The good news for buyers is that both home prices and interest rates have fallen to the point that housing is more affordable than ever. The housing market is on sale! Funny thing is, it seems the more affordable the houses the fewer of them sell.
Think about it, back in 2004-2005, when the market was on fire, people were desperately trying to get in. They’d buy a house with busted and worn-out everything, on a busy street next to power lines in an ‘up and coming’ neighborhood and offer $20,000 more than it was listed for.
They’d borrow from parents, take money out of retirement accounts, secure 100% financing at 6.5% or more, and I’ve even heard rumors that on those ‘stated income’ loans, some folks weren’t always truthful about what they earned. They would rationalize that they’d eat out less, fix the place up themselves, build ‘sweat equity’, refinance, and if times got tough, they could always sell for a profit.
All of this was done in an effort to buy homes they could barely afford, before prices went even higher, making them even less affordable.
We all remember the stories of the buyers who would contract for a home in a new development, then when it was finished 6 months later, turn around and sell it for $50,000 profit.
We saw neighbors refinance after owning for a year, and buy new furniture, jet-skis, cars and vacations. They’d then sell, still make a profit and have all this cool stuff.
What happened next? The bottom fell out. Someone finally shouted, ‘Hey, these houses are over priced!’, and others admitted that the emperor had no clothes. Prices started falling. People defaulted or just walked away from their homes. The market went into a tailspin.
Here we are, 5 years later, where prices and rates are such that the clerk at Dairy Queen can afford to buy, and there are plenty of bargains, but sales are relatively slow.
Why is this? What’s the psychology behind it? Yes, lending guidelines have changed, making it harder to qualify, but banks are still in the loan business, and with FHA and other programs, loans are still getting approved.
I think the real reason is fear. People are afraid it’s not over. It’s gonna get worse. Houses will be cheaper, interest rates even better…or will they?
According to Capital Economics Research, homes are currently undervalued by 17% relative to disposable income. I’m no math genius, but I think that means there are some deals to be had.
While homes aren’t flying off the shelves, there are some folks buying. Although it is a mixed bag, with relocations, folks returning to the market after years of renting, and recently, the move-up buyer, in my experience, those most eager to buy are the first-timers and investors.
I talk to people every day who are making their first home purchase. They’ve been saving their money, paying their bills on time, and now can have their pick of the market. I just sold a remodeled, 3 bed, 2 bath single story home in a nice neighborhood in Sacramento for $167,000.
Put 20% down on a house like that and you have a payment under $1000 per month for the life of the loan. FHA with 3.5% down and you’ll have a payment of about $1250 per month.
With homes like that renting for $1200 to $1400 per month, an investor can actually have positive cash flow, and when the market recovers will build equity in the place. These are solid investments, and people are starting to realize it.
As I always say, no one knows if we’re at the bottom, but we know a good deal when we see one, or at least some folks do.
Well, that’s about it from the cheap seats.
Please forward this to folks you know who may be thinking of buying or selling, or just like reading about real estate.
We’ll talk soon.
Happy Holidays from the Heard Family!