MARKET COMMENTARY

MARKET CONDITION

Housing inventory tends to shrink during winter as sellers wait until spring to list their houses and buyers disappear in the fall and wait until mid January to start their home search. That is not the case in the current market. Sales were strong all last year and unusually strong in the fall and early winter. This strength is carrying over to 2014. Inventories remain low and interest rates remain steady, approximately one percentage point above the historic low rates of spring 2013. Whether inventories and rates will stay low in the months ahead is anyone's guess. Either way, there are plenty of great opportunities right now for both buyers and sellers.

SELLING TIP

Due to the low inventory levels we now have a seller's market. Quality houses are selling quickly with strong pricing. Home prices have risen nicely over the last year. In some areas pricing is at or above 2005 levels.

The jump in interest rates last year may be part of the reason for the strong demand as buyers get off the fence before rates and prices rise much more. Rising rates will eventually cause demand to fall and put pressure on pricing. So, if you are thinking of selling, you may want to put the house on the market soon. Once the fence sitters buy a house and the inventory levels rise back to normal, I expect to see the market slow down. Should sellers enter the market enmasse to take advantage of the strong pricing and demand, both will evaporate. As of this writing sellers are not jumping to sell.

A very important factor in pricing is property condition. The more attractive a property looks, the more you it will sell for. While it is understandable that sellers hesitate to put money into a property that they are going to sell, just imagine how the buyer feels about having to take money out of pocket (assuming they have it) and put it into their new house. If they have to spend money, they will discount the house accordingly. In most cases buyers greatly overestimate the cost of the repair. Our Selling Tips page in the Sellers section of the site has great tips for improving the appearance of your house without spending a lot of money.

At this time it makes sense to price the house at the upper end of fair value to take advantage of the inventory shortage, but don't price it as if it were a rare commodity. Buyers are still very price conscious. Once the inventory shortage is eliminated so will the pricing advantage.

BUYING TIP

Housing remains a good value and interest rates are very low from a historical perspective. However, as the economy improves housing will most likely rise with inflation, as it has throughout most of history. Rates are artificially low thanks to government stimulus. That can't continue indefinitely. Waiting could be expensive.

There has been a lot of attention given to foreclosures, many of which need repairs. However, foreclosures are not as cheap as they once were. Banks are raising prices as the housing market has improved. So, which is better, buying a house needing work that is cheap or buying one for more money that does not need work? There are several important factors to consider. Do you have access to cash to pay for the repairs? Your mortgage will only cover a percentage of the acquisition cost. Can you do the work yourself or have access to cheap labor? Generally, paying someone at standard rates to do the work negates any savings from the reduced price. Do you have experience with the kind of work that needs to be done? If the answers are "yes" you could benefit from buying a fixer upper, otherwise you may actually come out better buying a house that has already been updated and upgraded.

Sellers typically don't get all their money back for improvements when they sell, which means the buyer is getting the upgrades and updates at a discount. Also, look at the financial cost by comparing the added monthly cost of buying a house that is move in ready versus the opportunity cost on the out of pocket money you spend for repairing a cheaper house. For instance, at 4.50% on a 30-year mortgage every thousand more you spend for the house costs you about $5.00 more on your monthly payment. If you save $10,000 on the price, how much can you repair for $50 a month? Carefully weighing all the factors will help you make the best financial decision.

May 19, 2014

Written by Mike Salkin, Berkshire Real Estate market analyst.

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