5 things to keep in mind about rising rates and values

Rising interest rates is one of the big topics right now in real estate. I don’t know about you, but I find myself having rate conversations all the time, so I thought we could maybe kick around some thoughts. Anything to add?

rates and value - sacramento appraisal group

5 things to consider about rising rates and values:

1) Duh, values will soften: Rising interest rates can affect the ability of buyers to afford higher prices because mortgages become more expensive (thanks Captain Obvious). Unless there is another factor to help prop values up, rising rates can naturally lead to softer values. To be fair though, let’s remember rates are not the only driving factor to make value go up or down in real estate.

2) Demand is strong enough: Rising rates can certainly impact affordability, but the interesting part to consider is we have a shortage of housing inventory. This means there is actually room for some buyers to completely leave the market (or be priced out) because there would still be enough buyers left to afford higher prices. On one hand I am very skeptical of articles that say rising rates will not impact buyers at all because that sounds like spin. Yet we do have to entertain the reality of demand being strong enough to a certain extent to deal with some rate increases without much value change (assuming modest increases of course).

3) The squeeze on lower-end buyers: In a market with rising rates, it’s buyers with less money that will be impacted the most because some buyers are on the brink of struggling to afford the market already. Thus an increase in interest rates that makes a $100 or $200 difference in a mortgage payment can be a very big deal for someone on a tight budget. Moreover, buyers with larger down payments simply have more power when making offers, negotiating, paying beyond appraised value, etc…. But before we start saying buyers putting less money down cannot play the real estate game, let’s look at actual stats. If you didn’t know, 25% of all sales last month in Sacramento County were FHA (very low down payment required) and nearly 29% of all sales under $400,000 went FHA. It’s easy to say things like, “Buyers without real money down are not winning in this market,” but the stats say otherwise.

4) Lenders getting creative: When rates rise it can put pressure on lenders to get more “creative” in their financing so more buyers can keep playing the market. In other words, lenders can help buyers artificially afford higher prices with newer and looser loan programs that compensate for higher rates. Part of me hopes lenders put movies like The Big Short and Inside Job in their Netflix queue just to remember how much power they truly have when it comes to making markets move. On a realistic level though, the lending market probably could loosen up a bit in a healthy sense since the regulation pendulum swung very far after the “bubble” burst. For anyone who has tried to get a loan recently, you know how rigorous and stressful it is. Simply put, getting a loan is not as easy as pushing a “rocket” button on a smart phone app.

5) Pressure to buy “before it’s too late”: Many buyers feel pressure to get into the market before rates get too much higher, and that’s a dynamic likely to persist throughout this year as discussions about rate increases ensue. It’s as if buyers feel like they have a small window of time to act before they are forever doomed and shut out of the housing market. What do you think of that? What advice or wisdom would you share with buyers feeling this way?

Questions: What is #6? How do you think rising rates will impact the market? Did I miss anything? I’d love to hear your take.

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Breaking Bad, Meth Houses and Real Estate

breaking-bad-logoThe series Breaking Bad just finished up yesterday. Everyone is talking about it, so I wanted to pitch in a few thoughts from a real estate angle.

Buying a Meth House: Would you buy a house that was previously used as a meth lab? Most people probably wouldn’t because of the fear of chemicals and their impact. It is possible to clean up a former lab of course, and you can read a 122-page report from the DEA on how to do that, but still many former labs simply end of being bulldozed so a new home can be built.

Meth labs do sell on MLS, but it’s not always easy to spot the sales. This is thankfully in part to there being few drug labs in Sacramento County, but otherwise since the lab details are often summed up in a matter of words or one sentence, it’s easy to gloss over at first glance. These homes can usually be found though by searching MLS under property description or client confidential remarks for “meth lab”, “drug lab” or something to that effect. Here is a sampling of comments from agents who sold meth labs over the past decade or so in the Sacramento region.

Meth House Comments on MLS:
“Clean report from Dept of Health on file”
“Past use as a meth lab. Has been cleared per sellers”
“Property had a meth lab”
“Per County there was a drug lab”
“Home was used for meth lab. Needing to bulldoze & maybe rebuild”
“Property was an illicit drug lab. It has been decontaminated”

breaking bad meets real estate

DEA National Lab List: If you didn’t know, the Drug Enforcement Agency (DEA) has a database called the National Clandestine Laboratory Register. In the DEA’s own words, “It contains addresses of some locations where law enforcement agencies reported they found chemicals or other items that indicated the presence of either clandestine drug laboratories or dumpsites”. Here are the addresses that came up for Sacramento County (you can search your area here):

DEA list national clandestine lab registry for Sacramento County

Meth and Neighbors’ Property Value: We all know meth houses sell at a severe discount because of the clean-up and stigma  involved. It’s interesting to consider though that meth labs can actually significantly impact value for surrounding homes too. In an extensive study of meth labs, economics professor Joshua Congdon-Hohman found that surrounding properties to meth houses sold anywhere from 4.5%-19% less over a two-year period after the discovery of the lab. Read The Lasting Effects of Crime: The Relationship of Discovered Methamphetamine Laboratories and Home Values (PDF). By the way, I found the link to the study through this blog post last week.

I hope this was interesting. I’d love to hear any comments or further insight below.

Question: Would you buy a meth lab? Is meth a problem in your area?

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