December 2015 market update
It is easy to feel really good about the stable real estate market in SE Michigan in the last 12-18 months.
Those of us who have worked in the industry for a long time will never forget the fast markets of the early to mid 2000’s with warp speed property value appreciation and, in retrospect, what was a very low bar for both mortgage qualification and out of pocket buyer costs at closing (think no doc loans and 105% loan to value financing). Hindsight is always 20-20 isn’t it? Then came the volatile economy of 2008 when interest in buying a home evaporated; without demand, property values declined as fast as they had gone up just a few years earlier. Homeownership became an almost unsurmountable burden for many during that year of great national economic uncertainly and high unemployment. 2009 brought rapid changes in my industry (new technology, many businesses tied to the real estate industry failed, downsized or consolidated). Government backed buyer stimulus programs lured some but not many 1st time buyers into the market; tricky short sale negotiations for “underwater” owners became standard practice for Realtors. In 2010 high inventory levels and historically low prices were not enticing enough to jump start a turn-around in the local real estate market; buyers stayed cautiously on the sidelines waiting for the prices to hit bottom. In 2011 bidding wars erupted in select market segments as buyers saw property values start to increase; mortgage interest rates dropped below 4%, a wake up call for anyone on the fence about the very affordable nature of property in SE Michigan at that time. The 2012 housing market recovery became a rally mid-year characterized by low inventory/high demand. SE Michigan companies were hiring again, creating a pool of buyers with jobs who figured out quickly that owning costs less each month than renting in light of continued historically low interest rates. An extreme seller’s market in the first half of 2013 meant that consumer confidence in home buying/demand was back at all market price points in most locations. It was a great time to be a seller, a frustrating time to be a buyer as it often took offers on 4-5 different homes to have one accepted in the ultra competitive sellers market. Many new user friendly websites made the internet a 24/7 source of real estate information for everyone, not just computer savvy millennials. In 2014 buyers and sellers usually both left the closing table satisfied with the transaction. There was generally a reasonable balance of property for sale and buyer demand for it. The pace of the market was manageable for all. Life as a Realtor was good. By midyear in 2015 the number of home sales in the region was up almost 8% compared to the same period in 2014. Median sales prices hit 10 year highs in many Michigan market areas. Few locations were left behind in what I see as the completion of the market recovery cycle. It was easy to establish market value for owners who bought at the peak of the market in 2004-05…start by asking what they paid for the property and go from there... Distressed sales…typically bank owned or short sales…accounted for about 5% of sales reported to the regional MLS, compared to up to 50% in 2010. Nationally the number of completed foreclosures dropped to close to 2007 levels.
The local early Spring 2015 market did not kick in in earnest until mid/late March due to lingering polar vortex weather conditions; once it did we had 4-5 weeks of what I call the annual magic month of real estate for sellers: high demand and low inventory, translating into quick sales at high prices. The first wave of new to the market buyers hit the streets…or shall I say real estate websites…in January with the goal of buying in the first quarter of the year. Their motivation can be that while selection may be limited, prices are lower early in the year…and there is certainly some truth to that statement. Some appraisals to establish value for mortgage purposes came in below the sales price in the first 4 months of 2015, a common situation in an appreciating market that buyers understand but lenders without solid recent historical sales data do not (kind of a chicken and the egg situation…current market conditions establish current market value but lenders will not acknowledge value without historical date, i.e. recently closed sales, which are inevitably lower in an appreciating market). By the end of May the market was balanced and price points had been established for the year. In November the annual real estate close out sale started…I got dozens of marketing emails promoting price repositioning (the soft way to say “price reduced”). The perceived threat of rising interest rates and unseasonably good weather kept more buyers actively looking later in the year, taking advantage of the new prices, and by mid December a lot of inventory was pending (sold but not closed). Barring awful weather, early 2016 should be a good time to have property on the market. Because of the year-end sell off in 2015 there will be fewer options for the first wave of eager 2016 buyers. Along the same lines…I always tell owners of property with an issue (location, unique floor plan, dated décor, etc) that might become an objection later in the year when buyers have more homes to choose from to get it on the market in January/February when there is less competition.
THE BIG QUESTIONS AS WE LOOK AHEAD TO THE 2016 REAL ESTATE MARKET: What impact will an (inevitable most lenders say) increase in mortgage rates have on home sales AND are home prices sustainable/will they continue to trend upwards now that they are back to 2004-5 market peak levels? Interest rates first. On December 1, 2014, the rate for a 30 year fixed loan was 4.125%; on the same day in 2015 it was 4.25%, dropping from a peak of 4.75% earlier in the year….so it is safe to say rates spiked up occasionally in 2015 but there was no solid sustainable upward trend as is predicted for 2016. Principle and interest for a $200K loan at 4.25 % is $984; at 5.25% P and I increases to $1104. Will rates go and stay over 5% in 2016…hard to say. Would a 1% increase mean fewer buyers will qualify or be inclined to buy a home in the low $200’s…probably not… it still costs less per month to own than rent even after taking taxes and insurances into account plus there are enticing income tax advantages for owners not available to renters. In the $450-650K price range (considered by many buyers in this market area to be an expensive home, something at the high end of their price range) higher rates may dilute the pool of qualified and willing buyers. A 417K loan (the max loan amount without paying a jumbo mortgage rate premium) at 4.25% costs $2056. P and I; at 5.25% that jumps to $2301. Not a huge difference. That said, in 2015 the majority of people I saw buying homes priced $450K+ were current homeowners stretching their monthly budget to the max to buy the home of their dreams while it was still (almost) affordable. There may be a time when rates increase and the stretch is just not affordable or not tempting enough in this price range for what I call optional buyers (people who are comfortable where they are and do not have to move but will if there is significant incentive to do so). Translate that to modest or no price increases. Next, will home prices go up, down or remain unchanged in 2016? We are very fortunate in SE Michigan. This market area has always offered potential home buyers many housing options in terms of price, style, size and condition in established communities with the amenities people want in their home town: strong school districts, city services/recreation programs for residents of all ages, convenient commuter expressway access, and viable business /shopping districts. The long and short of it is that the entire region has a lot to offer, it is an in-demand place to live, and apart from major far reaching financial meltdowns (aka the great recession of 2008) or cyclical low spots tied to the regional economy, the housing market has historically been and will remain liquid and sustainable. Confidence in the value of homeownership is back both in SE Michigan and other major metropolitan areas. Results from a mid-year National Association of Realtors survey indicate that 8 in 10 Americans now believe that owning a home is a good financial decision, and 68 percent also believe that now is a good time to buy. The recovery of our regional economy in the past 3 years has both gotten people back to work and created new jobs, expanding the pool of qualified and motivated potential home buyers. Many who lost their job and then their home in 2008-09 are now employed and eager to own a home again; after 3-5 years of good credit they can quality for select mortgage programs. This increased interest in buying and demand for homes in SE Michigan should at the very least support 2015 property values. Several shifts in ownership patterns could reduce the supply of homes for sale in the future, intensifying competition for property. I sense that many current owners have come to terms with their home as just that, a long term place to live in, put down roots and create a sense of place. Moving every few years for something bigger or newer, often in a location that increases commute to work time, seems to have gone out of style. Homeowners are leveraging home equity to obtain home improvement loans, electing to add on or remodel instead of moving so they can maintain neighborhood connections. Baby boomers are electing to age in place rather than downsizing or moving out of state when children leave home, so fewer of the larger homes typically owned by members of this demographic are coming on the market. All that said barring unforeseen circumstances or events that could impact the present upbeat national/local economic recovery cycle, home prices should remain stable with a comfortable 3-5% annual appreciation rate possible. Modest interest rate increases will have a modest impact on the market, more so with optional buyers in higher price ranges. High income, or dual income buyers probably will barely notice a rate increase and its impact on the monthly payment unless rates get to 6%, then all bets are off number for most Realtors.
REAL ESTATE FINANCING TRENDS The most interesting to me is the “8 minute online mortgage” introduced by Quicken Loans’ ROCKET MORTGAGE recently. The company says that this product will allow for full credit approval of a purchase or refinance mortgage in as little as 8 minutes after the consumer enters basic financial and personal information online. That information is used to verify and obtain supporting data electronically, so the need to assemble and furnish hard copy documentation is eliminated. This is a demographic driven adaptation of the traditional mortgage application process, one targeted to appeal to consumers completely comfortable with a smart phone app-based lifestyle. This hands off process is not for everyone, however. In 2015 four transactions I was involved in did not close because the potential borrower could not obtain financing, either because they got what turned out to be a worthless pre approval letter after making an online loan application OR a loan officer issued a mortgage pre approval letter without asking enough questions. Buyers please take note: if your financial situation is the least bit complex and/or there are extenuating employment, debt or credit circumstances ask me for a referral to a skilled local loan officer who can offer sound advice and help you package your application in a way that it will be approved. The Government CPFB (Consumer Financial Protection Bureau) initiativeput newrules in place in October that changed the way information is sent to borrowers before and during the formal loan application and before closing...part of a “know before you owe” initiative. At year end, lenders and title companies were working hard to put compatible software in place so that the appropriate and correct new forms could be created and distributed in a timely manner conforming to mandated disclosure timelines. Most lenders asked that the number of calendar days specified on a purchase agreement from loan application to closing day be extended from 30 to 45 days to accommodate the new regulations. Low down payment mortgage programs never really went away and buyers, even those with substantial savings, are using 3-5% down payment conventional or FHA loan programs, or even 0 down VA mortgages if they are qualified veterans. At current rates it costs about $5 a month P and I to borrow $1000 using a 30 year loan program, so keeping $10,000 in savings will increase the payment only $50 a month. Many homeowners are serial refinancers…it is not uncommon for me to see 5-8 refinanced mortgages in public records associated with one property. Think about it, all those letters and calls you get from your lender encouraging you to refinance to lower your rate/payment can be a benefit for you BUT the lender benefits too…there are fees involved. At some point owners who are settled in a home for the long term should consider locking in a low rate (like those available now) with a shorter term loan (rates are quoted in 10-15-20-30 year amortization terms) with the old fashioned goal of owning their home free and clear, with no mortgage, by retirement age. Having no mortgage gives you options then. Every time you refinance you are starting the loan amortization all over again; you are counting on appreciation to build equity, not on your monthly payment reducing the outstanding balance. It is about year 15 of a 30 year loan amortization when the principle part of your payment really starts to increase, reducing the amount you owe. And it is easy to take out a few thousand here, a few there along the way, every time you refinance making your home your piggy bank and less of an asset.
HOME BUYERS The biggest impediment to ownership for many first time buyers is student loans. Minimum required payments for these loans with high balances and high interest rates can lower the amount a borrower qualifies for to an amount that just is not reasonable in the SE Michigan real estate market. I offer no solution to this problem beyond buying lottery tickets, waiting to buy until your income goes up or finding a co-borrower or co-signer for the mortgage. Loan qualification ratios for borrowers present a short sighted picture of the complete cost of owning a home. Monthly income to housing cost ratios have gradually changed….qualified borrowers can spend up to 40% of their monthly gross income for a house payment (principle, interest, taxes and insurances) if their debt ratios are low and credit scores high. This locked-in- at-closing, fixed monthly expense does not take into account the other costs associated with homeownership: property tax increases, high utility costs if seasonal temperatures are extreme, or major maintenance/repair expenditures (every homeowner has to deal with a big ticket item every few years…4-8K for a roof, 2-5K for a furnace, 1-3K for a refrigerator, etc). My clients who keep house payments to 25% to no more than 30% of monthly gross income tell me that that allows for a life…meals out, movies, owning a reliable vehicle, vacations…and saving for the inevitable maintenance expenses of owning a home. My best advice: look closely at your recurring bills and current/potential future income. Then come up with a monthly amount that you are comfortable with for a house payment. Ask your Realtor or mortgage loan officer to use that number to calculate a price range that works for your situation, not the maximum loan amount your income/debt ratio qualifies you for. Trending now: buyers are interested in: “green” homes, harmful-free construction and finish materials; homes that can easily accommodate future multi-generational family living arrangements; space for a garden, including the option of edible landscaping in the front and back yards; open but not too open floor plans…sightlines from all over the main living level to a working kitchen with the associated cooking apparatus gets old fast. Very important for any buyer: set up a file on closing day and keep all receipts for improvements you make to the home when living there. Single homeowners with gains over $250K/for married people that number is $500K (current IRS on capital gains tax thresholds) need documentation when they sell in order to reduce taxable gain. Even if these gain numbers may not apply to you when you sell your buyer will appreciate knowing about improvements you made to the home and when they were done. Find on line and print the IRS publication 523 aptly titled Selling Your Home. It lists things you can subtract from the capital gain when you sell. Tax rules change all the time, so working with a tax professional is always recommended when you move beyond the single sheet tax return stage of your life.
HOME SELLERS Homes for sale typically fall into three condition NOT PRICE categories The bottom 25% are investment grade properties, in need of lots of work: cosmetic, maybe structural, and the ever so important major kitchen and bath remodels. “Flippers” and, in some areas at some prices, builders looking for tear down opportunities, snap these homes up. The middle 50% of homes for sale are average homes, solid with good bones, perhaps a bit dirty or cluttered, there may be old carpet over wood floors, They are in need of a major upgrade or two (replacement windows, efficient heating and cooling systems, larger capacity electrical panel, a kitchen remodel, etc). These homes need something compelling to make them “pop” in the eyes of buyers; without that they may linger on the market for 30-60 days. The top 25% of homes are appealing and compelling in many ways, starting with good visual appeal inside and out (curb appeal remains one of the most important selling features of any home). These properties are clean and freshly decorated, often staged using the sellers own items. They look good online and inevitably smell good (NOTE never discount this trait of your home…pet odors, cigarette smoke and cooking odor can and will kill a sale). These homes sell quickly AND for top dollar in their price/ style range. It is hard to find enough of this category of home to show at one time…they just do not stay on the market long. How would you categorize your home if you are considering a sale in 2016? It may not take much to get it from AVERAGE to COMPELLING. Ask me to walk thru your home before you are ready to sell…a month or two before your target list date. I can make general suggestions and/or refer you to a home stager if you are inclined to take things to that level. NEVER FORGET what we Realtors call THE HGTV factor. Popular “shelter” programs have raised the bar in terms of buyer expectations. With the low cost per $1000. to borrow money buyers almost always are drawn to and want to buy the compelling homes because the higher price will not increase the monthly payment a lot. Few buyers have time to invest “sweat equity” in a home and even fewer actually have the skill set to do more than paint. If your home falls into the average category and you do not have the resources…time or money…or motivation to make modest changes and improvements so be it. We will stimulate interest with aggressive pricing and a few other tricks of the trade.
MISCELLANEOUS REAL EASTATE OBSERVATIONS It’s going to take condos with big, first floor bedrooms in familiar neighborhoods to lure aging baby boomer buyers out of their long term family homes…people ask me about this housing option all the time and it is just not readily available in S Oakland County. The high acquisition cost of land to build new projects with the larger footprint associated with this feature makes the cost of the finished product prohibitive once land and construction costs are factored in. Builders make money building up not out. The property everyone notices: the container home at 2531 Rochester Road in Royal Oak. Over 2000 SF built using recycled shipping containers. List price: $429,900. People are talking about real estate in the City of Detroit. Earlier this year the New York Times Magazine had an article that was widely circulated with this headline: “black and white, young and old, billionaires and shop owners-a growing chorus of optimists in Detroit are saying that the time is right to invest. Is the post-post-apocalyptic city finally here? Buy Low” Google it and read it…very interesting. The Pantone COLOR OF THE YEAR, the color that will show up in home goods, clothing, even cars in 2016 is actually TWO colors for 2016: Serenity (light blue) and Rose Quartz (pink). This particular pairing calls to mind babies; Pantone says no, the shades were chosen to convey rosy warmth and tranquility. Note: I rarely saw the 2015 color MARSALA, a rich reddish brown, in home décor or even accessories. Dark accent walls are out; lighter paint colors and accessories that open up the space are in. A great new real estate app is REALCOMPMLS. It offers ad- free GPS based local information in real time. The use of technology and easy 24/7 access to information continue to dramatically alter the real estate business. I strive to balance the time-saving use of electronically transmitted forms with e-signatures and easy, quick text and email contact with clients and Realtors with my commitment to a relationship-based real estate practice. For me that means in person meetings when possible and open, frequent, in depth communication. My commitment to both buying and selling clients has remained unchanged for many years: I believe it is my job to provide all the facts, figures and big picture market information they need to make the right real estate decision for their situation.
Best wishes for a happy, healthy and prosperous 2016