information for buyers Archives

Adjustable Rate Comparison

An Adjustable Rate Mortgage (ARM) is not as common as a Fixed Rate (i.e, 15 or 30 Year Mortgage), but an ARM may be a better choice for a homeowner who knows they are going to stay in the home for less time than the break even point.

An ARM might easily be 1/2% less than a fixed-rate during the first period of the loan, which can reduce the monthly cost of housing compared to a fixed rate.

The actual rate of an ARM can go up or down during the life of the loan, depending on an independent financial index. If the index rate is higher on the anniversary of your mortgage, the rate of your ARM could go up. But if you believe that rates are going to trend down during the time you own the home, then an adjustable rate could be to your advantage.

A mortgage financial advisor can provide you with a comparison of an Adjustable Rate vs a Fixed Rate to estimate when a Fixed Rate would have been a lower way to finance. There is a breakeven point in terms of months and years.

The ARM may be a better choice for the homeowner who knows they are going to stay in the home less time than the breakeven point. But if you plan for this to be your Forever Home, a Fixed Rate will likely be the better choice. If you’d like a recommendation, please let me know.

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Lumber Prices and New Construction

People have commented on the current high prices of lumber and how that impacts new construction. Below are observations regarding lumber prices nationally as well as prices in Virginia at this time.

NATIONALLY

Nationally, new home construction has hit a 15-year high, fueled by strong housing demand. In May, home builders started construction on new homes at a pace of 1.57 million annually, a 3.6% increase over April and 50.3% above the level in May 2020.

The National Association of Realtors has recently shared information about the high prices of lumber. The price of framing lumber has plunged about 50% over the last seven weeks, offering up a hopeful sign that skyrocketing building costs would ease. However, builders say that the prices they pay have only declined by a fraction of that percentage. The disconnect in pricing has always existed in the lumber supply chain. It can still be a “long lag time” before the full price reductions come to builders, the National Association of Home Builders reports.

“As the price declines began grabbing headlines, the price of lumber packages quoted to builders held at record highs,” NAHB economist David Logan writes on the association’s blog, Eye on Housing. “This dynamic is primarily due to dealers’ inventory carrying costs and potentially large differences between the price at which inventory is bought and sold.”

The lumber supply chain consists of the following stages: from forest to sawmill to wholesaler to retailer to end user. The association offers up an explanatory reason prices are staying elevated at its Eye on Housing blog. Wholesalers and retailers have incentive to run through their existing inventory and recover what they paid for it—one of many factors that is currently keeping prices elevated for builders.

So, when will lower prices reach the builders and ultimately new-home buyers? The answer is unclear, but builders say more price drops in lumber may be needed. “Prices must fall for long enough to materially lower a supplier’s average costs after a run-up,” the association blog notes. “Depending on the rate and consistency of price decreases and whether prices have stabilized at the lower level, it may take a few weeks to a couple of months for builders to see price relief on the order initially reported in the futures or cash markets.”

Meanwhile, new-home building prices for home buyers continue to rise. In May, the median price of a newly built home was 18% higher than a year ago, at $374,400.

Source: “Why Builder Lumber Prices Remain Higher Than Headlines Suggest,” National Association of Home Builders’ Eye on Housing blog (July 6, 2021)

IN VIRGINIA

According to Dr. Lisa Sturtevant, Chief Economist for the Virginia Association of Realtors, new housing construction is up, and lumber prices are down. In Virginia, there were 3,125 permits issued for the construction of new residential units in May. Nearly 80% of permits were issued for the construction of single-family homes, while 20% were for units in multifamily buildings, including apartments and condominiums.

Like in many other places around the country, new home construction been on the rise in Virginia. In the first five months of 2021, there was a total of 17,685 permits issued for new housing construction in the state. By comparison, there were just 13,744 permits issued between January and May 2020. Year-to-date, the number of permits for new housing construction was up 28.7% compared to last year, with a 25.0% increase in single-family permits and a 36.3% increase in permits for multifamily housing units.

The cost of construction materials has been a major impediment to new construction. Lumber prices, in particular, surged to historically high levels during the COVID-19 pandemic. Back in March 2020, the futures price of lumber was $303 per thousand board feet. The cost more than quintupled over the past 14 months, reaching a high of $1,608 per thousand board feet in May 2021.

Lumber prices skyrocketed as a result of strong demand for new homes and a major interest in home renovations and DIY projects by people stuck at home. At the same time, supply chains have been disrupted by the pandemic and recession.

However, there is good news on the lumber costs issue. In June 2021, prices fell below $900 per thousand board foot of lumber, reflecting a drop of 44.2% from the recent peak. The drop in lumber prices is good news for builders. Some new residential projects that have been put on hold could start back up again as costs fall.

Lumber prices are falling now as more sawmills have been able to open up more fully and ramp up production. In addition, the opening up of the economy means that more people are back at the office and are spending less time on DIY projects around the house which has led to slower demand from homeowners.

Falling materials costs (e.g., lumber, concrete, steel, brick/masonry) are a good sign for the home building industry and for consumers looking for more choices. However, there are still challenges to home building. The shortage of construction workers, limited building-ready lots, and zoning regulations that limit homebuilding will continue to be challenges to building enough housing to meet demand.

Home Price Update For Virginia

Home prices in Virginia have been up by double-digit rates—or close to it—for ten consecutive months. According to Lisa Sturtevant, Chief Economist of the Virginia Association of Realtors, in May, the median home sales price in Virginia was $367,000 which was up 16.6% compared to the median sales price a year ago. The pace of sales growth this year has been much faster than in recent years, fueled by strong demand, favorable mortgage rates, and low inventory.

Strong Prices Across All Regions

There has been phenomenal price growth in all regions across Virginia. So far, for sales in 2021, the median statewide home price is 13.2% higher than it was during the same period in 2020. The strongest price growth in 2021 has been in some of the state’s smaller markets. For example, the year-to-date median price in the Eastern region is up 25.7%. In the Southside region, prices are 24.2% higher in 2021 compared to 2020.

There has been double-digit price growth in all areas of the commonwealth, including the state’s largest and highest-cost markets. The median price in Northern Virginia climbed 11.9% in the first five months of 2021. Prices are up 15.0% in the Central Virginia region and are 11.1% higher in the Hampton Roads region.

Prices Growing More than Twice as Fast as in Recent Years

In most markets, home prices are growing more than twice as fast as they have in more typical years. Between 2016 and 2021, for example, the median sales price statewide increased by 6.2% on an annual basis. Over the past eight years, since 2013, annual price growth averaged just 4.6% in Virginia.

Price Growth Will Likely Slow

Recent trends in home prices suggest that this past year has, indeed, been extraordinary. While price growth will remain strong throughout 2021 and into 2022, it is likely that the pace of home price appreciation will slow as demand softens, mortgage rates tick up, and inventory expands.

Virginia REALTORS® will release its economic and housing market forecasts later this year, at the 2021 Annual Convention. Several national organizations are forecasting above-average home price growth through 2021, although there is evidence of a slow down in appreciation in 2022. Only the Mortgage Bankers Association (MBA) is predicting a price drop in 2022. The vast majority of economists, however, expect prices to continue to rise.

VAR Realtor Survey – Spring 2021

Our Virginia Association of Realtors has recently published the results of a survey conducted among their Realtor members. Below are the shared nuances of the Spring 2021 real estate market in Virginia.

Making An Offer

• Nearly every REALTOR® responding to this survey said that buyers are making offers over list price or including an escalation clause in their offer. Nearly 90% said offers over list price were “very common” and another 8.5% said they were “somewhat common.”

• Buyers in this market are facing stiff competition, and almost all are offering some type of concession in an attempt to make a successful offer.

• About 87% of Virginia REALTORS® said it was “very common” or “somewhat common” for buyers to waive the home inspection. Some REALTORS® commented that buyers were having an inspection done for information purposes only, but not making the offer contingent on the home inspection results.

• Nearly 70% of Virginia REALTORS® said that waiving appraisals has become “very common” or “somewhat common.” Many REALTORS® note that buyers are including a provision that they will pay a certain amount over any appraised value. Other REALTORS® have pointed out that this trend in waiving appraisals has put VA buyers at a disadvantage because they cannot opt out of an appraisal.

• The following tradeoffs are also “very common” or “somewhat common” in today’s market: increasing the earnest money deposit (79.2%), waiving the home sale contingency (66.2%), and offering a shorter loan contingency timeline (68.6%).

Buying A Home
• The fast-paced market and historically low inventory has forced buyers to re-evaluate their housing and neighborhood preferences, widen their search, and make tradeoffs on amenities. Nearly nine out of 10 Virginia REALTORS® members (87.7%) said that it is “very common” or “somewhat common” for home buyers to look outside of their preferred neighborhoods as they realize how few homes are available.
• Buyers in this market seem less likely to make tradeoffs on the size or style of the home they are looking for, but they are willing to consider homes that need major upgrades or updating.
• Only 34.2% of Virginia REALTORS® said that it was “very common” or “somewhat common” for buyers to settle for a townhome or condo instead of a single-family home.
• A little more than half (51.0%) said that it was “very common” or “somewhat common” for buyers to compromise on space or number of bedrooms.
• More than three quarters of Virginia REALTORS® (75.2%) said that buyers were willing to consider homes that need major upgrades or updating.
• As the inventory of existing homes shrinks, some buyers have turned their sights to new construction. About 56% of Virginia REALTORS® said that building a new home, rather than purchasing an existing home, had become “very common” or “somewhat common” among buyers.
• Finally, the tight market has discouraged many buyers. In fact, more than 70% of Virginia REALTORS® said that it is “very common” or “somewhat common” for buyers to decide to put off buying a home altogether in this market.
Contact your realtor to learn how these findings apply in your particular area and price range.

Make Your Best Offer First

Buying a home in today’s low inventory real estate market requires a new mindset for purchasers. This strategy is not about trying to negotiate the best price; it is about beating out the competition and buying the home. It may be difficult to understand until you have lost a few homes to better offers but when the reality of the situation is that there are not that many homes on the market, the competition heats up and different tactics are necessary.

Sales in December were annualized at 6.76 million, a 22.2% increase year over year according to the National Association of Realtors. The median sales price nationally is $309,800 which is up 12.9% from the previous year. Inventory for December fell to 1.9 months’ supply from 3.0 months’ supply in December of 2019. Six months inventory is considered a balanced market.

Things that work in a buyer’s market will not work in a seller’s market. The shortage of available homes for sale has led to not only shorter market times but multiple offers that have sales prices above the listing price. Buyers, especially in entry to mid-level priced ranges, may have lost out multiple times to buy a home.

Buyers must be strategic if they want to successfully put a home under contract. There are some things that are absolutely essential to just be in the game.

Unless you are paying cash and have adequate proof of funds, you need to get pre-approved. Realtors and financial advisors have been saying this for decades, but it is critical now. There are plenty of reasons that benefit the buyer but most importantly, it is to show that a buyer is serious and has gone through the effort to have a lender run his credit and verify his income, expenses, employment, and credit. Sellers want to make sure that the offer they are choosing will be able to go to closing.

If the home fresh on the market, in a desired location and price range, you need to assume there will be competing offers and you may never even get a counteroffer from the seller. You need to consider making your highest and best offer first, as if you will not get a second chance. This is more difficult for some people than others because of their bargaining nature.

Many properties are going under contract at more than asking price. One strategy that buyers are employing is the escalation clause. For example a buyer will offer full price, but their offer will state that they are willing to escalate their offer by $1,000 (for example) over any competing offer up to a specified amount. With the offers that are coming in at over asking price, there is the chance that a property will not appraise. Some buyers may show the ability to pay an amount between the appraisal and the sale price, if the property does not appraise, thus effectively removing the appraisal contingency. Of course since a cash offer will not have an appraisal, this is another reason that makes a cash offer more desirable.

Earnest money that accompanies a contract shows that the buyer is acting in good faith. The amount that may be customary may not be enough in a competing market. Consider two or three times what might be normal. Talk to your agent about what would make an impression on the seller.

While contingencies like loan approval and inspections will protect your earnest money from specific concerns like loan approval and inspections, the seller will look at them as ways that the buyer can get out of the contract and as a result they’ll need to put the home back on the market. If a seller is presented multiple offers, they might be prone to accept one with the least contingencies, especially, if the prices are comparable.

There is usually a period connected to the different contingencies that are allowed to complete them. By shortening these times as much as possible limits the time the seller might feel they are in limbo.

If you have the flexibility, you might express your willingness to move the closing and/or possession dates to accommodate the seller’s schedule. This could be an important factor in your favor and could be done in a verbal statement conveyed from your agent to the listing agent.

These are things buyers should consider and discuss with their agent before they find the home that they want to buy. While you are formulating your position, another offer may be accepted before you even make yours.

Customer or Client

A Virginia realtor is required by law to treat you like either (A) a customer, or (B) a client. In Virginia, buyers and sellers are required to sign a document saying that they actually want to be a realtor’s client before we can assist with any transaction. See below to learn how buyers are required to be treated if they are a Customer or a Client in Virginia…… [Read more…]

Home Buying Steps

WHAT IS THE PROCESS OF BUYING A CHARLOTTESVILLE VIRGINIA HOME?

It’s not just first time buyers who can become overwhelmed with the process of buying a home. If you haven’t purchased a home recently, this might give you a refresher of exactly what steps will be necessary to purchase a Charlottesville Virginia home, and in what order they are likely to occur. [Read more…]

What Are The Tax Benefits of Owning a Charlottesville home?

What Are The Tax Benefits of Owning a Charlottesville Home?

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There are many reasons for wanting to own your Charlottesville home instead of continuing to pay rent. Among the main reasons to purchase a home are to have a place to raise your family, your own space to share with friends, and providing a home where you and your family feel safe and secure. Also there is the feeling that home ownership is a sound investment opportunity due to the fact that homeowners’ net worth is over forty times higher than that of renters, and it is important to consider the tax benefits that reduce tax liability.

Taxpayers who have owned and used a home for at least two out of the last five years, can exclude a maximum of $250,000 of gain as a single taxpayer and up to $500,000 of gain for married taxpayers filing jointly.
If the gain on a principal residence exceeds the allowed exclusion, the balance is taxed at the lower long-term capital gains rate rather than the marginal tax rate of the homeowner.
Homeowners can deduct the interest paid on up to $1,000,000 of acquisition debt used to buy, build or improve their first or second home. They may also deduct the interest on up to $100,000 over acquisition debt that is a recorded lien on their first or second home.
IRS will allow taxpayers to decide each year whether to take the higher of the itemized deductions or the standard deduction.
Points paid on new loans for home purchases are considered interest and can be deducted in the year paid. On the other hand, points paid for refinancing a home must be amortized over the life of the mortgage.

For more information, talk to your tax professional and see IRS publication 523 and IRS Publication 936.

When you are deciding whether your family should purchase a Charlottesville home or continue to rent, don’t forget to factor in the tax benefits of homeownership.

Charlottesville Homes For Sale – How Do Interest Rates Affect Price?

Charlottesville Homes For Sale | How Do Interest Rates Affect Price?

Buyers and sellers alike have been keeping a close eye on interest rates. Rates are still low by historic standards, but the reality is that they are slowly creeping up and many experts predict that they will be up one to one and a half percent by the end of the year. What does this really mean to you if you are considering purchasing a home?

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A ½% increase in interest rate may not sound like much but it is roughly equivalent to a 5% increase in price. It becomes obvious when you compare the payments.

If you financed 100% of the cost of a $250,000 home at 4.5% interest for 30 years, the payment would be $1,266.71 per month. If the mortgage rate went up to 5%, the payment would be $1,342.05. If the home increased 5% in value, the $262,250 loan at the lower 4.5% rate would have payments of $1,330.05.

The two payments are close enough to justify the statement that a ½% change in interest is approximately equal to 5% change in price.

Each time interest rates go up, fewer people can qualify to buy a seller’s home. The mortgage rules that went into effect this year require buyers to meet specific payment to income ratios. As demand picks up for the seasonal market, most experts expect rates to increase.

Buyers will be doubly challenged in the current market because prices are rising (NAR reports 11% last year) along with the anticipated mortgage rates. Buyers who wait will inevitably be paying more to live in the same home had they acted sooner.

Check out on how Interest Affects Price for a home in your price range.

If you have a Charlottesville home for sale, the increase in interest rates will also affect you. It may mean that you will have a smaller pool of buyers who can qualify to purchase your home. Also many sellers are waiting for prices to rise before putting their home on the market. But the reality may be that a rise in home prices in tandom with rising interest rates will price many buyers out of the market.

If you are considering buying or selling a Charlottesville home, it may be a good strategy to to act now, if you are able to, rather than waiting for later in the year.

Adjustable Rate Comparison