What can bring down house prices and rates?

What could bring house prices and rates down? According to my friend Jay Vorhees at JVM Lending, it could be something called “monetary tightening,” or an experiment conducted by The Fed to infuse the economy with cash. Basically, what Jay is getting at, is that you’ll never know exactly when to buy or sell (or when a market dictates that decision), and that assuming you know the market intimately trying to time the market may be a mistake. Read on for more from our slightly-edited version of Jay’s blog:

Dude Sells Too Soon!

I was at a graduation party yesterday and the host told me how his law partner sold his Silicon Valley home two years ago because he was convinced the market had peaked.

It hadn’t. The poor guy’s former home has gone up another 20% since he sold, and so has his rent. The host made the further point that people should never try to time a market they are not intimately familiar with.

I like to remind everyone that nobody should ever try to time a market, no matter how much they know, because there are so many variables they have no control over – especially when those variables involve the Fed.

Elephant in Room: Monetary Tightening

There is a huge elephant in the room that nobody is talking about: Massive Monetary Tightening via Higher Rates and Quantitative Tightening.

After the meltdown, the Fed engaged in a massive experiment known as Quantitative Easing, where the Fed bought trillions of dollars of government bonds and mortgage-backed securities. These bond purchases increased the money supply by flooding financial institutions with cash in an effort to increase lending and liquidity. The Fed also lowered the rates to unprecedently low levels.

The low rates and huge capital infusion pushed up asset prices, particularly with respect to stocks, bonds and real estate. This is what usually happens when the Fed increases the money supply, and this is partially why we see such high asset prices now. Many people believe high prices are just a function of too much demand chasing too little supply, but that is not always the case.

Excess demand is often driven by excess capital in an economy; people want to park their capital somewhere, as opposed to letting it sit in bank accounts, so they buy assets. In any case, the Fed created about $4 trillion of new money up through 2016, and in 2017 they reversed the policy! They are now not only pushing up rates but also selling bonds with the intention of vacuuming about $2 trillion out of the economy.

This will likely have an adverse effect on asset and housing prices at some point. Do I think real estate prices will tank? No. I still like real estate because the fundamentals are so strong in many areas. But, I don’t think we’ll continue to see such strong appreciation, and now might be a good time for Silicon Valley lawyers to sell their homes.

Fed Could Reverse Again

Nobody is more aware of this than the Fed, and they are watching closely. If Fed policymakers see the economy showing excessive signs of softening, they could very likely change course again – and lower rates. Again, nobody knows what will happen because we have never seen anything like this before! We are in the midst of one giant experiment, and we all get to be the lab rats.

The Cost of Waiting

I generally encourage all my clients to be patient in the home-buying process. You’re looking for your dream home, and a house to call your home where memories are created. You want to exercise patience and really find the right place. However, at some point, waiting too long or sitting on the fence can have consequences.

As you’ll see in the blog from my friend Jay Vorhees at JVM Lending below, waiting too long on a home purchase can be costly. He highlights one particluar (anonymous) client who kept quibbling over small price differences and that stubbornness led to her not only missing out on her dream home, but settling for an entirely different town. To add insult to injury, the home she wanted has doubled in value since!

Read on to learn more:

COST OF WAITING IN 2012

In 2012 and 2013, we had a borrower looking to buy in Oakland and she was obsessed with getting the absolute lowest possible price.

As a result, she kept walking away from transactions, b/c of $5,000 to $10,000 price discrepancies, even though she was shopping in the $650,000 range in what was becoming the hottest market in the country.

The $10,000 differences she quibbled over worked out to be less than $50 per month in payment. What is most interesting is that she waited so long that she was ultimately unable to buy in her desired Rockridge neighborhood altogether, and she ended up buying in a suburb east of Oakland.

The houses she was bidding on are now worth twice what she was offering too. Her “cost of waiting,” or cost of not executing, was extremely high, to say the least. Unfortunately, her story is not unique.

RATES HIT 7 YEAR HIGH

According to this CNBC Report, “interest rates are surging to their highest level in seven years.”

And, it looks like they are going to continue to climb, based on continued strong economic reports and announcements by the Fed.

Despite the rate increases, the demand for housing remains very strong. In addition, property values continue to appreciate at a surprisingly fast pace.

COST OF WAITING IN 2018

These factors (increasing rates and appreciation) combined make the “cost of waiting” as high as ever.

In a recent National Real Estate Post Video, at about the 9-minute mark, Barry Habib uses a $500,000 Orange County purchase as an example.

At current appreciation rates, waiting even six months can cost a buyer an additional $200 per month, according to Mr. Habib.

Waiting a year can cost over $400 per month.

Interest rates remain a gift

Recently, we’ve talked a lot about the rising interest rates. Everyone seems to be in panic mode over it, and my friend Jay Vorhees of JVM Lending is here to explain – in a historical context – why the reaction is overblown. He says the only people who should really be worried are businesses and companies that focus only on refinancing.

We’ve already touched on why higher interest rates are good, but an interest rate under 6 percent is amazing when put in a historical context, and should be treated as such. Here is a graph from Freddie Mac that shows an in-depth breakdown of interest rates over the past 30 years, but we’ve also shared JVM’s table on interest rates:

DATE                                      RATE                      COST
 
March of 2017                    4.2%                     0.5 Points

April of 2014                      4.34%                   0.6 Points

2008 (entire year)           6.03%                   0.6 Points

2000                                      8.05%                   1.0 Point

1995                                      7.93%                   1.8 Points

1990                                     10.13%                  2.1 Points

1985                                     12.43%                  2.5 Points

This shows that not only are rates much lower than they have been at the highest points of the market, but that loans are also much lower than usual – yes, I know our prices are higher than most of the country, but higher interest rates, always hurt you in the pocket book more than higher prices.  Anytime you can lock in a rate below 6 percent, you are doing quite well. So maybe now is the time to get into the market!

What to know about the new tax bill limits in 2018

The GOP finally pushed through its tax package, and the reaction has been interesting to say the least. While some seem to love it (The Wall Street Journal said the bill is the best thing to ever happen to our economy), many others hate it. Regardless of how you feel about the bill, it is signed in now and it’s time to see how it affects you, as a homeowner, seller or buyer.
My friend Jay Vorhees at JVM Lending put together a blog detailing some main points about the GOP tax bill and how it may affect real estate. Here are the main thoughts:
1. Current homeowners will be grandfathered in and still allowed to deduct interest against $1 million of mortgage debt. In 2018, buyers will be limited to $750,000 and interest against home equity lines will not be deductible.
2. State and local tax deductions will be capped at $10,000. This will be difficult for people in California.
3. Standard deductions are doubling to $12,000 for single filers and to $24,000 for married filers, so many homeowners won’t have to deduct their interest and property taxes anymore.
4. We have no idea what exactly the bill will do for the market when all is said and done, but for now, we can expect the low-inventory, high-demand market to suffer in high-end areas down the road, while remaining neutral in the short term.
5. To fully understand the bill’s impact on you, see a CPA. Defer your commissions. And if you’re planning an out-of-state move, consider relocating to a low-tax state like Florida, Texas or Nevada.
I’d like to expand on #5 quickly – as Jay mentioned, there will be a new $10,000 cap on tax deductions starting in 2018. If you paid off your property taxes before January, you should be able to save thousands of dollars on that by avoiding the new rule for a year. And if you are planning a move out of the Bay Area to another part of California or another state, you should be consulting a realtor or a CPA to see what kind of savings you can get!

Why rates went down after 4th Fed increase?

My friend Jay Vorhees at JVM Lending wrote another interesting end-of-year blog recently, regarding rates. Despite the Fed increasing rates for the 4th time in 2017, they are still down. Why is that, and how does it affect you?

In Jay’s blog, he notes that 30-year fixed rates have fallen 1/4 percent over the last year even though the Fed has done four increases. On that note, he asks why the Fed’s rate increases don’t push up mortgage rates?

In response, Jay gives two main reasons:

  1. Short-term rates don’t always affect long-term rates
  2. Many factors (besides the Fed) influence rates

Inflation, geopolitical strife, economic news and demand for credit and bank loans are the other main factors named by Jay. Most of those are very relevant in today’s societal and political climate. Basically, the Fed helps influence rates, but isn’t the sole influencer – if investors are pushed out of stocks or bonds into the other, due to war, a poor week on the stock market, etc., rates will change just as rapidly.

So, what does this mean for you?   Rates are going to continue to fluctuate. They are still low, so if you are considering buying, it might be a good time to get off the fence and make a move in 2018!

Let’s talk about Millennials and Real Estate

My sons are Millennials. My Walnut Creek Lifestyle freelance writer is a Millennial. More and more of my clients and colleagues are Millennials, as that generation continues to age into home-buyers.

So, realtors like myself are starting to notice more trends with the market geared toward that age group. It’s a different real estate market for Millennials than it was for their parents – nowadays, they are graduating with huge student loan debts, having trouble finding lucrative work out of college, and then struggling to pay sky-high rents and mortgages once they do get jobs.

That said, Millennials are driving the real estate market right now, which has made the following observations more obvious.

From San Francisco realtor John Solaegui:

  • There is a low inventory of single-family homes in San Francisco
  • Millennial buyers don’t care about parking spaces (though this might be more prevalent in San Francisco – it’s contradicted by the graphic above!) with the rise of ridesharing apps – they’d prefer having decks or gardens for outdoor entertaining
  • Areas like Noe Valley, Glen Park, Bernal Heights and The Sunset in San Francisco are extremely popular with Millennial buyers right now

From the California Association of Realtors’ REALTOR Magazine:

  • Millennials are cashing in on equity at a historic rate, thanks to rising home prices
  • One-third of Millennials say they are considering applying for a HELOC (home equity line of credit) in the next 18 months – much more than Gen-X or Baby Boomers
  • HELOC’s are popular with Millennials because they can consolidate debt and afford home remodels with them

I think this is an interesting trend in our market. Home prices are high, but so are the debts and loans owed by Millennials, so we’re seeing more and more interest in new ways around that issue. And even more interestingly, Millennials are changing the way we market homes – who cares about parking when you don’t have a car, right?

What the most recent rate hike means