Latest RealPodVA is up. This was a fun one. Talking about market data for the Charlottesville MSA, ARMs, the future of the real estate market.
Thoughts, comments, insights, suggestioncous welcomed. Truly.
- Big Short
- The Future
- Market Update
- The damage acronyms do to America
- Cost of new construction
- Murder rooms
Jim: My name’s Jim Duncan with Nest Realty at Real Central VA, RealCrozetVA, among other things. RealPodVA is a podcast talking about the Charleston area real estate market, community stuff [inaudible 00:00:10] real estate, and anything somewhat related. We’re always open to topics, suggestions, for someone to let us know. I’m here with my friends Dave and Bart. Bart?
Bart: I’m Bart Isley from Scrimmage Play.
Dave: And I’m Dave Stipe from Rockfish.
Jim: So last time, I talked about ARMs and shifting mortgages and stuff like that, and I pulled some numbers, and surprise, surprise, the MLS data is not entirely accurate. So I talked to a couple of friends of mine as well who look at the data a little bit differently. So real quick, it’s mid-July, it’s bloody hot, like really, really hot. There was a movie with Matthew Broderick where he said, “Africa hot.” It’s fricking hot.
Dave: It’s hot.
Jim: It’s just… ugh. But 2016 for the MSA, which is the area, we had almost 2300 total sales throughout the year, 2017 had about 2360 total. So far this year, about 1300, so it’s gonna be interesting to see if we can pull of another 900-1200 sales in 2018 to balance out year over year.
Jim: I think a lot of that’s driven by house prices. Prices have risen, interest rates are going up. There’s a lot of fear in the market. I’ll get to some of the reasons for that but we touched on ARMs last week and MLS data is not nearly accurate. If I look at the MLS stuff, it says that we’ve got, let’s see, ARMs in 2016, 1.5% of all closings were ARMs, 1.7 in ’17, 1.3 in ’18. That ain’t right. I talked to another friend who looks at it from a different angle, different profession. He said that last year, up to this point, so in 2017 up to mid-July, ten percent of the loans he closed were ARMs.
Dave: Ten percent.
Jim: So ARM, adjustable rate mortgage, so it’s set for five years, seven years, ten years, is interest only frequently and then it resets to be a standard amortized loan. So ten percent last year were ARMs, adjustable rates. Any guess on what this year is?
Bart: Oh no.
Dave: Ten percent seems too high. What is it?
Jim: So I had a client years ago, doctor, he got a doctor’s loan, 7/1 ARM and he said, “you know, I’ll pay you know one and a half percent interest only. I’m only gonna’ be here for six years.” So his rate was one and a half instead of four and a half or whatever. He wasn’t paying any principle. It worked out great.
Dave: Yeah but ten percent of the homes are gonna’ fit like that?
Jim: So him, it worked. You know, and I say there’s probably five to ten percent is fairly reasonable to have that.
Jim: This year, about half.
Jim: 50%. And what that tells me is that one, people are being short sighted and thinking that the market is always going to appreciate and that they’re going to be able to sell whenever that time comes. Two, they think rates are gonna’ be low, so when the loan does reset to a standard loan, it’s not gonna’ reset too high for them to be unable to afford it.
Dave: Except for the news has been reporting for two years that the feds is gonna’ keep raising rates from here on out, but okay.
Jim: Nobody reads, that’s fake news. And three, I think it’s a sign that people are being very, very short-sighted and thinking that they’re gonna’ move in three to five years, and they’ll be able to sell.
Bart: And back to the previous point, like, we do know that like, we’re moving closer to a adding to a five rather than going down to four?
Jim: Yeah, I think that… I’ve been doing… 17 years been doing this and this is my second increasing rate environment that I’ve seen. Everything’s indicating, I’ve been saying for 10 years, rates are gonna’ go up and they haven’t gone up. This time, I think it’s real. You’re starting to see four and a quarter, four and a half, four seven five, five, five and a quarter for some stuff. So that point difference is huge and that’s money.
Dave: And we’re saying it’s going up too, but it’s actually going back. It’s only been ten years and we’re doing this all over again. How is this happening?
Jim: I’ve got a chart. If you go to the fed, Freddie Mac has mortgage interest stuff where you can look at the chart. I go back to my mom when she was selling real estate in the early 80’s, 18%. You know, five is still fricking’ cheap. My first loan was eight point eight.
Jim: They gave some idiot 24 year old kid $75,000 and I felt lucky. And then I sold it in two years and it was great.
Dave: And it’s also not gonna’ go up quickly. It’s gonna go up a quarter of a point or half a point occasionally and everything that I’ve read has even said they don’t expect it to exceed more than six or seven percent whenever it goes back up again, but I mean, 50% of our loans are going back to adjustable rate mortgages again? It’s only been ten years since we just dealt with an entire housing crash, that fed into a country wide and worldwide recession.
Jim: Well, Countrywide, they were actually a big part of it. Nicely done.
Dave: See how I set these things up?
Jim: ARMs are a good product for a lot of people, but I think that for the bulk, at least through my lens, my practice, my clients tend to buy for five, seven, ten, fifteen, twenty year horizons. They’re buying with either kids that they want to start elementary and go through high school and then they think about selling or they’re semi-retired with a 16 year old kid at home and like, “yeah, I’m gonna have a roommate for another year and then that kid’s gone.”
Dave: But even then, the ARMs still only make sense if you plan on selling in three to five years, or refinancing.
Jim: Or refi. Yeah.
Dave: And for both of those things to work, your home has to retain at least the value in which you purchased it, so if housing prices go down, you’re screwed.
Jim: But that said, I know of a couple people who have had ARMs for 25 years and they’ve worked out. Meaning that you bought at eight percent and then when it resets every year, every two years or whatever. So if you buy it at eight percent and the cap is 12%. There’s always a cap of how high it can go, but they’re might not be a floor. So I know someone who bought at eight percent many years ago, and every time it reset it either stayed flat or it dropped. So you have that, if the cards work out right for you, it can work. Again I hear that half of the loans that this guy is seeing are adjustable rate, you know, it scares me. I think it’s a legitimate concern that we’re seeing people looking so shortsightedly but it’s also, if they’re looking at it from a, “Well, I’m paying $600,000 for this house, I can’t afford it on a 30 year fixed or a 15 year fixed unless I do a 7/1 ARM,” that’s when I get uber concerned.
Bart: When you’re using it as a tool to get it.
Jim: Yeah. If it’s a choice, like my client said, “I could do a 30 year fixed but this one legitimately works out better for me.” But if you’re using it as a, “I can’t do this, unless I do this,” that’s where I get profoundly concerned.
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Bart: If you want to buy a house, but you’re betting on the fact that your financial situation will improve, that’s one of the only ways to like, buy when you’re young, is like betting on that idea. It’s not concrete by then, like what you’re doing, so like, if you’re 25 trying to buy a house, like say some people were in 2007. I don’t know any of those people, but like, you’re betting on the idea that you’re going to make more money going forward. You’re betting on the idea that you’re going to be able to maintain it even though you’re in an industry that maybe is crumbling.
Dave: It’s funny how these things are applicable to both of us: journalism and music.
Jim: To be fair, I’ll throw real estate into that bag as well.
Bart: There’s a lot of disrupting going on right now, but you’re making that bet. The bottom line is like, making a 30 year bet is, like a bet. There’s no getting around that. There’s no like, sure thing in any of it, so if you’re trying to push it – what I’m saying is that, so you got this ARM situation. You’re saying if you’re using that as a way to buy the house even though you don’t know if you can afford it or not, is there any situation? Maybe that’s a philosophical question about whether there’s any situation that you know for sure that you can afford it. If you’re making the choice based on your current situation, I should have never made any decision that I made in 2007, because I just didn’t know what was going to happen or what was going to go on, but you’ve got to make a decision like that, and if you’ve got to use a financial tool to do it, is that necessarily a bad decision?
Jim: I don’t think it is necessarily a bad decision, so long as it is a considered and thoughtful decision and you’re making it with the right advice and again, selfishly, if you’re making it with the right realtor advising you, that you trust and you’re making it with the right lender with whom you have the same relationship, who says, “You know it’s gonna be here’s your financial scenario with 30 year fixed or 15 year fixed and here it is with a seven or 10/1 ARM and here is what you’re looking at, what you’re projecting.”
Bart: Is there a difference between doing something like that and then, I know that there was some kind of rule that I could not have a 90/10 or whatever and I had to do a home equity line in order to be able to pull it off. That’s using a financial product to make something happen even though, because the other financial product wouldn’t work for you.
Jim: Well, again looking back to the boom and bust, so long as that 80/10/10 is, or 90/10 or whatever, ten of that is your money, fine but I remember some of the loans were 90/10 where 90% was a loan and-
Bart: And ten was the equity line.
Jim: Yeah. And that’s taking no money to the table, no skin to the game, so if things go sideways, everybody’s screwed.
Jim: So I think it’s important to see that for most situations, the buyer’s bringing some money to the table.
Jim: Again, looking back, having the benefit of hindsight and experience it was the ones that were getting the 103% loans, 107% loans, that were, it’s just insane. You look back and you’re like, “Well of course that went bonkers.”
Jim: That’s not reasonable or responsible.
Bart: I’ve watched The Big Short.
Jim: I’ve watched The Big Short. I’ve read The Big Short. I think that we’re in a position now where the economy is doing relatively well.
Bart: It was in 2006 and 2007 too.
Jim: Yeah. Well.
Dave: That’s where I’m legitimately concerned. I’m sitting there going, yeah, I’m doomsdaying it over here. Don’t give me weird looks Bart Isley.
Jim: For the kids out there, he’s a Debbie Downer.[crosstalk 00:12:44]
Bart: Dave’s just like, it’s just like..
Jim: Is it piglet, the one that’s always?
Dave: It’s Eeyore. Jim is the one who came to me and he just talks about ARMs and I’m like “Well, this is gonna get dark real fast.”
Bart: But Dave just walks in here with his tail pinned on his rear, like Eeyore, with his dark cloud walking through and like, we’re just trying to be Pooh and Piglet over here. Like we’re just trying to bring this like, fun loving, exciting, I don’t know maybe we need to bring a Tigger in here to offset this Eeyore-ness.
Dave: If there’s one thing that fits my personality it’s just, I think my repeat cynicism nonstop.
Bart: Dave legitimately is like, the truest believer of all things, but…
Jim: I think the best response to you Dave is “woh woh.”
Bart: Start telling jokes from last week. I don’t know why these acronyms create such a problem for you. Like HOAs create a real problem for Dave.
Dave: Yeah, they do. They really do.
Bart: Now ARMs are creating a real problem. I don’t know man, maybe you got a problem with acronyms.
Dave: I do have a problem with acronyms.
Jim: It’s not the ARMs per se, it’s the acronym that’s really the stick in the mud.
Dave: I’m gonna get out there and say it, I think acronyms are lazy.
Bart: That’s a hot take, bro. That’s a hot take.
Dave: The dumbing down of America is demonstrated through acronyms.
Bart: American government. There you go. All of my libertarian friends just applauded right now.
Bart: This is Bart Isley with Scrimmage Play. I was going to write an old school radio jingle for this, something slick with a catchy chorus so people just singing our name over and over again, but we have zero musical talent on staff. What we do have, and that is one slick transition there, is a passion for talking about, writing about, and shooting video of high school sports in Central Virginia. For almost a decade, we’ve been the top source for high school sports coverage in this area. We’ve also got a podcast, that’s not apart of the Central Network. If you love high school sports, give us a listen and if you like what we’re doing, check out the support link in each episode description and support the work we’re doing. In the meantime, we’ll keep working on that jingle.
Jim: Alright, last thing and then, it’s talking about the cost of new construction. I was in a meeting last week and the builder I was talking to said that his materials cost had gone up about 50% year over year. His cost to insulate a house had gone up 85%. Dumpsters fees have gone up two to three times over the last two to three years. I think that he was telling this in context of one, prices of new construction, but also projections out and saying that he’s looking at probably gonna’ be even more expensive because of the tariffs. You’ve got tariffs coming in for steel, soft wood lumber, aluminum, are causing everything to go up.
Bart: And it’s gonna be more. It’s gonna be more than just that.
Jim: So I think it’s something we need to be cognizant of and there’s really nothing that any of us can do or change it other than to acknowledge that it’s an issue. It’s gonna cause new construction to go up. It may cause some sales to go down, but the flip side of that is-
Dave: At least we’re not pairing that kind of escalated pricing with risky mortgages.
Jim: Well see, not yet. Not yet. Anyway Debbie, I think we’re gonna’ start to see-
Bart: Dave sees a bubble in every room. God like, it’s just like I walk around… he’s not the guy… Dave is not the guy in the scary movie that’s gonna’ be like, “Oh, like, I think this’ll be fine.” He’s gonna’ be the guy that’s like, “Don’t go in the basement. Why are we going in the basement? Don’t go in the basement. Just stay locked in your room and just like listen to music all day.” That’s really all we want you to do. That’s the safest choice you can make.
Dave: Holy crap, you’re making my argument for me. Are you kidding me? Yes, of course when I’m at a party I’m gonna be like, “Oh, I think we can all like, wander down to a basement that’s dark and scary, by myself.” I’m gonna be like, “This is the part of the movie where you get murdered!”
Jim: What is the basement has cool stuff happening? What if there’s ten foot ceilings with lots of natural light?
Bart: Whoa, yeah what about that?
Dave: Maybe then it’s not a murder room.
Bart: Ten foot ceilings?
Jim: You’re gonna pay, but you know, and it costs more now because of tariffs that go from eight foot to nine foot to ten foot.
Bart: If you wanna have a comfortable murder room, you’re gonna have to pay for the ten foot ceilings.
Jim: There’s lots of natural light.
Bart: What’s a murder room without lots of natural light? That’s good.
Jim: I think I saw that on an episode of Dexter.
Bart: Does it have crown molding? Does the murder room have crown molding? And granite countertops? ‘Cause it seems like that’s gonna be awesome.
Jim: So I showed a house years ago, speaking of murder rooms-
Dave: I would think the granite countertops would be clean.
Bart: Hold on. Jim Duncan just said, “Speaking of murder rooms,” and I’d like to hear.
Jim: It was a basement. It was a fine basement. It was in Albemarle County and we were going to this big old house. It was a 1980s house, 1990s house. We go down to the basement and the back corner of the room has got a garage door to come in and we go in and the place is, it’s a killing room, for deer and that was, we walked in and there was just stains, blood everywhere and it was freaky as hell first and foremost and second, it resonated well with my buyer who said, “This is fantastic. I’m a hunter as well and this is exactly what I’m looking for.”
Bart: There’s a house for everybody, is what we’ve just learned.
Jim: My first broker said when I started years ago, he said, “There’s a dog for every doghouse.”
Dave: Was your buyer-
Jim: This dog house, the dog’s gonna’ get killed but you know.
Dave: Was your buyers name Dexter?
Jim: I don’t know.