With Terry Story, a 30-year veteran with Keller Williams located in Boca Raton, FL
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As the year winds down, Real Estate Round-Up covers general trends in the 2018 housing market over the past year.
Drop In Pending Sales
After starting the year strong, pending home sales declined 2.6% in October. A pending home sale is when the buyer and seller agree on price and sign a contract to begin closing the sale.
Pending contracts are an early sign of the future because what’s pending will eventually close. So weak pending sales are indicative of a slowdown in housing.
Home Affordability Math
Steve notes that for the 2018 housing market, mortgage rates were near historic lows. In the early 2000s, mortgage rates were close to 8%. Now they are under 5%. While lower rates help, higher home prices bite into affordability.
If your budget gets stretched even with these low mortgage rates, you should think twice before buying a home. Moreover, lenders may require higher down payments if your debt-to-income ratio puts a strain on your finances.
Millennials Are More Conservative With Their Finances
Skipping ahead, millennials are not taking on debt because they’re financially conservative.
Millennials have lived through the financial crisis of 2008. They witnessed the stock market crash and the havoc caused by the housing crisis and economic weakness. All this has made them more cautious.
Now, many millennials are wary of taking on credit card debt. Consequently, they do not have well-developed credit histories, which hurts them when they apply for a mortgage.
Take On Debt And Build Your Credit File
Terry says millennials should sign up for credit cards, pay them in full every month, and develop a strong credit history.
When making borrowing decisions, lenders only have your credit history to go by. If you’re earning well but do not have any debt, lenders assume you’re either not making enough or aren’t saving enough to buy and build assets.
So if you’re a first-time home buyer, take on a little bit of debt and use credit cards. Prove that you’re a dependable borrower by paying your cards off in full each month. And take advantage of benefits such as cash back, points for travel, and more. On the flip side, if you use a debit card, you get nothing.
To clarify, not using a credit card or not borrowing isn’t going to keep you from getting a mortgage. You may still qualify but your mortgage rate could be a lot higher. Steve warns that with a 30-year mortgage, even a 1% rate difference can add up to thousands over a 10-15 year period.
Terry ties this back to the drop in pending sales in the 2018 housing market. Sales could be dropping because millennials aren’t willing to take on mortgage debt.
Baby Boomers Not Downsizing
On the 2018 housing market, Steve adds that empty-nester baby boomers aren’t downsizing the way they used to. With boomer homeowners projected to increase from 9 million in 2006 to 16 million by 2026, this trend of not downsizing could sizably drain the inventory of homes available for sale.
Part of this is boomer nostalgia about not wanting to sell a home with fond memories of kids growing up, etc. Other deterrents include the lack of reasonably affordable smaller homes and higher mortgage rates. Boomers may also be unwilling to give up homestead exemptions which lower property taxes for older homeowners.
On the other hand, a smaller home could come with lower monthly mortgage expenses and lower maintenance costs. So weigh the pros and cons, and do what works best for you.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week, we get together with noted real estate agent, Terry Story. Terry’s a 30-year veteran with Keller Williams located in Boca Raton, Florida. Welcome back to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: Let’s talk about the market, the general market and we’re going to bring it down to kind of what you’re experiencing. What’s the story with home sales that are pending? Are they rising, are they falling, what’s going on?
Terry Story: Well, actually, the last ten straight months, there’s been declining which is kind of sad.
Steve Pomeranz: [LAUGH] Well, you mean the amount of contracts?
Terry Story: The amount of pending sales.
Steve Pomeranz: Sales, yeah.
Terry Story: So, you have to have a property and then it has to get under contract, that’s what is considered pending.
Steve Pomeranz: Yeah.
Terry Story: And then from pending, it goes to closing.
Steve Pomeranz: Okay.
Terry Story: So it’s the pending.
Steve Pomeranz: So the number of pending contracts.
Terry Story: Correct.
Steve Pomeranz: So that’s a sign, it’s an early sign of kind of the future because what’s pending will eventually close. If that’s weakening, then you can kind of point to saying that sales are actually going to be weakening as well.
Terry Story: Right.
Steve Pomeranz: Okay.
Terry Story: Correct.
Steve Pomeranz: All right, so they slipped 2.6% in October. It’s not a terrible number, but it’s just kind of the sign, and you said for the last ten months.
Terry Story: For the last ten months, it’s really because of the recent rise in mortgage rates, it helped fuel the number of pool of buyers that are out there.
Steve Pomeranz: Yeah, yeah, yeah, because it’s more expensive. I think rates have risen by about 1.5%, still basically at historic lows.
Terry Story: Absolutely.
Steve Pomeranz: We always want to say that because in the early part of the 2000s, we had 8% mortgage rates.
Terry Story: Right, average, yep.
Steve Pomeranz: And now they’re like oh, just five-
Terry Story: Under five.
Steve Pomeranz: Or more frequent under five, yeah.
Terry Story: So come on, we’re still half.
Steve Pomeranz: So higher housing prices are justified because the affordability is still there.
Terry Story: That’s right.
Steve Pomeranz: But if you are a buyer who could afford a house at 3.5%, then you can probably, I mean barely afford it, let’s say.
Terry Story: You’re right.
Steve Pomeranz: You can’t afford it-
Terry Story: Correct, that’s right.
Steve Pomeranz: …at 4.75%.
Terry Story: If you were at your max at 3.5%, and it bumps up that little bit, that’s enough to, because everything’s ratios, Steve. They look at your debt-to-income and once you exceed a certain threshold, they won’t lend the money.
Steve Pomeranz: Skipping ahead here, there was an article that you sent in me that talked about millennials not taking on enough debt because they’re so conservative.
Terry Story: They are.
Steve Pomeranz: I guess, they’re coming out of the ‘08 crisis.
Terry Story: Yep.
Steve Pomeranz: And they heard all these messages about how debt is bad and gets into trouble. So now they’ve kind of, the pendulum has swung completely the other way and they’re not taking on any credit card debt and that hurts them if they go try and get a mortgage.
Terry Story: It does, I have daughters that are of that age and I’ve told them, you don’t buy anything unless you can pay for it.
Steve Pomeranz: Yeah.
Terry Story: You use credit cards for convenience, which is great, but I’ve also realized I’ve let them down a little bit. Because one went to get a car and went to get a car loan and they jacked up the interest rate, and I’m like, well, this is wrong.
Steve Pomeranz: Yeah, that’s right, and the fact that they don’t have credit or they don’t have debt, is really a good thing, but that’s not the way lenders look at it.
Terry Story: The world thinks, right.
Steve Pomeranz: Because they think if you’re making more money, you should have more assets and then take on a little bit more debt. Whereas if you don’t have the debt, they do the reverse math and they say, well, you must not be making or saving and have the assets to support.
Terry Story: But they like to see three credit cards being used, they call it a fat file versus a thin file, which is none. So if you’re a first-time home buyer you know take on a little bit of debt, pay it off,. The real key is pay it off each month, don’t be late, be responsible.
Steve Pomeranz: Yeah, but it’s actually, it’s more than that. So you’re thinking about taking on debt. I listen to Steve and Terry, and they said take on more debt. I don’t agree with them, I don’t want to do it, but I’m going to do it. Because why haven’t I done it? Because I’m afraid that if I do put stuff on my credit card, that I’m not going to have the self-discipline to pay it, right?
Terry Story: To pay it off, right.
Steve Pomeranz: But the whole key to it, is that you must pay it off. And to me, the real sin is that credit cards give you benefits, points for travel, or cash back.
Terry Story: Sure.
Steve Pomeranz: Where if you use a debit card, you get nothing.
Terry Story: That’s right.
Steve Pomeranz: And you’re hurting your future ability to borrow money for the important items, like a house and a car.
Terry Story: And you can get a mortgage, it’s not like you’re not going to be able to get a mortgage. The difference is, it’s going to be at a higher rate, and that’s just wrong.
Steve Pomeranz: That’s just wrong. [LAUGH]
Terry Story: It’s so wrong.
Steve Pomeranz: Well, and if you have a 30-year mortgage, and you live in a house for say 10 to 15 years, I mean, that-
Terry Story: We’re talking a lot of money.
Steve Pomeranz: That’s right.
Terry Story: 1% difference over 30 years.
Steve Pomeranz: I know, okay, so another reason that houses, maybe pending home sales are dropping is that baby boomers just aren’t moving.
Terry Story: Right.
Steve Pomeranz: There used to be this idea that, okay, we’ve got this big house. The kids have grown up in our house. Now the kids are gone, so let’s downsize and take that extra money and go travel, and now live this other life that we plan, but they’re sticking.
Terry Story: They’re sticking, yep.
Steve Pomeranz: And why are they sticking, that’s the question?
Terry Story: The million-dollar question, and the baby boomers’ numbers are growing. In 2006, there was like what?—9 million, and by 2026, there’s going to be 16 million.
Steve Pomeranz: Yeah, well, that’s the number of homeowners between age 65-
Terry Story: Correct, homeowners.
Steve Pomeranz: …and 74.
Terry Story: Correct.
Steve Pomeranz: So in 2006, there were 9 million homeowners. By 2026, there’s going to be 16 million. And so there’s a lot of inventory kind of being sucked up there.
Terry Story: Yeah.
Steve Pomeranz: That if that doesn’t turn. Now, of course, when us baby boomers, and I speak of myself, of course, not of you.
Terry Story: Right.
Steve Pomeranz: I know you’re just a-
Terry Story: No, I’m actually a baby boomer.
Steve Pomeranz: You’re 20 years old. I know you’re a baby boomer, okay?
Terry Story: Yep.
Steve Pomeranz: I mean at some time, they’re going to sell because we’ll no longer be on this Earth.
Terry Story: We’re going to die, right. [LAUGH]
Steve Pomeranz: But we talk about what happens before then. So number one, as people age, they tend to move less.
Terry Story: They’re moving less.
Steve Pomeranz: There’s some nostalgia there, you’ve got your homes, where your kids grew up, and pictures on the wall, and all that.
Terry Story: Right, well, then, there’s also the reality. The reality, why they’re not moving, is there’s not that many smaller homes that they like or where they want to be. That’s one reason, the other reason is the cost. So let’s say, for example, you have, I don’t know, we’ll say an $800,000 house and you’re moving to a $400,000 house, and you’ve been in that $800,000 house 30 years. Your tax base when you go to the newer house.
Steve Pomeranz: Well, first let’s back up, you’ve been in that house all those years, you have this homestead exemption which limits the amount of increase.
Terry Story: That’s right.
Steve Pomeranz: Right. So your house may be worth 800, but maybe you are only paying taxes on-
Terry Story: 5,000.
Steve Pomeranz: Yeah.
Terry Story: I’ll give you realistic.
Steve Pomeranz: House or something, whatever, it’s 5,000. Now you go to a $4,000 house, taxes have gone up and millage rate has gone up and now you’re establishing a new base at this higher level. So it may absorb a good deal of the savings that you thought you were going to get when you downsized.
Terry Story: That’s right, and so it doesn’t look as attractive as it initially sounded.
Steve Pomeranz: Plus if you’re going to borrow money, then mortgage rates are-
Terry Story: A little bit higher.
Steve Pomeranz: They’re higher as well, but if you’re going to pay cash that eliminates that issue.
Terry Story: Right.
Steve Pomeranz: But there’s real reasons there, but this makes for the complexities and the dynamics of the real estate market.
Terry Story: But even if you’re paying more and you have less house to maintain, if you think of it that way, Steve. If you’ve got a 4,000 square foot house and you’ve got to put a new roof on that, versus a 2,000 square foot house, that’s a big savings, just I guess maintenance costs.
Steve Pomeranz: The maintenance costs are going to be lower too.
Terry Story: Right.
Steve Pomeranz: So you got to put that in the calculation as well.
Terry Story: That’s right, don’t forget those.
Steve Pomeranz: All right, cool. My guest as always is Terry Story, 30-year veteran with Keller Williams located in Boca, and she can be found at terrystory.com. Thanks, Terry.
Terry Story: Thanks for having me, Steve.
