Monthly Archives: October 2018

Interest rates vs Declining Values – PR11 Transcript



 

Tom, here.

This is Price-Reduced.com where we talk a lot about real estate and a little about life.

Want to dig deeper? Read the transcript version of this podcast for helpful and interesting links.

Are you a bird watcher? Do you like Cranes? Did you know they live on all continents except South America and Antarctica? Crane watching can tell us a lot about what is happening in the world today.

Are you familiar with the RLB CRANE INDEX ®? Of course when it comes to this index,  we are talking about construction cranes and not the bird.

Like a big storm sweeping across the U.S. we have gone from storm watching to crane watching, where commercial construction is booming and unemployment low. Wages are rising and it seems like it is full steam ahead.

If you want the world view, there is the RIB International Crane Index®. What cities have moved in up or down in relative construction cost? Dublin up 3 spots, Sydney up 1, and Auckland up 6 spots. Perth and Christchurch each dropped 4 spots, and Madrid dropping 9.

What is happening in North America? Toronto leads with 97 cranes, Seattle jumped back up from 45 to 65 during a six month period. Portland dipped slightly from 32 to 30.

Where was the real estate market so hot that the number of homes for sale went from 87 down to less than 10 in just forty hours? Why, the same place where the vacancy rate for rental houses is 42%, which is the highest in all of British Columbia. How can this be happening in the town of Kitimat? This is a great example of how development can dramatically affect the local economy of any one city or town. In this case it is the approval of Canada’s LNG (liquified natural gas) project.

The U.S. unemployment rate, at 3.7%, is the lowest since 1969. With all of those potential home buyers working, the real estate boom has to continue, correct?

Won’t increasing interest rates put the brakes on the housing market as homes become more unaffordable?

Probably not in the short run. If you have been thinking of buying but felt no urgency, what might be the tipping point to cause you to move into action and buy that home you have been considering? For many home buyers increasing interest rates would cause them to lock in interest rates before they continue to increase and put home ownership out of reach.

Consider this. A $300,000. Loan amortized over 30 years at 5% interest would cost $1,610.46 per month for thirty years for a total cost of $579,765.60  Rates jumping to 6% would cause your loan payment to go up to $1,798.65 for a total loan cost of $647,514.  That is a monthly increase of $188.19 for a total loan cost difference of $67,748.40

So, which side of the coin flip are you calling?  Heads, interest rates are rising and better buy now, or tails, prices are going to level off or even decline to offset the higher interest rates?

If you are in an area where “Price Reduced” is a common real estate ad heading, that doesn’t necessarily mean foreclosures are on the rise. View this chart of historical foreclosure rates as well as a U.S. map of color coded foreclosure rates by city which show foreclosure rates are down 75% in the first half of 2018 compared to the peak during the first six months of 2010.

The New York Times recently did a study of the Denver real estate market. There is a slowdown in the acceleration of prices, but they have to this point continued upward. What is happening in Denver as housing becomes unaffordable? Some leave to more affordable housing in other cities. This trend can be seen in other part of the U.S.

Rising interest rates not only affect those buying a home, but also those thinking of selling and buying.

If you bought a home between 2011 and even as recently as part of 2017, you could have borrowed money somewhere in the 3% – 4% range. If you were not getting a job transfer or had a major life change, would you be willing to almost double the cost of the money you borrowed? Another way to look at that is would you be willing to move and replace your current home with one half the size of what you currently have?

In 2016 the number of people in the U.S. who were moving was at an all time low. From 1985 to 2008 the average time spent owning a home in the U.S. was six years. Can you guess what it was in the latest 2018 report? Eight years? Ten years?  The average is 13.3 years. Check out this map to see what it is in twenty major U.S. cities.

If you are thinking about buying a home, what month do you think would be one of the best to buy in? Realty Trac tracked 32 million homes over 15 years and on average, those who bought in October paid 2.6% less than market value. That is $2,600 for every hundred thousand dollars of house that you buy.

Do you know which neighborhoods in the Portland Oregon Vancouver Washington Metro area where prices are increasing the fastest? Oregonlive has neighborhood maps and statistics that keep you in the know!

If you wanted to compare the headlines and news reports between 2018 and 2007, what might be one way to do that?

Where to find it? Do you know you can go to Archive.org, also known as The Archive Machine, to find news clips of what was happening in 2007? It describes itself as “a non-profit library of millions of free books, movies, software, music, websites, and more.” You not only have the text version of many books, but also the audio version. A recent article goes into more detail about what is offered on Archive.org including a vast classic video game collection you can enjoy.

The amount of information it has on real estate investing, training and news from many sources around the world is worth taking a look at.

The Communication Conundrum

The real estate sale and purchase process is in some ways very simple. Find the house you want. Put in writing some basics such as how much you will pay, what conditions your offer is subject to and when you want to close and make it yours.

How hard can it be to communicate during this seemingly simple process?

Probably no harder than the daily communication we have with each other in our homes or at work.

In 1990, Elizabeth Newton, a graduate student at Stanford University did an experiment which The Harvard Business Review says illustrates “The Curse of Knowledge.” She created a game where you were either a “Tapper” or a “Listener”. The tappers would choose a song that was well known and tap it out. The Listeners would name the song. There were 120 songs tapped out.

If you were a tapper, what percentage of listeners do you think would correctly name the song you tapped out? In this experiment, the tappers expected 50% of their listeners would be able to do that.

When we are talking, sharing, or explaining something about real estate, or any topic for that matter, what are our expectations that those listening will have a solid understanding on what we are saying? Whether are home or work, don’t we really expect everyone we talk to, to understand what we are saying? After all, it is so clear in our minds.

The experiment showed the tappers had an expectation of 50% correct responses. That expectation was met with the reality of only 3 of 120 songs correctly named.

At 2.5%, that means their expectations were met just one out of every twenty times.

You can listen and try it yourself.

Why such a low rate of understanding? One often stated reason is that the idea, task, or concept in our mind is very clear to us because we are familiar with and have studied it.  The question is how to make what we want to convey, as clear to the person we are talking to, as it is to us.

Simple as it sounds, becoming aware of the challenge before you is the first major step you can take. You can also do some more research and learn other ways to overcome this challenge.

The next time you are sharing something that is important to you, remember the experiment of “The Tappers” and the “Listeners”.

Thank you for listening to Price-Reduced.com and always remember, financially speaking, “When it comes to real estate, the best time to buy or sell, is when you don’t have to.”


What was – What Is – What is to Come – PR010 Transcript



 

Tom, here.

This is Price-Reduced.com where we talk a lot about real estate and a little about life.

Just a reminder that you can access the links and references when you go to the transcription version of this podcast.

WHAT WAS

Information without context is much like the tree falling in the forest. Who will hear it fall? If you are a long ways from that falling tree, or around the bend, you might not see what is happening, but you could hear the barely perceptible muffled sounds of cracking branches as it forces itself against others trees on its journey to ground level. You could be close enough that the loud sound of tearing wood fibers stops you from what you are doing. You might see the tree coming down and be able to take in the whole scene and notice if anyone is within its path of destruction. The worst possible scenario is when that tree is so big and moving so fast, that you see it headed toward you and you don’t have time to react or get out of its way.

What happened to you in the 2007-2008 economy could range from business as usual to life altering devastation, economic slowdown, recession, or depression. Any one of them could describe what you experienced. Even that range of responses could vary from country to country, city to city, and even neighbor to neighbor.

Real estate and the economy can also be like the sky above us. It is just there. In the background as we go about our daily lives. It affects us but is not usually our focus. We enjoy the sunshine and blue sky but sometimes we get rain or snow. It is when the weather becomes extreme, massive amounts of rain or snow, or no rain at all for long periods of time that we take notice. It is when a hurricane comes or a tornado touches down that the weather is no longer in the background.

When you read about economic destruction remember that there are people behind the headlines. The headlines come and go, but those who struggle may continue to do so. There is an article about an Omaha debt collector that helps us get a glimpse into what it is like in America to owe money we don’t have and what happens in the process to both the person owing the debt and the one trying to collect it.

Does the city name of Omaha Nebraska sound familiar to you? It should. This is the hometown of Warren Buffett estimated to be worth over ninety billion dollars. Same city, same economy. But experiencing life in a far different way.

Listen to these quotes:

A real estate crash might not be the most likely outcome, but it certainly seems legitimate to think about what one would look like.”

Take a deep breath. We’re not forecasting a nationwide housing collapse… The problem is as basic as beams and trusses: The triple threat of soaring prices, higher mortgage rates and relentlessly rising property taxes has drastically increased the cost of ownership.”

“Many sellers have stubbornly stuck to listing prices suggested by the sales of comparable homes a year or more ago, despite price drops since.”

Sound familiar? I will tell you when those quotes were made. The first about a real estate crash not being likely was in August of 2006. The second not forecasting a nationwide collapse was May of 2006. The lasts about stubbornly sticking to list prices was about a year later than the first two, August of 2007

How bad was the housing crisis in the United States?

Housing prices peaked in 2006 and in 2007 the median price was $219,000. Contrast that to the 2012 median price of $154,700. which is almost a 30% drop in value. In January of that same year 35% of all homes sold went for less than their original mortgage amount.

In December 2008 60 Minutes produced a segment called “Mortgage Meltdown”. Take the twelve and a half minutes to better understand what was happening with various mortgage loan products and how they affected the consumer.

This meltdown may have started as a U.S. problem but when Lehman Brothers collapsed, the dominos began to fall. The U.S. bond rating was downgraded and the world financial markets felt what was no longer just a corporate problem of failing businesses, but a Sovereign or governmental problem pushing countries to the brink of financial ruin.

Even though it was a global crisis, countries such as Canada refused to join the party and escaped with but mild consequences.

What other Country had their stock market affected but technically missed a recession in 2007? What country had higher home prices in 2009 than 2007? And why?

CBSnews had an article entitled “How Australia Ducked the Crisis”. One of the conclusions of the article was that their choice of trading partners, China, practically negated what was for most, a world crisis. The average Australian might have said “what recession”.

WHAT IS

According to Brookings we have reached a tipping point where half of the world’s populations is considered middle class, and as having some discretionary income. Will we now tip forward? Or backward?

Homes Sales are down and prices reduced across the U.S., right? Wrong! Homes sales numbers in New Mexico continue to set new records with a 45% increase in number of sales for July 2018 as compared to July of 2017.

Let’s come back to Australia, whose fate may be far different now than in 2007 and 2008.

60 Minutes Australia has a two part series entitled “Bricks and Slaughter”. In Part 1 60 Minutes Starts off quoting the prediction that “Housing Values in Australia Could Fall by as much as 40% in the next year.” It interviews homes owners, investors, real estate agents, and data experts. Listen to the parallels of Australia today to the U.S. of 2007 & 2008. In some areas foreclosures rates have gone up over 600%. The big mistake during this crisis, “Believing that house prices would keep going up and up forever.

In Part 2 you hear about the banks who are denying 50% of refinance applications compared to 5% a year ago. Learn about how banks who are raising interest rates or are now requiring principal and interest payments on what once were interest only loans, affects consumers.

Sounds like all of Australia is on the auction block getting ready to be sold for pennies on the dollar.

Real Estate values and trends are local and what was portrayed appears to be accurate. Accurate that is for the City of Paramatta. Maybe not for Australia as a whole.

Is that the true picture? Is that the whole picture? Greg Clough, who was interviewed by 60 Minutes, posted a video clarifying his perspective of what is really happening. Here are a few new quotes:  “70% of Australia’s market is owner occupied and 50% of those do not have a mortgage. 30% of the remaining 50% are in advance of their payments.” He also talks about some of the differences between the loan default process in Australia and what in America he calls “jingle bells”.

WHAT IS TO COME

Some predict a recession is coming to the U.S. Is there one indicator that seems to correlate more than another? It just might be the gap between household income and home prices. And how do they relate to each other? According to a Federal Reserve Study, for every decrease in a home values of $100., consumer spending decreases between $2.50 and $5.00

Did you know there is a Global Real Estate Bubble Index put out by UBS. The highest Bubble risk city?  Hong Kong. The lowest which is considered undervalued? Chicago.

Let’s look at some current headlines or quotes that may sound similar to that of ten years ago:

So, while a crash in the near future is probably not likely, it is important to keep tabs on these fundamentals going forward.

“How to Spot a Real Estate Bubble”

“Opinion: These 4 called the last financial crisis. Here’s what they see causing the next one”

I recently read an article entitled “Stop Extrapolating Your Perceptions”. I perceive something and then I come up with my list of “also must be trues”. The last several years prices have been going up and inventory declining. That would continue forever, right? That was my reality of the moment. However, our local real estate market slowed down the later part of August. It’s the coming recession of course. The next big down turn. Or, it could be the end of summer when families with kids finish their vacations or spend all of their focus on shopping and preparation for school.

Buying or selling a home is most often an event or circumstance driven process. You buy a home to lessen the impact of increasing rent, you sell and move up when your family grows. You may also sell when it is too big, when a job change or divorce occurs.

Just as the world real estate market has common trends and yet variations down to the neighborhood level, so as buyers and sellers we have common motivations with other buyers and sellers, but yet our circumstances are unique.

Most of us in the U.S. have an average of a ten year gap between buying or selling, so for most of us, this is a process that we don’t concern ourselves with.

What we hear about the real estate market in our area may be true, but it may only be partially true. Take the time to do your homework.

When it is time to make some decisions, it is always best to not be driven by fear.

Thank you for listening to Price-Reduced.com and always remember, financially speaking, “When it comes to real estate, the best time to buy or sell, is when you don’t have to.