some spackle and a fresh coat of paint does wonders for the perception of how your home has been maintained. As far as your return on investment, I would expect at least a 50% return for this improvement. One note of caution: Because painting jobs involve mostly labor, I always encourage my clients to get 3 quotes. In my own experience, there can be as much a 40% difference between the high and the low quote, so it's definitely worth the exercise to get 3 quotes.

2) Cleaning up the landscape beds in the front and backyards of the home - this one is a no-brainer in terms of increasing curb appeal, yet many homeowners miss this one. If you don't have a green thumb, don't sweat it. Hire a landscaper to weed the beds, put down some fresh mulch, trim up the shrubs and plant a few flowers. Your investment will be less than $500, and trust me, you will get every dollar of it back. I always say that well-maintained landscaping on a house is like a nicely-wrapped present. You are always more excited to see what's inside a wrapped present than what's inside a paper bag.

3) Having your carpets professionally cleaned if they are more than 2 years old and show average wear and tear. There are folks who would tell you to just replace the carpet, but in this day and age of so many flooring choices and configurations, you are throwing your money away on new carpet if your ultimate buyer plans on tearing it out and putting in wood floors. That buyer is never going to give you any credit for the new carpet when it comes time to negotiate price. If your carpet is in really bad shape, a better option is to offer a credit allowance for new flooring and build that into the listing price and let potential buyers know about the allowance. Most buyers would much rather have the allowance anyway, and you've just avoided the cost and disruption associated with replacing all of your carpet.

4) Updating light fixtures and door hardware if your home's décor is more than 10 years old. This is one that you're not going to hear a lot of brokers mention, but it is a much cheaper alternative to updating your bathrooms and kitchen. There are lots of articles promoting the idea of updating your kitchen and bathrooms as a way to increase the appeal of your house, and yes, it will increase the appeal - and the outstanding balance on your credit card. It is a fact that of everything that makes up a home, bathroom and kitchen cabinets and fixtures have the most mark-up to their pricing - hands-down. Most renovation experts say that you'll get back 50% of your investment in redoing a kitchen or bathroom when it comes time to sell - but you're also talking about a 50% loss on a renovation that will likely cost $20K or more. If your kitchen and bathrooms need updating, chances are your door hardware and lighting fixtures do as well. Just updating those two areas will cost a fraction of what a kitchen or bathroom redo would, and the overall impact can be just as good on a dollar-for-dollar basis. And unlike the kitchen and bathroom redos, which will require the services of a carpenter and a plumber, you can probably handle the hardware changes yourself and hire an electrician to switch out the fixtures. Assuming you go with neutral, middle-of-the-road hardware and light fixtures, you should expect a 75-100% return on your investment - and more importantly, a significantly smaller investment.

5) Moving excess furniture, exercise equipment, boxes, etc. to a storage facility. What I mean by this is going through each room, de-cluttering it as much as possible and moving that clutter off-site before you list your home. The purpose is to make each room appear as big as possible by reducing the amount of "stuff" that is in it. If you think this is hokey, I happen to know of one very large, publicly-traded builder that used to have all of the most popular furniture brands rebuilt - at 2/3 of the normal size - so that when potential buyers walked through a model, they would see "their couch" or "their bed" in a room and think the room was spacious because it could accommodate their furniture. Imagine what move-in day must have been like when they realized that "their furniture" barely fit into a room. Not the best way to market a house, but you get the basic concept: Anything you can do to open up your rooms and make them appear larger will help in the marketing of your home. Depending on how much stuff you have and assuming a 90-day marketing and closing period, your investment should be less than $1,000 to move and store your excess stuff, and you should get a return of every dollar of your investment on this strategy.

So if you are thinking of selling your home, print off this article - this is your to-do list to get your home ready for market. If you have other ideas about what to do with your home and want to know if they would be a good investment, call your broker and ask him or her to give you their professional recommendation before you go spending any money. If you currently don't have a broker, then shoot me an email at chris@theeliterealtypros.com and someone from our team can help you figure out which improvements will give you the best return on your investment.



*If you would like a copy of my recently-published book, "The Secret of Wealthy Home Sellers," drop me an email today and I'll drop a copy in the mail tomorrow.

Take the Money and Run on BST - Part 2

Note: We have had a tremendous response to our most recent blog, "Take the Money and Run on BST." Because we have a number of clients who are big Dave Ramsey fans (including myself), I received requests to provide a table that shows how rising interest rates affect loan costs and purchasing power based upon a 15-year mortgage (which is what Dave recommends - for those who aren't familiar with his Financial Peace University). So here is "Take the Money and Run on BST - Part 2" with a breakdown of the numbers based upon a 15-year mortgage.

*****

There's a great scene at the end of "Wall Street" where Bud Fox, who has artificially pumped up the price of Blue Star Airline's stock (BST), starts telling all of his broker buddies to dump the stock in order to cause a massive drop in its price. The incomparable John C. McGinley, playing Marv, sums up the mood when he starts calling all of his clients frantically, telling them that they need to "take the money and run on BST."

I chose that scene to start off this month's blog because a very similar scenario is playing out in the housing market right now. Unfortunately, most buyers and sellers don't have Bud Fox standing over their shoulders telling them when to buy and sell. That's where this blog comes in.

Anyone not paying close attention to the housing market may have missed that we are approaching our own "BST Moment." It's getting close to time to get out of BST. By that, I mean that it's probably time to get off the sidelines and buy a home if you've been thinking of buying, and it's time to sell your home if you've been thinking of selling.

Just like BST's stock being manipulated by Bud Fox, interest rates have been manipulated for the last decade by cheap money policies. And the correction in the stock market last week sent a loud and clear message that the cheap money will be over very soon - and so will the historically low interest rates of the last decade. So why do higher interest rates mean that buyers should buy now and sellers should sell now?

Let's start with the easy one first - the buyer who has been kicking around the idea of buying a house but hasn't pulled the trigger yet. Higher interest rates don't just cost the buyer more money over the long haul; higher interest rates reduce a buyer's purchasing power today. Here's a breakdown of the numbers, starting with the current 15-year fixed rate FHA mortgage, with $10K down, at 4.5% for a buyer making a $100K/year. Watch what happens when rates creep up to 6.5%:

                              Rate:               Amount of House You Can Afford to Finance:
                              4.5%                       $256,904
                              5.0%                       $250,249
                              5.5%                       $243,820
                              6.0%                       $237,616
                              6.5%                       $231,638

Those are some pretty startling numbers. And before you shoot down my assumption about a 2% interest rate increase over the next 12-18 months, know that most economists have already built a 1% increase in rates into their 12-month modeling and are starting to look at the possibility of a 4th rate hike from the Fed this year.

So what does all of this mean for buyers sitting on the sidelines? Not including the increased interest costs over 30 years that come with higher rates, waiting to buy until next year will mean that you are buying less house for the same amount of money - which translates into a lower return on your investment later when you sell your home. It could mean the difference between getting a check at closing and writing one.

Now let's switch to the sellers that are sitting on the sidelines, which is a more complex situation. As we have illustrated, when interest rates rise, buyers' purchasing power gets reduced. That's bad news for the buyer, but it's worse news for the seller, especially if your house is worth more that what an average buyer in your market can afford to finance at 6.5%. Here in the Midwest where I live, the average buyer in my market makes $60K/year, which translates to an average home price of $203,159.

As rates rise, that average home price "sweet spot" - that price range where you have the largest pool of eligible buyers available to buy your home - goes down. Less eligible buyers available to buy your home equates to longer days on market to get the selling price you want from your home, and longer days on market equates to less net return on your investment as you continue to pay your mortgage, taxes and insurance on your home while you try to sell - none of which you recoup in the final sales price of your home.

But you say, wait a minute, housing inventory is tight in my market - doesn't that offset the downside of higher interest rates? Sorry to be the bearer of bad news, but the answer is "no." The math on what lenders will finance on a home is much tighter now than it was before the Great Recession - that's the big difference between what the housing market looked like when interest rates were in the 6's back then and this time around. Steady incomes, debt-to-income ratios and FICO scores actually matter now to lenders. Because of this, buyers will have less purchasing power when interest rates go back to pre-Recession levels than buyers did back in 2006 when nobody was checking the math on loan applications.

Tighter underwriting regs than we have seen in the last two decades, tighter housing inventories and rising interest rates after a decade of historically cheap money - all of this represents an unprecedented paradigm shift in the residential real estate market. But then these are unprecedented times. It's been a wild ride, and like all wild rides, this one's coming to an end. That's why it's time for homebuyers and homeowners to take the money and run on BST.

Take the Money and Run on BST

There's a great scene at the end of "Wall Street" where Bud Fox, who has artificially pumped up the price of Blue Star Airline's stock (BST), starts telling all of his broker buddies to dump the stock in order to cause a massive drop in its price. The incomparable John C. McGinley, playing Marv, sums up the mood when he starts calling all of his clients frantically, telling them that they need to "take the money and run on BST."

I chose that scene to start off this month's blog because a very similar scenario is playing out in the housing market right now. Unfortunately, most buyers and sellers don't have Bud Fox standing over their shoulders telling them when to buy and sell. That's where this blog comes in.

Anyone not paying close attention to the housing market may have missed that we are approaching our own "BST Moment." It's getting close to time to get out of BST. By that, I mean that it's probably time to get off the sidelines and buy a home if you've been thinking of buying, and it's time to sell your home if you've been thinking of selling.

Just like BST's stock being manipulated by Bud Fox, interest rates have been manipulated for the last decade by cheap money policies. And the correction in the stock market last week sent a loud and clear message that the cheap money will be over very soon - and so will the historically low interest rates of the last decade. So why do higher interest rates mean that buyers should buy now and sellers should sell now?

Let's start with the easy one first - the buyer who has been kicking around the idea of buying a house but hasn't pulled the trigger yet. Higher interest rates don't just cost the buyer more money over the long haul; higher interest rates reduce a buyer's purchasing power today. Here's a breakdown of the numbers, starting with the current 30-year fixed rate FHA mortgage, with $10K down, at 4.5% for a buyer making a $100K/year. Watch what happens when rates creep up to 6.5%:

                              Rate:               Amount of House You Can Afford to Finance:
                              4.5%                       $351,763
                              5.0%                       $337,100
                              5.5%                       $323,339
                              6.0%                       $310,255
                              6.5%                       $298,568

Those are some pretty startling numbers. And before you shoot down my assumption about a 2% interest rate increase over the next 12-18 months, know that most economists have already built a 1% increase in rates into their 12-month modeling and are starting to look at the possibility of a 4th rate hike from the Fed this year.

So what does all of this mean for buyers sitting on the sidelines? Not including the increased interest costs over 30 years that come with higher rates, waiting to buy until next year will mean that you are buying less house for the same amount of money - which translates into a lower return on your investment later when you sell your home. It could mean the difference between getting a check at closing and writing one.

Now let's switch to the sellers that are sitting on the sidelines, which is a more complex situation. As we have illustrated, when interest rates rise, buyers' purchasing power gets reduced. That's bad news for the buyer, but it's worse news for the seller, especially if your house is worth more that what an average buyer in your market can afford to finance at 6.5%. Here in the Midwest where I live, the average buyer in my market makes $60K/year, which translates to an average home price of $203,159.

As rates rise, that average home price "sweet spot" - that price range where you have the largest pool of eligible buyers available to buy your home - goes down. Less eligible buyers available to buy your home equates to longer days on market to get the selling price you want from your home, and longer days on market equates to less net return on your investment as you continue to pay your mortgage, taxes and insurance on your home while you try to sell - none of which you recoup in the final sales price of your home.

But you say, wait a minute, housing inventory is tight in my market - doesn't that offset the downside of higher interest rates? Sorry to be the bearer of bad news, but the answer is "no." The math on what lenders will finance on a home is much tighter now than it was before the Great Recession - that's the big difference between what the housing market looked like when interest rates were in the 6's back then and this time around. Steady incomes, debt-to-income ratios and FICO scores actually matter now to lenders. Because of this, buyers will have less purchasing power when interest rates go back to pre-Recession levels than buyers did back in 2006 when nobody was checking the math on loan applications.

Tighter underwriting regs than we have seen in the last two decades, tighter housing inventories and rising interest rates after a decade of historically cheap money - all of this represents an unprecedented paradigm shift in the residential real estate market. But then these are unprecedented times. It's been a wild ride, and like all wild rides, this one's coming to an end. That's why it's time for homebuyers and homeowners to take the money and run on BST.  

Avoiding the Dartboard: Your Home IS An Investment

There's a great line in the movie "Wall Street" where Gordon Gekko explains his philosophy on making money: "I don't throw darts at a board. I bet on sure things."

That's the same philosophy we use when advising our clients on real estate investing, and that's going to be the theme of this series of articles.

Just to be clear: ALL real estate purchases are real estate investments. Some of today's financial gurus like to spout that your personal home is not an asset or an investment. I personally think that this is reckless advice. My basic rule of thumb is that if I buy something that I intend to turn around and sell at a later date, then I treat it like an investment. That doesn't mean that I necessarily intend to make money on that investment (e.g. the purchase of a car), but that does mean I crunch the numbers on it before I purchase it and understand upfront whether I am going to make money or lose money on it when I go to sell it.

This idea that your personal home is not an investment is, I think, one of the reasons why so many people lost their shirts during the Great Recession. If you don't think of your home as an investment, then you're not going to pay attention to the numbers when you're buying or putting money into your home. And trust me, there are plenty of unscrupulous people out there in a variety of industries who don't want you to pay attention to the numbers - sellers, builders, contractors, lenders, etc. So if you are thinking of buying a home, whether on your own (not my recommendation) or with the help of an experienced realtor, here are three factors to consider that will help you "avoid the dartboard" and make a good investment out of the purchase of your home:

1)  Look at all of the numbers associated with the purchase. If you are only paying attention to the monthly payment and nothing else (and trust me, there are some professionals that subscribe to this approach), then...red flag. At a bare minimum, you need to look at the resale history of the neighborhood you want to buy in, the estimated cost of any repairs or improvements you want to make to the home and whether you can recoup that cost when you sell, the tax situation for the district you will be moving into and potential closing costs to name a few. I always tend to do a deeper dive than this for my clients, but this is the bare minimum I would recommend.

2)  Look at the school district where you would like to buy. If you say school systems don't matter because you don't have school-aged children, then...red flag. You may not care about the school system right now, but when you go to sell your home, many of your potential buyers will care. I would say that after condition of the home, the next biggest factor that impacts resale value is the strength of the school district, so if you don't have a realtor helping you, then you need to do your homework and get educated on school districts before you buy a home.

3)  Don't base your purchase of a home on any assumptions about how long you are going to live there. So many people tell me when they are looking to buy a home that they plan to stay in it for a few years or to raise their kids in it or stay in it until they "go to the home." The harsh truth is that nobody knows how long they're going to stay in a home when they buy it. For that reason alone, how long you plan to live in the home should not really play a factor in any discussions about a possible purchase.

What should figure into the decision-making process is the numbers - it's all about the numbers. You know what you like in a house in terms of design, layout, yard size, etc. You don't need a real estate professional to tell you what you like. But you probably do need someone to tell you if what you like is a sound investment.

And that is the most important takeaway: Your home purchase is an investment, and you should treat it like one. The single biggest factor driving your decision on the purchase of a particular home should be the answer to this question: Can I buy the home that I want, at a price that I can afford, make the improvements that I want to make to it, and still get a check at closing when I go to sell it? If you can answer "yes," then you have just made a sound investment, my friend. You are not throwing darts at a board; you are betting on a sure thing. And that is always a good thing.

-Chris Camperelli at www.theeliterealtypros.com