Interest Rate Forecasts and New Loan Limits

Question: What are current forecasts for mortgage rates in 2023 and beyond?

Answer: Happy New Year everybody!

A few weeks ago, I posted a “Beyond the Headlines” deep dive with James Baublitz, VP of Capital Markets at First Home Mortgage, into why interest rates have increased so much.

As the calendar turns, many of you will be kicking off your home search and asking about current and forecasted interest rates, so I’ll cover that today, plus a quick note on recent loan limit increases for down payments as low as 3%.

What is a “Normal” Mortgage Rate?

The first thing to understand about mortgage interest rates is that they are market-driven and forecasting comes with the same amount of unpredictability as any other economic/market-based forecasting (GDP, Unemployment, Stocks, etc). Take predictions/forecasts with a grain of salt.

The other truth that is best illustrated by the chart below, which shows the average 30yr fixed mortgage rate since 1971, is that there really is no established “normal” interest rate that we can point to and say “this is what you can expect when markets stabilize.” So, use caution when relying on assumptions about future rates (e.g. for a refi).

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Forecasting Future Rates

Most major forecasting organizations including Mortgage Bankers Association, Freddie Mac, and National Association of Realtors (NAR) believe rates will steadily decrease through 2023 and that trend will continue into 2024.

Mortgage Bankers Association expects rates to fall faster than Freddie Mac and NAR, with average 30yr fixed rates hitting mid 5s by the 2nd quarter and low 5s by the end of 2023. They forecast that rates will be in the 4s by Q1/Q2 2024 and believe the long-term stable rate to average 4.4%.

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Freddie Mac sees rates remaining in the mid 6s for most of 2023 and closing out the year at an average of 6.2%.

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NAR expects the average 30yr fixed rate will hover just above 6% in the first half of 2023 and then settle into the upper 5s in the second half of the year:

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Higher Loan Limits for Lower Down Payments

The Federal Housing Finance Agency (FHFA) just released new conforming loan limits for 2023, with significant increases to reflect recent price growth. The jurisdictions in the greater DC Metro area were given the maximum loan ceiling of $1,089,300.

Beginning this year, Fannie/Freddie will insure loans up to $1,089,300 with as little as 5% down, or the equivalent of a purchase price just under $1,115,000 with 5% down. The new conforming limits increase the maximum loan amount with 3% down to $726,200, or the equivalent of a purchase price just under $749,000 with 3% down.

For any conforming loan (or any loan for that matter), borrowers must also qualify on several factors including credit score, debt-to-income ratio, first-time buyer status, and more. Feel free to reach out to me for lender recommendations if you’d like to explore your mortgage options.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

My Best Advice to Start Your Home Search

Question: We are looking forward to buying a home next year. Do you have any recommendations on how we should start the home buying process?

Answer: If you Google “home buyer tips” or “what to know before buying a home” and you’ll find plenty of advice on the topic, so I’ll include some suggestions I don’t usually see online and put my own spin on some of the more common advice. 

Weighted Criteria

It’s easy to come up with 3-5 things that are most important to you, so challenge yourself early to come up with a list of 10-15 must-haves and wants. Then, starting with 100 points, allocate points to each criteria based on how important it is to you and you’ll end up with a weighted criteria list to help you focus your search and objectively compare properties.

I encourage couples to complete this exercise individually first, then work together on a combined list. This will put even the best relationships to the test!

If you want to take it to the next level, bring your weighted criteria list with you on showings and score each house based on the points you allocated to it and score each home on a 100-point scale. I often find that buyers who have taken this exercise seriously and are working within a budget are hitting scores in the 70s-80s on their top choice homes.

Length of Ownership

How long you expect to live in your home is one of the most important factors in defining what you prioritize and how you use your budget. You should focus on the following:

  1. Likely length of ownership
  2. Difference in criteria for a 3-5 year house vs a 10-12+ year house
  3. Difference in budget requirements for a 3-5 year house vs a 10-12+ year house

Appreciation is not guaranteed and difficult to predict, but the value of longer ownership periods is undisputed. One way longer ownership adds value is the potential for eliminating one or more real estate transactions over your lifetime, thus the associated costs (fees, taxes, moving expenses, new furniture, etc) and stress that comes with moving.

If you have an opportunity to significantly increase your length of ownership by stretching your budget, you generally should. On the other hand, if your budget or future (e.g. job will move you in a few years) restrict you to housing that’s likely to be suitable for just 3-4 years, it’s generally better to stay under budget.

Influencers (not the Instagram ones)

Family, friends, colleagues…they’re all happy to offer opinions and contribute to your home buying process, but the input can be overwhelming and unproductive if you don’t set boundaries. Try to determine up-front who you want involved in the process and how you’d like them to be involved.

Think about how you’ve made other major decisions in life – what college to attend, what car to buy, where to get married, whether to change jobs – and if you’re the type of person who likes input from your friends and family, you’ll likely do the same when buying a house. Plan ahead with those influencers so their input is productive and comes at the right time (e.g. not when you’re already two weeks into a contract).

Does Your House Exist?

Before jumping too far into the search process, spend a little bit of time searching For Sale and Sold homes on your favorite real estate search website/app to see if the homes selling in the area(s) you want to live in and that are within 10% of your budget are at least close to what you’re looking for. If not, spend some time adjusting price, location, and non-critical criteria to figure out what compromises you’ll need to make and then compare those compromises to your current living situation and/or alternatives like renting.

Know Your Market

We’re transitioning from the most intense housing market ever into a much more moderate environment, but what you see and read about the housing market may not be accurate in the sub-market you’re looking in.

Each sub-market behaves a bit differently and comes with its own unique set of challenges and opportunities, so take time early on to understand the sub-market(s) you’ll be involved in and what you’re likely to experience. This is something your agent should be able to assist with.

Pre-Approval & Budget

There is a lot of value in working with a lender early in the search process. For starters, you’ll have somebody who can provide real rates and advice based on your specific financial situation/needs. A lender can only do this if they’ve reviewed your financial documents and credit. The more you put in, the more you get out.

You’ll need to have a lender pre-approval to submit an offer (the seller has to know you qualify for the purchase you’re offering to make) so if you have to do it anyway, do it early on so you get the most value out of your lender. It also means that you’ll be prepared to make an offer if you find the right home earlier than you expect.

Despite the market slowing down, the quality of your pre-approval can make a big difference when you make an offer. Quality means a lender who has taken the time to fully review your documents and credit, will speak on your behalf to the listing agent, and is a bank/mortgage broker with a good local reputation.

You should strongly consider having a pre-approval from a reputable local lender to give yourself an advantage when making an offer. Pre-approval letters from big banks and online lenders don’t go over as well in our market. If you’re looking for a recommendation, consider Jake Ryon of First Home Mortgage (JRyon@firsthome.com).

Find an Agent

Agents come in many different forms and finding somebody who suits your personality and goals is important. Ask friends, colleagues, and family for referrals or spend time talking with different agents at Open Houses until you find somebody you like.

The worst thing you can do is choose your agent based on whoever responds to an online showing request faster. A good agent can provide a lot of value getting involved in your buying process 2-4+ months before you’re ready to buy.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Arlington Condo Market Performance Metrics

Question: How has Arlington’s condo market reacted to higher interest rates?

Answer: In last week’s column, I looked at performance metrics for detached homes in Arlington, shared my thoughts on local pricing behavior, and discussed news about the national vs local real estate market. This week we will look at the underlying performance metrics in Arlington’s robust condo market.

Underlying Arlington Market Performance Data for Condos

Here’s how I approached the data used in this week’s analysis:

  • Low-, mid-, and high-rise condos only
  • Resale data only, no new construction
  • All data is presented by the month a home was listed in so we can measure how home sales performed based on the month they came to market
  • Net Sold = Sold Price less Seller Credits
  • I used data from 2017, 2019, 2021, and 2022 because I think it offers a helpful snapshot of recent Arlington markets to compare 2022 to. 2017 was our last “normal” market because Amazon HQ2 was announced Nov 2018 and that kicked off a condo craze. 2019 was the first full year with the Amazon bump, but pre-COVID market, and 2021 was a full year of the COVID-driven shift in condo demand.

I either did not use or must caution your interpretation of this year’s August-November data because it is incomplete for purposes of this analysis. There are 13, 26, 39, and 42 condos actively for sale that were listed in August, September, October, and November, respectively, which will influence the performance metrics for those months when they do contract/close and most likely will result in worse performance metrics than those months currently show.

There are only 10 condos still for sale listed January-July that will likely pull down the performance metrics for those months once they contract/close, but not enough for me to be concerned about the resulting data being presented in this analysis.

Business as Usual for Condos

While the detached market was on fire in 2021 and early 2022, the condo market performed mostly along the lines of historical metrics, except for one month, February 2022, when average sold prices climbed slightly above the original asking price. As a result, high interest rates have led to a more modest reversal in pricing behavior over the last six months, compared to the detached market.

The only time in the last 15 years that we’ve seen a real acceleration in condo prices was during 2019 (and pre-COVID 2020) as a result of Amazon’s HQ2 announcement.

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Pace of the Condo Market Slightly Below Normal

We had a few months during the peak of the 2022 market where the pace of sales came close to the craziness we experienced in 2019, after Amazon announced HQ2, but average days on market has returned to its normal seasonal trends. As more data rolls in for closings in August-December, I expect the average days on market for the last 3-4 months of 2022 to exceed historical averages, but not by much.

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One of my favorite performance metrics is the percentage of homes that sell within 10/30 days. I think it beats average and median days on market for a true understanding of the pace of a market.

As opposed to average days on market, these charts indicate that high interest rates have slowed the pace of the condo market beyond the usual seasonal slowdown, with a notably slow October where just 38% of condos listed sold within 30 days. Expect to see these metrics fall even further as more condos listed after July contract and close.

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Looking Forward

Condo pricing tends to be pretty stable and movements up or down are relatively small, with the exception of major events like Amazon HQ2 (rapid appreciation) and COVID (rapid, temporary depreciation), so expect a return to stable and predictable pricing in our condo market where we’re used to seeing 0-2% appreciation year-over-year.

The effect of high interest rates will likely be felt most in the slow pace of the market. The pace will almost certainly increase in Q1 2023, which means we can expect about 1/3 of condos to sell within the first 10 days and about 2/3 to sell within the first 30 days during the spring selling season. 

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Arlington Housing Market Performance Metrics

Question: How have you seen the Arlington housing market react to higher interest rates?

Answer: I hope everybody had a fantastic Thanksgiving. The results of last week’s Dark Meat vs White Meat poll were impressive. With 559 votes in as of this morning, only three votes separated white meat as the preferred part of the turkey over dark meat! We may have found the only vote closer than a Georgia Senate Race!

National vs Local Market Expectations

With daily news about the nationwide (and global) housing collapse resulting from parabolic price appreciation followed by parabolic interest rates, I want to use this week’s column to check-in on what we’re seeing locally and remind everybody that what you read in the news is generally going to be the most attention-grabbing data points and that our market is likely to experience a much more modest correction than many other markets nationwide, as we saw during the Great Recession.

My Take on Local Pricing Behavior

I shared some detailed thoughts and observations last month in a column addressing price drops in Arlington and the TL;DR version is that 1) yes prices have dropped relative to their peak this spring, 2) there’s not nearly enough data available locally to say with any statistical confidence how much that drop has been, and 3) my observation was/is that market-wide in Arlington we’ve lost most/all of the appreciation we saw in the first 4-5 months of 2022 ,but 2021 prices are still mostly holding up. Keep in mind that in a volatile, low inventory market (current state) pricing is more randomized and case-by-case than it usually is, so you’ll see plenty of individual examples that buck the aggregated trends/assumptions.

Underlying Arlington Market Performance Data for Detached Homes

This week, I thought I’d share some charts of underlying market performance metrics to help illustrate what our market is experiencing. Here’s how I approached the data this week:

  • Detached (single-family) homes only. I’ll probably look at condos next week.
  • Resale data only aka no new construction because performance metrics used in this column for new construction aren’t usually representative of the market
  • I used data from 2017, 2019, 2021, and 2022 because I think it offers a helpful snapshot of recent Arlington markets to compare 2022 to. 2017 was our last “normal” market because Amazon HQ2 was announced Nov 2018 and that sent data in unusual directions. 2019 was the first full year with the Amazon bump, but pre-COVID market, and 2021 was a full year of COVID frenzy buying with normal seasonal behavior (2020 was totally out of whack on seasonality).
  • All data is presented by the month a home was listed in so we can measure how home sales performed based on the month they came to market instead of the month they closed (closed data is a lagging performance indicator)
  • Net Sold = Sold Price less Seller Credits

**An important caveat to this data is that I either did not use or must caution your interpretation of this year’s September, October, and November data because it is incomplete for purposes of this analysis. There are 15, 22, and 19 homes actively for sale that were listed in September, October, and November, respectively, which will have a significant influence on the performance metrics for those months when they do contract/close and most likely will result in worse performance metrics than those months currently show.

Note there are 2 homes for sale listed in each month May-July and 7 for sale from August that will likely pull down the performance metrics for those months once they contract/close, but not enough for me to be concerned about the resulting data being presented for those months

Net Sold Price to Original Ask down 9.3% in 6 Months

The average net sold to original ask dropped from a March peak of 105.9% to 96.6% in August. I suspect that once September-November listings close and we can start filling in those fields, we’ll see that number fall further but maybe not significantly because asking prices have started to react to weaker market conditions and many sellers are coming off their expectations for spring 2022 prices.

Of note, this performance metric is coming more in-line with 2017 metrics. I’ll be interested to see if performance metrics stabilize around 2017 numbers, pre-Amazon HQ2, or if they worsen. My guess is that they’ll worsen slightly compared to 2017 through the end of the year and come more into balance in 2023 (pending interest rate movements).

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Average Days on Market 4.8x Higher in August than February ‘22

Unsurprisingly, the average days on market has skyrocketed relative to earlier this year from 9 days in February to 43 days in August. August ’22 is still lower than August ’17, but the August average will increase once the 7 properties still for sale from August contract/close. 

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Homes Selling Within 10/30 Days Go from Record High to Low

One of my favorite performance metrics is the percentage of homes that sell within 10/30 days. I think it beats average and median days on market for a true understanding of the pace of a market. As opposed to average days on market, these charts indicate that our market pace is slower than 2017, on a seasonal basis.

We’ve gone from 82% of homes listed in March selling within 10 days to just 27% in October. Similarly, at least 90% of homes listed February-April sold within 30 days compared to 45% and 44% selling within 30 days in August and October, respectively. That is a massive change in market pace within 4 months!

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Looking Ahead

I expect the performance metrics of August-October to worsen as more of those listings contract/close and November-December to come in below 2017 numbers. It’ll be a bit difficult to truly understand the aggregate effect on pricing because Arlington is a relatively small housing market, but I’ll do my best to come up with some accurate measures once we’re far enough into 2023 and enough 2022 listings have sold. Ultimately, the tale of local home values will be told in how long it takes interest rates to settle back down into the expected 4.5-5.5% range (don’t hold out for sub-4% rates again).

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Assumable Low Interest Rate Loans

Question: Is it possible to take over a seller’s existing loan if they have a low interest rate?

Answer: Thank you to our Veterans and Active-Duty military for your service.

In keeping up with the theme of last week’s column, addressing popular mortgage product/strategies, and in honor of Veterans Day, this week I’ll cover assumable VA loans.

An assumable loan is a loan that can be transferred from a seller to a buyer, allowing the buyer to maintain the interest rate of the seller’s existing loan rather than accept a market-rate interest rate. This can be valuable in a high-interest rate environment like we’re in now when most homeowners have an interest rate well below current market rates.

To help me provide the best information about assumable VA loans, I reached out to Skip Clasper of Sandy Spring Bank (sclasper@sandyspringbank.com), who I highly recommend for a range of loan products including VA loans, construction/rehab loans, and jumbo loans.

Only Some Loans Are Assumable

VA loans (available to Veterans, service members and surviving spouses), FHA loans, and USDA loans are the only traditional loan products that are assumable. They make up a relatively small percentage of existing home loans in Arlington (likely single-digit percentage of total loans). I’m not aware of any conventional loans that can be assumed.

Key Details about Assuming a VA Loan

There are some important details and caveats to assuming a VA loan that both buyers and sellers need to understand prior to transferring a loan:

  1. Buyers do NOT have to be a Veteran or otherwise qualify for a VA loan to assume a VA Loan
  2. Sellers can NOT obtain a new VA loan until the previously assumed loan is paid off (or refinanced out of) unless the new buyer is a Veteran and uses their eligibility on the assumed loan
  3. It is less expensive (closing costs) to assume a loan than to originate a new loan.  The VA Funding fee is only 0.5% for assumable VA loans.
  4. You need a down payment that covers the gap between the assumable loan balance and the purchase price. For example, if the seller’s loan balance is $200,000 and the purchase price is $500,000, the buyer is assuming $200,000 is debt and will have to cover the remaining $300,000 via down payment or alternative debt such as a second trust.
  5. Buyers need to qualify for the loan using normal income, debt, and credit guidelines

As you can probably determine from the above details, there are only a limited number of scenarios where assuming a VA loan makes sense for both parties. The biggest hurdle to VA loan assumption is that the VA loan eligibility stays with the loan so if the buyer does not have their own VA loan eligibility, the seller must be sure they are okay giving up this very valuable benefit until the new buyer pays it off or refinances.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

How do you prefer your seller discount? 2-1 Buydown Review

Question: The seller of a home I’m interested in is offering a 2-1 Buydown incentive. Should I accept that or negotiate for something else?

Answer: Higher mortgage rates have re-opened conversations about creative ways to help buyers reduce their rates and monthly payments to incentivize demand: assumptions, seller-financing, buy-downs, adjustable mortgages, and more. Over the coming months, I’ll start covering some of these options to share pros and cons of each.

This week, we will look at the 2-1 Buydown, which has captured a lot of attention lately and is being marketed as a way for seller’s to draw buyer interest by helping them reduce their monthly payments during the first two years of their loan.

I’d like to thank Trey Reed of Intercoastal Mortgage (trey@icmtg.com) and Brad Pace of US Bank (brad.pace@usbank.com) for their contributions on this article.

POLL: How would you prefer to allocate a $10,000 benefit from the seller of a home you are buying?

Answer 1: $10,000 off interest payments spread over two years (2-1 Buydown)

Answer 2: $10,000 in points to permanently lower your interest rate (“lose” benefit if you sell or refi)

Answer 3: $10,000 off closing costs (up-front cash savings)

Answer 4: $10,000 reduction to the purchase price

What is a 2-1 Buydown?

A 2-1 Buydown is a seller-paid benefit to the borrower/buyer that reduces their mortgage rate by 2% in the first year and 1% in the second year. In the simplest terms, it allows the seller to pre-pay some of the buyer’s interest payments for the first two years of the loan to reduce their monthly payments.

It generally equates to a savings on total interest payments equal to ~2.35% of the loan amount, over the two-year period. The seller pays that amount to the bank at closing, which shows up as an additional cost to the seller on their settlement statement. The 2-1 Buydown is something sellers may offer up-front or that buyers can negotiate for.

Ultimately, the question (which is reflected in the above poll) is whether or not the dollars allocated by the seller to a 2-1 Buydown are best used there versus towards buyer closing costs (reduces buyers out-of-pocket), lowering the purchase price (reduces interest/payments over the life of the loan and loan payoff amount), or points (a permanent reduction in interest rate rather than pre-paying some interest for two years).

It’s important to note that the 2-1 Buydown doesn’t change the qualification requirements (e.g. Debt to Income ratio limits) for the borrower (buyer). They must qualify for the loan at the full mortgage rate, not the discounted rate.

There is also a less commonly used 3-2-1 product that lasts three years and reduces the rate by 3%, 2%, and 1% in years 1-3 of the loan.

Example of a 2-1 Buydown

Here’s an example from Brad Pace at US Bank of a 2-1 Buydown, compared to using the same dollars to reduce the purchase price:

Standard Deal w/o Any Negotiated Discount:

  • Purchase Price: $1,500,000
  • Loan Amount: $1,200,000 (20% down)
  • Interest Rate (7yr ARM): 5.75%
  • Principle & Interest (P&I) Payment: $7,002

Deal w/ 2-1 Buydown:

  • First Year P&I Savings: $17,345.85 ($5,557 P&I payment)
  • Second Year P&I Savings: $8,917.27 ($6,259 P&I payment)
  • Buyer Savings in First Two Years (also the cost to seller): $26,263.12

Deal w/ Cost of 2-1 Buydown Applied to Price:

  • Purchase Price: $1,500,000 – $26,263 = $1,473,737
  • Loan Amount: $1,178,989 (20% down)
  • P&I: $6,880
  • Buyer pays $23,328 more in first two years compared to the 2-1 Buydown and will take ~16 years for the lower ($122/mon P&I) payment on the price reduction to breakeven with the cost savings of the 2-1 Buydown. However, buyers also benefit from a lower loan balance which means more equity and more proceeds when they sell.

Pros and Cons of the 2-1 Buydown

While the 2-1 Buydown may be considered a helpful marketing tool for sellers to draw interest in their home, buyers ultimately need to decide whether they feel it’s the right allocation of dollars being offered by the seller compared to alternatives like closing costs, price reduction, or points.

For me, I think it’s worth considering if you’ve already negotiated for the seller to pay 100% of closing costs and there’s still enough negotiation room to cover the cost of a 2-1 Buydown and the savings in the first two years is more valuable to you then longer-term payment reduction and loan balance reduction you get by lowering the purchase price.

Pros of a 2-1 Buydown:

  • Will reduce your payments significantly more during the first two years than an equivalent reduction in the purchase price
  • If the buyer refinances their loan or sells before the two years of the 2-1 Buydown is complete, the bank will credit any remaining balance on the 2-1 Buydown against the payoff of the loan. This makes it different (and potentially more valuable) than buying down a rate permanently with points because you lose that benefit upon refi or resale.
  • Gives buyer more time to adjust to their full mortgage payment if they expect a raise or additional source of income within 2-3 years from their purchase
  • Gives buyer extra cashflow in first two years to help with moving expenses including buying furniture

Cons of a 2-1 Buydown:

  • If the 2-1 Buydown is in lieu of seller paying buyer closing costs, buyer may benefit more by having those funds used to reduce their closing costs which results in an up-front cash savings instead of receiving that same dollar amount spread over two years (money now vs over time)
  • Many banks do not carry a 2-1 Buydown option so the “natural” interest rate on a 2-1 Buydown can be higher and some banks only offer it on their 30yr fixed rate loans, not ARMs or Jumbo loans
  • Over the long run, a reduction in purchase price (loan amount) might save you more money than the up-front savings of a 2-1 Buydown. Discuss this trade-off with your loan advisor.

Trey Reed of Intercoastal Mortgage shared his thoughts on the 2-1 Buydown program in this short three minute video.

Let me know what you think about the 2-1 Buydown in the poll and/or comments section!

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Are Home Prices Dropping In Arlington?

Question: I’ve read a lot of bad news about the real estate market, how is that playing out in Arlington?

Answer: Bad news sells…keep that in mind as you get your daily/weekly dose of headlines that the housing market is collapsing under the weight of high interest rates and overinflated prices. With that said, I’m not about to deliver a rosy picture of the Arlington real estate market, but it’s important to keep in mind that most of what you’ll see in the news will be cherry-picked statistics and stories around the country/region that are likely more extreme than what our market will experience overall.

Arlington remains one of the most stable, reliable real estate markets in the country. We are absolutely feeling the effects of a dramatic tide shift in demand, but just as our market didn’t see meteoric price increases like other markets from Loudoun County to Tampa to Boise during Summer 2020 to Spring 2022, we most likely won’t experience as extreme of a pullback while interest rates remain high.

Usually, you’d scroll down and see a lot of charts and data from me in an article like this, but I don’t think we have enough of the right data yet to tell an accurate story of property values in Arlington. So this week is more of a stream of conscious of my thoughts on property values, with a few data points sprinkled in. I welcome any and all theories, agreements, and disagreements in the comments section!

Have Prices Gone Down?

The short answer is “yes,” prices have come down from their 2022 peak. By how much? That is a very difficult question to answer and there’s no reliable way for us to know at this point. So let’s talk about how I think we should we talking about prices based on what we do and do not know at this stage:  

What we do know:

  • The prices we saw in the first half of this year are out of reach, in most cases
  • In the last seven days, 52 properties in Arlington (12.5% of homes for sale) have cut their asking price, which is a pace consistent with previous seven-day windows. Odds are this pace increases as we get closer to, and into, the holidays.
  • Price reductions and sale prices are not being discounted anywhere close to enough to offset the difference in monthly payments between earlier this year and now
  • The market always slows in the summer and continues to taper off through the end of the year (with the exception of September/early October), we’re just experiencing a more dramatic version of seasonality because of the sharp interest rate increases that have paralleled the traditional seasonal slowdown and because of where we’re coming from – insane demand for nearly two years.
  • Supply coming to market is down, contract activity is down, and showing activity is down all about 20-30% year-over-year

What we don’t know:

  • What is the appropriate baseline to judge price change from? Is it the relatively short window of peak pricing from roughly February-May 2022? If you want headline news, sure, but if you want a more accurate/helpful perspective on market conditions, you probably want to use a wider data set that goes back to Q2/3 2021.
  • We don’t have anywhere near enough data points after the market inflection this summer to assess market price changes in Arlington (or even Northern VA or the DC Metro, in my opinion) and because sold price data lags so much behind shifts in market condition, we won’t truly know what the pricing effects were on Q3/Q4 markets until at least February 2023 because many homes struggling to sell now won’t show up in sold data until then.
  • There’s no precedent for how buyers as a whole will respond to such extreme interest rate increases (see chart below I saw last week on MortgageNewsDaily.com that highlights the historical significance of recent rate increases), so it makes pricing challenging for sellers (and buyers, for that matter). Days on market has increased 2-3x or more for most sub-markets and the number of showings are down by about 30-35% year-over-year so it can also be very difficult for sellers to infer whether their time on market is price induced or not. A lot of current pricing is based on seller motivation and their hope/fears of market conditions 3-6 months from now.

The Big Unknown (hint: interest rates)

The most significant “what we don’t know” is what will happen with interest rates in the coming months/year. And please save me the “interest rates are still low relative to the last 30 years” non-sense. The fact is that buyers, homeowners, and prices have adjusted for sub-5% rates over the last 15 years and a long-term reversion back to the 6-8%+ range will be painful.

Per MortgageNewsDaily.com, the average 30yr fixed rate is ~7-7.3%, depending on the data source (see chart below). What we don’t know is how long we’ll have unusually high interest rates and that is ultimately what will drive changes in property values in Arlington, regionally, and nationally (I know, stating the obvious here).

Barring a change in Fed policy (e.g. reducing expected Fed Rate increases or bringing liquidity to the mortgage market), it seems unlikely rates will drop much or at all in Q4. High rates compounded with the normal seasonal slowdown means that there will be plenty of discounted sales from motivated sellers who don’t want to hold out until 2023, but when we eventually aggregate all the sales data from Q3/4, I’m not sure it will amount to an eye-popping drop in prices across the entire Arlington market (maybe 5-10%, depending on your baseline data).

I think the problems (aka a double digit drop in home values over a longer 6-12 month period) will show up in Q1/2 2023 if interest rates are still 7% or more through Q1 2023. I think that is when we’d start to see property values in and around Arlington drop as a whole, by uncomfortable amounts (maybe below 2021 prices).

On the flip side, if rates come down by late Q4/early Q1 and we start seeing 6% or lower averages on the 30yr fixed, that would coincide with our normal ramp-up period into the spring and the market could very quickly turn around. I would bet that if we see the average 30yr fixed rate get to the mid 5% range or less in Q1, we will see a rapid return to competition as buyers who have been sidelined due to high rates in the 2nd half of 2022 return to the market and meet the normal churn of new buyers introduced to the market in the new year.

Chart, line chart, histogram

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If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Find Savings in Your Condo/HOA Budget

Question: We are finalizing our 2023 condo budget. Do you have any advice for ways to save money?

Answer: As a former Condo Board Treasurer, I feel the pain that this time of year brings, so I’m happy to offer some advice that helped me finding savings while I oversaw the budget and has helped other Associations do the same…review your Master Insurance Policy. I know, it’s not the most exciting answer, but your insurance policy is likely a top three expense on every year and if you haven’t reviewed it lately, there’s a good chance you can cut the cost by 5% or more and probably improve your coverage at the same time.

I’m not an expert in insurance so, I asked Andrew Schlaffer, President of ACO Insurance to provide some details on what Boards should look for when they do a review of their Master Policy. If you’d like to discuss a review with Andrew directly, you can reach him at 703.595.9760 or andrew@acoinsgrp.com. Take it away Andrew…

Hardening Markets, Increasing Premiums, Decreases in Coverage

The condominium insurance marketplace is facing challenges that will impact homeowners in 2022 and beyond. Water damage claims are still among the loss leaders impacting Unit Owners, along with fire damage and wind/hail claims. The DMV is home to many aging condo buildings that continue to struggle with mitigating water damage losses and their impact on insurance premiums.

As water damage claims continue to rise and property damage costs increase, many insurance carriers are beginning to make changes to their coverage offerings that may increase your risk exposure. A few examples of these coverage changes include Increased deductibles, per unit water damage deductibles, removing coverage for Sewer or Drain Backup and Wind-Driven Rain. 

In general, condominium property rate increases in the DMV have been significant and unpredictable. Much of the pricing impact can depend heavily upon carrier underwriting discretion which highlights the importance of your insurance professional specializing in this space. It has not been unheard of for Master Insurance policies to receive between a 7% to 15% property rate increase in 2022. For struggling communities, these rates are much higher. 

The umbrella/excess liability carrier marketplace has also faced tremendous disruptions. There are several factors driving these rate increases including but not limited to: COVID-19 impacts, years of underpricing, reinsurance rate increases, and the rise of nuclear verdicts (claims over $10MM). Additionally, there have been several specialty real estate programs who no longer offer umbrella/excess liability options for the habitational industry which has put a lot of strain on remaining carrier markets to fulfill the increase in demand. Many communities can expect umbrella/excess liability rates to increase between 10% to 25% this year. 

Pillars Of Insurance Reviews

Condo insurance reviews require a holistic approach, so it’s important to break the cost into a few distinct categories: insurance premium, deductible expense, and out-of-pocket costs. To effectively accomplish long-term savings, all three of these categories need to be considered and addressed with a qualified insurance professional.

Adjust Coverage Responsibly To Save On Premium

Premium is certainly a factor to consider during the insurance selection process; however, available insurance products differ significantly. Coverages and services should be very carefully analyzed and compared. While omitting various coverages will save premium dollars, it might also result in substantially increased costs to the Association for out-of-pocket expenses related to uncovered claims. It is critical to work with a professional who understands local insurance needs and can adjust your insurance program in a way that maximizes premium savings while maintaining adequate insurance coverage. Some coverages may be required by statute and/or Association documents, so cutting required coverage exposes the Board to unwanted risk.

Deductibles Based On Loss History

Associations with strong financials often choose to increase their property deductibles which can provide immediate savings of 2-5%. Deductibles range from $2,500 to $25,000+. When considering deductibles, it is important for the Association to review their loss history and the loss history of comparable buildings in an effort to obtain an accurate estimate for deductible expenses.

Rate Shopping

The most common strategy employed by Associations seeking lower insurance costs is to shop their carrier. An Association can accomplish this in several ways but generally their appointed broker can offer alternative carriers in an effort to obtain the most competitive rates possible. Make sure your broker has access to all of the competitive markets in order to maximize the likelihood of finding savings.

Secondly, and more importantly, if savings is found, your broker should verify that all required coverages are included to secure the Association’s long-term financial security and lender approval. Additional savings can be realized by a thorough coverage analysis to verify the Association is not being over-insured by paying for coverage it won’t use.

To insure cost savings and long-term health of your property, make sure your insurance broker specializes in Condominium or Homeowners Associations. To maximize your savings, the Association, insurance broker, and insurance carrier need to work in harmony to identify and reduce threats to the financial health of the community.

Help Reducing Claims

One of the best ways to keep insurance costs down is to avoid claims altogether.  Some examples of how insurance brokers can help reduce claims and the impact claims have on your future premium costs include coverage reviews/benchmarking, claims management services, site inspections, building upgrade recommendations, life safety planning, vendor contract reviews, discrimination/harassment training, and hiring/firing best practices. 

Thank You

Andrew, thank you very much for providing your insight. I know from experience how much of an impact an insurance review can have on a condo budget, but also how important the right coverage can be when there’s an unexpected claim.

One thing Boards often overlook when they’re solely focused on price is the quality and speed of service when a claim in filed. For example, if a pipe bursts and floods the gym and lobby, a Board should be confident that the work orders will be executed quickly so the building can be back on its feet without delay or headache. Unfortunately, most Boards don’t think about this until they’re dealing with it, and it’s too late.

I encourage any Board/Treasurer to reach out to Andrew to review their policy. His contact info is:

Andrew Schlaffer, President

ACO Insurance

www.acoinsgrp.com

Direct: 703.595.9760

Email: andrew@acoinsgrp.com

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Improved Study on Off-Market Sales

Question: Should I consider selling my home off-market?

Answer: The correct question is not whether you can buy/sell a home yourself (yes, you definitely can), rather what are the chances that you net a better result doing so. Last year, Bright MLS released a significant study comparing the results of on and off market sales and found homes sold “on-market” through the Bright MLS platform (link to article explaining what Bright MLS is) sold for 16.98% more than those sold off-market. It was an excellent first attempt at objectively comparing sales data between the two approaches, but there were some flaws in the methodology that received pushback.

2022 Study is Much Improved

In August, Bright MLS released a new, much improved study on the same topic with significantly more data and better methodology. They expanded the data set from 443,000 sales from 2019-2020 to 840,000 sales from 2019-Q1 2022, which means we added data from the peak real estate market of 2021-early 2022. They improved the methodology in several ways such as controlling for flips, new construction, sales between family members, and distressed sales and also significantly improved how they compared prices by analyzing property and neighborhood characteristics, not just by median prices.

On-Market Sales Sold for 13% More, Even more in DC Area

The study found that from 2019-Q1 2022, homes sold through the Bright MLS platform in the Mid-Atlantic sold for 13% more than those sold off-market and the returns were even greater when the market peaked in 2021 (14.8%) and Q1 2022 (19.7%). The DC area market saw even higher returns for on-market sales than the Mid-Atlantic (see chart below).

I think that one of the most important takeaways from this study is how significant the increase in returns were for on-market vs off-market sales when the market was at its peak from 2021-Q1 2022. There’s a clear trend that as the market became more favorable for sellers, and it became easier to sell a home than ever before, the difference in returns between on-market sales and do-it-yourself sales became significantly greater.

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Are you Informed about Real Estate (Reader Poll)?

I would love to hear more from you in comments or by email (Eli@EliResidential.com) about your opinions on the availability of good real estate content – national or local market information, investing, best practices/how-to, etc. Whether it’s content you’d like to see here in my column or content you wish you could access from other sources, I’d love to hear!

Question #1: Are you informed on the real estate market?

A1: Yes, I seek out information and data regularly
A2: Somewhat, the news I follow includes enough to keep me informed
A3: Not really, I occasionally hear/read the headlines
A4: No, I don’t get any exposure to real estate news or information

Question #2: Are you happy with the real estate information/news you receive?

A1: Yes, I get exposure to the type and amount of real estate information I want
A2: No, I get real estate information but it’s not what I want
A3: No, it’s hard to find real estate information

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.