Realtor: Low Mortgage Rates Are Killing the Industry

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By Melissa Terzis, Realtor, City Chic Real Estate, Washington, DC:

Mortgage Rates need to go up. There it is. They do. These rates are killing the industry. The DC Real Estate Market is the Poster Child for why interest rates need to go up.

Since the beginning of this year, I have lost two clients to the decision to rent for another year. I have written 11 contracts for would-be homebuyers, and I have only been able to secure two of those contracts. I promise this is not because I’m a horrible agent. It is because I have a conscience, and I don’t let clients do stupid things on my watch.

The bidding wars are insane and when the going gets tough, I advise people to take their money and keep looking. I realize that steering people away from buying houses and wishing rates would go up makes me the anti-Agent, but flying with the pack is overrated.

It is profoundly problematic for interest rates to stay so low for this long. The primary reason is that it shifts demand and supply into different timeframes instead of letting the economy adjust and self-correct.

Buyers live in “today,” and if they think rates will go up, they panic. If rates tick up an eighth of a point, they feel robbed and cheated. They lament the fact that they didn’t get the house they bid on last week. Then, a few days pass, and rates drop back down, and they kick up their feet and start singing again. They run back out to see more houses. Feeling the looming threat of a rate increase again, they scramble to buy something – anything, just to lock in the low rate. Operating solely out of fear of a rate hike, they become desperate. They make the mistake of overpaying.

We see it every single day, but it bears repeating: low rates encourage desperate buyers to bid prices up, sometimes to an unrealistic number. The demand of the future is effectively robbed because next year’s homebuyer is buying now.

That desperate buyer out there? They are not the only one. There are plenty of others, competing for homes and driving prices up, all in the name of interest rates and not necessarily because of real need. Many of these buyers will get homes that need work, are imperfect, are not in desirable areas, because it was all they could get, and they wanted to lock in while the rates were low.

Instead of a balanced market where these less than desirable homes sell for lower prices, the low rates make even the duds look better. Two more problems stem from this scenario.

First, these homes will still be duds in several years unless the location magically improves or the owner renovates to make the home more desirable. When markets are more balanced, buyers aren’t interested in these homes if they can get one in a better area or better condition for a similar price.

Second, many of the homes purchased today would be on the market again in 5-10 years due to normal changes in people’s lives that require them to sell. If prices stabilize or even slide when this looming rate hike hits, anyone who overpaid will be faced with three options: sell for a loss (which many won’t do), stay, or rent the house to someone else. So now the supply for the future is compromised too.

Many of today’s home sellers have locked in or refinanced at low rates and can make money if they rent. They can move on to another house and let their current one become an investment. And look at that! They don’t even have to refinance to loan-to-value ratios of 75% that are required of investors.

If they recently refinanced while this was their primary home, they can have a much higher loan-to-value ratio than if they were to purchase the same house at the same price but strictly as an investment. Why sell? Seems like a home run to just rent it, which many do, so they can take some monthly cash flow with them and move on. So there’s another house that will not be on the market for sale this spring.

There are also cases where people need or want to move, but are priced out of buying anything else. I recently had a chat with someone who asked my advice on this issue. Because of a schooling situation with their child, they were considering moving from Maryland to Virginia for several years, then moving back and wanted to know what they could sell their house for. I asked why they would sell it, given the costs of selling, moving, buying, selling again, and moving back. They wisely noted, “Yes, and in 3 years, we probably couldn’t afford our neighborhood again since we really couldn’t afford to buy again right now.”

I stopped them from four needless transactions and advised them to rent their home out and rent a place to live so they could come back to their home when they were ready. Well, there’s another four transactions that won’t be happening in the next decade. And I’m not sorry.

After this weekend of house tours, I’ll be writing 5 contracts for 2 different clients with the hopes that they each walk away with a house. Crossing my fingers. And I’ve told both of these clients as well as all my others: things are looking too unstable for the near future and not to plan on selling in the next 10 years. They need to buy the best house they can get for the best deal possible, not be afraid to walk away from overpriced homes, and not get into a bidding war. If they can commit to that, they stand a chance of making a decent investment. By Melissa Terzis, Realtor, City Chic Real Estate, Washington, DC

The party is over. For many speculators, hangover is next. Read…  Investors Left in the Cold in Washington, DC Real Estate

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  20 comments for “Realtor: Low Mortgage Rates Are Killing the Industry

  1. CrazyCooter
    Mar 23, 2015 at 9:15 pm

    My ex wife rode me for years to buy a home – and I finally did in 2007. The marriage ended and the house was an unmitigated financial disaster that to this day still costs me money.

    I am fairly close to a 12 month plan to be completely out of debt and I do not suspect I will ever borrow money again – unless the asset has cash flow. I view homes as an albatross – they limit my ability to move for work/economy, I am beholden to the muni for taxes (and almost no muni’s aren’t in trouble and looking for revenue), and they are constant upkeep risk. In this economy being able to be flexible and keeping costs of living low is tantamount to success.

    I don’t want to live in a crime infested dump, but I don’t want to piss away my money either.

    When I look at rents and mortgage payments, it just doesn’t make any sense at all. I got sucked in, despite my better judgement, but I suspect as time goes on the whole home ownership meme will suffer as more and more people experience the downsides.

    There will come a day when my taxes are going to be too high. I am going to do research, pack my bags, and go someplace more suitable to my preferences. I am happy where I live and I hope it doesn’t come to that, but the way things are going it is hard to not see the possibility of the outcome.

    Regards,

    Cooter

  2. Vespa P200E
    Mar 23, 2015 at 10:13 pm

    I think the housing prices may be peaking where I live in east of San Francisco. There were dearth of inventory on my 8-yr old development last year but all of sudden lot of houses are getting listed in last month or so and it’s only March. Never seen this kind of inventory since we moved in late 2011. I thought about selling this year and move into smaller rental home in not as nice neighborhood but my family is against it.

    As for desperate buyers – a friend in RE business told me that a family was paying $2,500 for a 2-bedroom apartment and the rent was raised to $3,500 when lease ended which forced the family to buy a house in bidding frenzy.

    I think it is not going to end well in the yet inflated again housing in 2015 or 2016…

    • Melissa Terzis
      Mar 24, 2015 at 12:31 am

      The online rent vs. buy calculators on the New York Times site are pretty decent.

      I bet people are selling because they think the rates are going up later this year and they won’t get their price unless they sell now.

  3. VegasBob
    Mar 24, 2015 at 12:16 am

    Amen, Melissa! It’s good to hear from an honest real estate agent.

    I think we are on the same page. I view real estate prices as being set at the margin. At the margin, marginal buyers are buying a mortgage payment. That mortgage payment buys a lot more house at low interest rates and a lot less house at high interest rates. So at low interest rates, housing tends to become grossly overvalued.

    Frankly, I think those who believe housing is an “investment” are crazy. Try not paying your property taxes or sinking thousands of dollars into maintenance and repairs, and see if you still have a valuable “investment.” A house is a wasting asset. If you don’t keep paying, the value eventually drops to whatever the land is worth.

    I grew up in the DC area, but I stay away because of the housing bubble. Maybe I’ll come back when this echo bubble pops and house prices become reasonable again.

    • Melissa Terzis
      Mar 24, 2015 at 12:26 am

      Thank you!

      Yes, I would rather do less business and be able to sleep at night than to push people into escalations and have them hate me in a few years when they get stuck in the swing of DC’s revolving door. People are always being transferred in and out of here – that’s inevitable. I’ve seen quite a few properties for sale this year alone that were just purchased in the last 12 months. The buyers got transferred out of here and became sellers way too soon. And – because of this stupid market, they still listed at an 8-15% increase and got it!

      Some neighborhoods here have a clear and obvious bubble. When DC’s bubble deflates or bursts, those neighborhoods will suffer more than the ones with decent amenities and schools. When you can pay the same price for a house in an established neighborhood with a sought after school pyramid that you can for roughly the same house in a trendy neighborhood which has no metro access or nearby grocery store, there is a problem.

  4. lG
    Mar 24, 2015 at 12:42 am

    rates will never go up ever again! Im waiting for 2.5 by June then refy with a 10 year pay off house leave it to my daughter move to Mexico! Adios America!

  5. interesting
    Mar 24, 2015 at 2:51 am

    “Many of today’s home sellers have locked in or refinanced at low rates and can make money if they rent”

    not even close here in socal, AND i could care less what the rate is at with a VERY modest 3bd/2ba home at about 7x my income the rate could be zero and i’m still priced out.

    but the thing is that same house is about 10x the area average income so the “market” makes zero sense to me.

  6. Christoph Weise
    Mar 24, 2015 at 4:57 am

    The terminology is weird: People buying so called property with debt are not home owners but guarantors who secure the contract between seller and debt providing bank with their future income. The real owner is the bank. People having made such arrangements and need to move would be better served to swap living space using a specialised Uber-typ webpage instead of incurring lots of cost associated with selling and buying “property”.

  7. Michael Gorback
    Mar 24, 2015 at 7:13 am

    I’m hearing conflicting assertions. On the one hand, we’re told buyers are going crazy because rates might rise. On the other hand, sellers want to sell because rates might rise. But obviously this is not balanced if there is a feeding frenzy to buy.

    The advice given to the couple who wanted to sell their house, move away for 3 years, and then move back is questionable. That’s simple extrapolation that the next 3 years will continue the trend. Consider that advice in Phoenix, Las Vegas or any number of bubble markets in 2007. You wouldn’t have done those people a favor.

    • Mar 24, 2015 at 9:02 am

      But wait, Michael….

      If housing crashes over the next three years, and the couple had sold their old home at the peak and had bought a new home elsewhere at the same peak, they would have made a lot of money on the first transaction, but when they have to sell the new home in three years, the one they bought at the peak, they would lose a lot of money. In fact, they would probably not be able to sell. They’d be stuck with it, or they could mail in the keys and walk away.

      The thing with a home that you live in is this: you cannot cash out of the housing market because you have to live somewhere. You can move to a cheaper city or out into the country; and you can rent instead of buy. But in essence, you cannot cash out.

      And Melissa’s advise saved the couple a LOT of transaction costs. Because realtors take their cut, coming and going.

      • Michael Gorback
        Mar 24, 2015 at 12:05 pm

        Or they could have sold their house, rented for 3 years, and got back in. Why on earth would you buy a house with a 3 year time frame anyway? Just the round trip in fees would probably eat you up.

        • Mar 24, 2015 at 1:20 pm

          True. And I think that was at least in part Melissa’s point.

        • Melissa Terzis
          Mar 24, 2015 at 1:51 pm

          The couple wanted to buy back into their current neighborhood. Why leave and sell a house you love only to move for 3 years and then come back to the same neighborhood but at a higher price?

          There are few sellers who want to sell. The ones who want to sell and sell now while rates are low so they can get a high price are the ones who are leaving the area. The people who are just move-up buyers can’t afford to sell because any profit they reap out of their house then has to be dumped into the next house.

          Just like 2005, the best thing to do is actually probably sell and rent. But then, rates will be higher when they go to buy.

          Decisions, decisions. Unfortunately many of these situations are met with solutions that don’t involve adding to a healthy housing supply.

        • Michael Gorback
          Mar 24, 2015 at 3:41 pm

          Once again, mixed signals. Wolf says hang on to the house because the house you own for 3 years will could drop in price as much as the house you sold. Melissa says you might have to come back in at a higher price but using Wolf’s logic you’d also be selling your current house at a higher price.

          And if rates go up, prices go down so are rates really an issue? Most people buy the payment, not the price.

          It seems to me that the important factors are the time frame and if there are a lot of people on one side of the boat. The more distorted in a given direction and the more time you have to let the distortion get corrected, the better your chances of a winning bet. I call it a bet because after all, that’s pretty much what it is. My wager is on a market distorted to the high side and 3 years is plenty of time for the boat to capsize.

  8. Uncle Frank
    Mar 24, 2015 at 7:13 am

    In Silicon Valley when people are paying $300K for a mobile home in a park charging $1K monthly space rent you know it’s out of hand.

  9. williamwilliam
    Mar 24, 2015 at 9:33 am

    I just gave my wife the green light to look for a new neighborhood, school district because the rents on our street are higher than our mortgage payment. I already have a property management firm handling an investment property a few miles away.

    I do believe most people should investigate property ownership. But many places in America are no longer a good place to buy. I grew up in a city where the major employer went from 140,000 employees down to 8,000 over a few decades. And never did the real estate market have a good year above national average in the realm of price appreciation.

  10. Paulo
    Mar 24, 2015 at 10:11 am

    I have a question for you folks. If one lives in a bizarre housing market like SF or DC…perhaps southern California, why do people stay there? Why don’t people research and find other places to live where they can still find work and actually own some property outright?

    I have a nephew who just bought a house in Novato..a small rancher. It cost $750,000.00!! He has a good job, but not that good. It has to be at least 5-6X his gross income. I can’t see him ever paying it off or being solvent, ever. He is 40. I respectfully asked his mom if she thought he might be buying at the top of the market and it might not be a good idea? She had no answer expect the usual crap about Silicon Valley cost pressures, etc. She went into the usual litany of how good her kids are with money, etc. (I don’t see it).

    I bought a rancher in ’88 for $66,000.00. It had a lovely view and was on 1/2 acre. It was 2X my salary. My wife stayed at home with the kids until the oldest was 13 and the youngest was in elementary. I had it paid off by 1990. I refied in ’98 in order to pay off a divorce and owned it outright (again) by 2006. Sold in 2007 and moved to a cheaper rural area….riverfront, 16 acres, etc and still put money in the bank. Taxes were $350/yr until the assesor caught up with our renos and now they are $650/yr. Big deal. My point is this…..it was a common meme that one did not ever buy a home for more than 3X wage. I always had 10% to put down. If a house was more than 3X wage then it was unaffordable. We also had shit furniture for almost ever. I see young folks today with stainless steel marvels, new couches, big screen tvs, etc. Don’t people ever say, “no, I can’t afford it”?

    Sorry Wolf, you can cash out. Even if you buy a small lot and throw a trailer on it you can cash out for the bulk of your equity. If I woke up from a nightmare and found myself in those nutso markets I would leave leave leave and build a life. And yes, it is that easy to do. I found work in every recession, and sometimes even worked away from home. Besides, you guys are well on the way to recovery, aren’t you?

    Isn’t there a bit of self-induced disconnect around here?

    • williamwilliam
      Mar 24, 2015 at 11:11 am

      People buy in fear of missing out on huge future gains, or they face huge rents. Also, CA laws cap property tax increases which make people fear missing out of locking in lower taxes. It’s expensive to rent in Novato. The math has changed from the 80’s because interest rates enable someone to borrow for a home 8X their income. With higher rates, people used to borrow for a home 2-3X their income. The whole market is wildly distorted making it a mine field for players. I still recommend people investigate the property market in the area.

    • CrazyCooter
      Mar 24, 2015 at 9:51 pm

      If you read my post upthread, you will realize that people do exactly that but it never makes the news. No one in RE wants to talk about the growing segment of folks who eschew debt and insist on paying cash.

      I am not out of the woods yet, but when I am I will NEVER venture back in. The last time there was a whole generation of Americans with that attitude they lived/worked/had families during the 30s (depression and then war). And that is exactly the type of situation we find ourselves in again.

      And since we have debt-money now, this is going to be a real s**t-show. Anyone that claims to know the outcome is lying; these waters are uncharted.

      Don’t try to teach money-sense to anyone out of high-school, but keep some goats so when they call, desperate for a roof, advise them you have one and they get up a X A.M. in the morning and get to work. They will hate and then love it. If they aren’t ready for that, send them packing with a clear conscious.

      We gotta get back to life, family, and economy that has a real foundation and we are quite far from port. Tough times ahead.

      Regards,

      Cooter

  11. Julian the Apostate
    Mar 25, 2015 at 9:00 am

    I’m on the same page as Vegas Bob and Cooter. Owning a house is a never ending battle – and we own our house free and clear. My job precludes me being a landlord; I can barely able to keep up with the homestead. Last month it was a $2400 furnace, which put a serious crimp in my emergency fund. I will not move again – the kids can handle it when I’m gone. Read the Zero Hedge article that rated the states for liveability after the crash, my state got a B- , works for me. I largely agreed with his ratings as my job takes me to all 48, and once to Alaska on vacation. The prices people pay in some of these places like Silico Valley scare me and I’m fearless.

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