Michael and Tori had the pleasure of hosting a Hops and Home Buying community event at the Multnomah Athletic Club complete with craft beer and lots of knowledge sharing. They covered real estate market drivers, provided a walkthrough of the home buying process, and offered guidance on how to safeguard your real estate investment. We look forward to hosting similar events in the future! Enjoy this presentation recap and don’t hesitate to reach out with any follow-up questions.
REAL ESTATE MARKET DRIVERS
One of the most frequently asked questions our team receives is “how’s the market?”. It’s a simple question to a complex matter. The Portland Metro area is currently seeing an unprecedented seller’s market with record-low inventory, but it’s also arguably never been a better time to buy with historically-low interest rates. So what’s causing these market conditions? It can be boiled down to three main drivers – inventory, interest rates/affordability, and economic factors.
Inventory is calculated monthly by taking a count of the number of active listings and pending sales on the last day of the month. In February 2022 inventory was reported at 0.8 months, meaning if no additional homes were to go on the market, based on the average time they’re selling, there are 0.8 months of houses left. A level of 0.8 means we’re in an extreme seller’s market. For perspective, the lowest reported national average inventory level was just over 3 months in 2003. Fast forward to 2009 and inventory levels had risen back to 12 months.
Taking a look at the graph below you’ll see how inventory has been trending down the past 3 years. The Portland Metro market in particular has a major inventory problem due to our population density and lack of housing and buildable land.
If you’re not purchasing a home with cash, chances are you’ll be taking out a home loan from a banking institution which will assign an interest rate (percent interest you’ll be charged to borrow money). Your assigned rate will be based on your loan type (i.e. USDA, FHA, VA) and credit score. Take a look at the chart below and you’ll see the dramatic drop in interest rates over the last 50 years with rates more or less plateauing the past 5 years.
Interest rates are a crucial factor for affordability. Let’s use 2006 data as a comparison to 2021 conditions (see image below). While we’ve seen a 41% increase in average home price, interest rates dropped from 6% to 3%, giving prospective 2021 home buyers a lower monthly mortgage payment. Monthly household income has also increased 55% making mortgage payments only 19% of household income. Don’t let high home prices discourage you, it’s just one value in the equation. What you want to pay attention to is overall affordability.
The third major market driver is economic factors which are spread out across taxes, inflation, general economic outlook, and consumer preferences and priorities.
As we mentioned earlier, monthly household income in 2021 was 55% higher than 2006. And with taxes staying somewhat unchanged, this gives home seekers more buying power. When it comes to inflation, we’re currently seeing the standard case of supply and demand at work. Inflation is great for homeowners as their property value tends to increase with inflation. During times of high inflation, prospective buyers will want to seek out long term investments (e.g. living in the home for at least 5 years).
When it comes to general market outlook, many are trying to be conservative amid uncertain times. Investing in real estate allows you to diversify your portfolio and in many cases affords you additional investment opportunities for the future (e.g. short or long term rental).
The rippling social effects of COVID-19 is the perfect example of consumer preferences and priorities driving the market. During this time, renters and homeowners alike wanted to upsize for more space and others opted out of city life. We all know someone who adopted a “quarantine dog” over the past three years and many of those new pet owners have decided they need a yard for their furry friend, further fueling the suburban sprawl.
The Portland housing market is in uncharted territory and understanding key market drivers is essential for successful navigation.
THE HOME BUYING PROCESS
It’s easier to buy a home than you’d think! With a great agent you should expect a smooth, transparent process that will tackle any issues that may arise. Below is a brief overview of what to expect throughout the home buying process.
Find a Trusted Agent
Selecting an agent to represent you is the most important decision you will make during your home buying journey, next to actually purchasing your home. With thousands of active real estate agents in Portland, how do you know who to trust? We recommend meeting with at least 3 agents before making your decision. Take a look at some of our key considerations below.
Read their Reviews: Scrolling through the agent’s reviews on Zillow and Google is a great, quick first step for vetting agents.
Ask Great Questions:
- What services do you offer to buyers?
- Do you work with a team? If so, what are the benefits?
- How do you communicate with your clients?
- What’s your negotiation experience?
- What’s it going to take to get an offer accepted in this market?
- How many clients do you serve simultaneously?
Beware of These Common Red Flags:
- Recommending homes outside of your budget or desired search criteria
- They come off as a salesperson, not a trusted partner
- Failing to maintain consistent, reliable communication
- Not asking you about your goals and expectations
- Real estate is a part time job for them
- Unfamiliar with your desired neighborhood or property type
- Just not a good personality fit
Now that you’ve chosen a trusted agent, it’s time to begin the loan application process so that you can get pre-approved for financing, if needed, by a lender. This is a relatively simple process.
It’s vital that you have a pre-approval letter prior to beginning your home search for a couple reasons. First, you’ll know what your maximum budget is and a lender will calculate how much your potential mortgage payment will be and also give you an idea of how much down payment you will need. One quick note on maximum budgets – This is the total amount you qualify for and you can always spend less, but it is nice to know how much you could spend. Second, with a pre-approval letter in-hand you will be ready to write an offer as soon as you find your perfect home.
One of the biggest myths we bust is that a 20% down payment is required, making ownership financially out of reach for many. In reality, the average down payment is just 6% and conventional loans start at 3% down. Not to mention other specialized loans (like VA loans) that require zero down payment.
Start Your Home Search
Your agent will act as your market and property specialist and work with you to prioritize your housing criteria and get you set up on a home search. Once the search is established, you and your agent will be able to review new or updated listings for suitability. You’ll want to eliminate marginal or unsuitable properties, and adjust your search criteria accordingly.
Once you start finding desirable homes, your agent will help obtain additional details on the property and arrange for a private showing. When evaluating homes, we recommend the 80/10/10 rule: If you find a home that fulfills 80% of your requirements, 10% fixable aspects, and 10% of things you don’t prefer but could live with – it’s a keeper!
Make an Offer and Get it Accepted
In today’s highly competitive market it is crucial that your agent knows what it will take to get your offer accepted and be able to strategically market and negotiate your offer. At Green Buck Real Estate we always lead with our client’s best interest and provide honest, transparent, and well-rounded advice. First, we thoroughly research and review recent comparable sales in the home’s area to determine the approximate fair market value. Then we’ll evaluate each scenario and recommend a negotiation strategy, taking into account current offers on the property, days on market, previous sales history, seller motivation, and of course fair market value.
Open Escrow and Deposit Earnest Money
Once your offer has been accepted, your agent’s Transaction Coordinator will open escrow. Escrow helps protect the seller and buyer throughout the selling process, ensuring funds (i.e. earnest money, funds to close, etc.) are held by a neutral third party. Escrow will stay open until all required documents are signed and funds change hands or the transaction is mutually terminated.
Obtain Property Disclosures and Review Preliminary Title Reports
This step in the process is very hands-off for buyers, but ensures that no legal surprises come up at the end of the transaction. In Oregon, property disclosures are submitted by the seller and include very specific information on the property including updates, remodels, issues, or hazards. Disclosures need to be taken with a grain of salt as sellers may not know of lingering issues, or they fail to report them outright. Regardless, it is a good starting point of information for you, your agent, and the inspector.
Preliminary title reports give you insight on the legal status of the property and ownership. For example, knowing if there are specific easements or right of ways on the property, or if any liens or delinquencies exist that could be inherited with the property.
Home inspections help give you a more extensive understanding of the status of the property. The hired inspector will go through the entire home from roof to foundation. Additional inspections can be performed including radon testing, sewer scope, and mold inspections. Buyers are responsible for covering the cost of their inspections (~$500) and must complete them within the agreed upon date as stated in the sales agreement. Our team works with trusted inspectors and will help you make arrangements.
This is another step in the home buying process where an agent’s negotiation skills are crucial. Any issues or notes of concern that may arise in the inspection report can be leveraged to negotiate repairs, seller credits, or a reduction in the sales price, prior to closing.
Your lender will arrange to have the property appraised, a service for which you are charged in your loan application fee (~$800). Appraisals are required for most home loans and serve as a professional assessment of your home’s fair market value. If the purchase price is higher than the appraised value you may have to come up with a larger down payment, renegotiate the purchase price, or terminate the transaction. If any of the terms of the loan, as specified in the loan contingency, cannot be met, you have the right to withdraw the contract and have your earnest money refunded (assuming you include a financing contingency, which many buyers are waiving).
Reinspection and Final Walkthrough
This step gives you the chance for one last look at the property prior to closing and ensures that any work or repairs done were addressed properly and up to standard.
Schedule Closing and Move In!
Once the inspection and appraisal period has closed and there are no further negotiations, we’re off to close. On the closing date, escrow will be complete. Simultaneously, funds and the title will be transferred. Pop the champagne, you’re a homeowner!
SAFEGUARDING YOUR INVESTMENT
Now that you’re a homeowner you’ve got to think about protecting your investment, adding value, and saving money on inevitable costs. This all starts with your home inspection to ensure you don’t run into significant issues after closing.
When you first move into your home you’ll be eager to start making it your own. We recommend sitting down to map out any foreseeable work that will need to be done and determining if it’s eminent or can be done overtime, and whether it’s cosmetic or fundamental to the function of the house.
For new home buyers we highly recommend purchasing a home warranty. Home warranties cost around $500 and cover major items that typically aren’t included in homeowner insurance. A few examples would include the furnace or water heater going out, the washing machine or dishwasher breaking, etc. If one of those items were to fail, there would be a ~$75 fee to repair or replace the system. The reason a home warranty is important is because the first year of homeownership is arguably the most expensive (down payment, updates, furnishing, etc.), so you’re protecting yourself from an unexpected cost related to a major system failure.
We also recommend homeowners insurance. If you have a loan, insurance is required. But for those who did not finance with a traditional loan, insurance is still a must. A typical homeowners policy will cover major home damage including fire and water.
We have countless client stories where either a home warranty or homeowners insurance saved them thousands of dollars on unexpected damages.
The Portland Metro market is facing record-low inventory and significant levels of appreciation, but affordability is still high. Even if you bought a home at the height of the market in 2006, you still would have made money on the investment if you lived in the home for 10 years (the average homeowner lives in their home for 16 years). Also note that 4 out of the last 5 recessions, home values came out of the recession higher than they entered.
The number one thing you can do right now is to take action and do the right thing for yourself. If that means buying a home, get a trusted partner in real estate (like us!). Once you secure your dream home, keep your investment safe with insurance and adequate maintenance planning and upkeep.
If you have any questions on the topics we covered, don’t hesitate to reach out. We’d love to chat!