Teton Realty Blog

Interest Rates, Ideas for Buyers and Market Impacts

May 6, 2022 By Tayson Rockefeller Leave a Comment

It’s no secret, interest rates are definitely on the rise, and likely will continue to do so. It’s interesting hearing about all of the potential impacts. A lender friend of mine provided some good insight recently. Interest rates are still very low from a historical standpoint, and there are still some great ways to minimize the impacts of rising rates. These include mortgage points that come with a variety of options and the ability to have these points negotiated into a transaction or even paid by the seller. A mortgage point is effectively a way to buy down the interest rate up front. This can be a great tool to help buyers keep up with today’s real estate prices, which don’t seem to be going down despite interest rates creeping up. Buying mortgage points can also work well for buyers that intend to keep their loans long-term. Typically a “point” is equivalent to 1% of the purchase price and that will usually reduce the interest rate anywhere from 1/8 to 3/8 of a percent. Other options include a 2-1 (or even a 3-2-1) buy down which reduces the first year by 2 points in the second year by one point, which is where the highest amount of interest is paid on a loan while the principal of balance is still high.

Obviously interest increases are coming as a way to combat inflation, and it’s probably the lesser of two evils. Interestingly, supply chain issues, high building costs and other factors on the supply side are keeping new inventory at bay. Whereas real estate is primarily supply and demand based, this has created an interesting dynamic for both buyers and sellers. Personally, I do believe that the cumulative total of these issues will have an impact on the market, but without the increase of supply, I’m interested to see how much (if any, I should add).

New Construction Contracts

April 20, 2022 By Tayson Rockefeller Leave a Comment

We all know that construction costs are sky high with no relief in sight. This is creating issues for sellers, builders and buyers alike. This article is geared towards buyers purchasing existing spec homes, usually from a broker representing a builder. These contracts will usually include the building site, the construction and usually the landscaping. Obviously, working with a general contractor with a parcel that you own (custom build) is a separate topic, with different financing requirements.

Types Of Contracts
Historically, we have seen regular purchase and sale agreements that give the buyer an opportunity to review the finishes and quality of construction upon completion. That method has been almost entirely replaced with a non-refundable deposit up front with a provision for the contract to be canceled only if the completion is not done by a certain date. This leaves the door open for quality control issues and very little room for changes along the way. In addition, we are starting to see contracts with built-in price escalations based on material costs. This usually gives the buyer an opportunity to withdraw from the transaction in the event that the costs increase beyond the buyer’s budget, but I wouldn’t be surprised if there were agreements that locked the buyer into these potential price increases as well.

What’s Included?
In some cases builders working with brokers will use a traditional State purchase and sale agreement with an addendum or exhibit outlining items that are included in the sale along with the finish schedule, but sometimes they have builder contracts which can be daunting to review and understand. Regardless, it is important to understand what is included in the purchase price. A clear understanding of appliances, landscaping or partial landscaping, window coverings and other items in addition to the home and building site are important aspects.

Change Orders
It has become increasingly common for a builder to simply provide a finish schedule of materials used. Builders are also building in language for potential changes based on availability of materials in the event something needs to be substituted. The issue is that many materials are ordered far in advance and therefore cannot be changed. General contractors would historically hold meetings for finishes along the way, but with the lack of available materials, builders are finding themselves ordering appliances, tile and flooring, doors, windows and trim even before concrete is poured. In many events, this is limiting buyers to very basic modifications such as paint colors.

Financing
Unlike those working with a general contractor to build a home as opposed to buying a spec home directly from a broker or builder, conventional loans are typical. This simply provides that the buyer completes the appraisal and underwriting loan process after the certificate of occupancy is issued. This obviously opens the door to issues with interest rates. Buyers will want to be forward thinking and conservative based on their budget or debt ratios to ensure they can still qualify for the home they have contracted, particularly if they have a contract with a deposit that is not refundable. For those working with the general contractor directly, “one time close” loans can provide some reassurance and create a safety net, but these types of loans are not as common unless building a custom home.

Preparing For Closing
Another risk factor and major consideration are things that may or may not be included, and how to acquire those items within a reasonable time frame as you approach closing. Just like building materials, many items such as furnishings, window coverings, appliances that may not be included in the sale can be hard to find and/or have incredible lead times. Buyers have to weigh not only the risk of purchasing something for home that they don’t yet own, but also need to be careful about making large purchases on credit that may impact their debt ratio in order to qualify for their loan as they approach closing.

Brokers
As a final note, many of these spec home builders are working with the broker to take the direct communication element out of the equation so that they can focus on what they do best. Use your real estate agent’s knowledge to your advantage to help you understand all of the points above, and to create a homogeneous working environment with your lender to ensure a process that is as painless as possible. It is also very important to work with your broker to understand expectations and to be prepared for delays and changes along the way.

What’s it cost to build a house around here? (2022)

April 2, 2022 By Tayson Rockefeller Leave a Comment

I’ve always got to start with my typical disclosures. I’m obviously not a builder, but I work closely with builders and stay in touch with customers that have projects in the works. I always tend to have a few projects going on myself, as well.

I wrote an article back in 2015 with information about my experience with the cost of construction. As you probably already know, things have changed quite a bit since then. In addition, a good portion of my 2015 project was sweat equity. I later constructed another small home in 2017, and I should have updated this article then as I relied more heavily on subcontractors, though I acted as the general contractor in both circumstances. I later again acted as my own contractor during an extensive remodel of my 1980s home, and I am currently closely involved in a project with a general contractor.

Getting back to the nuts and bolts, the cost of construction has gone up pretty dramatically. Obviously there are a few things at play here including material costs, supply shortages on both materials and labor, not to mention the cost of living which has changed pretty significantly since 2015. This definitely trickles down to the cost of labor as well. To have some fun, I looked at some of the material costs from my previous projects. I decided to use 7/16 OSB or sheeting as my “gold standard”. That may not be totally accurate across the board for all lumber and materials, but it’s a good indication as to what’s going on.

7/16 OSB, 2015-2022
2015: $9.22
2017: $14.71
2021: $23.99*
2022: $60 +/-

Materials
To be fair, that 2021 price is… not fair. If you were watching, you might remember there was a lumber bubble that popped in the Fall of 2021, and we all thought that may be a tipping point on material costs. That assessment was incorrect, as things jumped right back up to a high point, and continued that trajectory. The interesting point was how much that drop in lumber prices could impact a typical 2000 square foot home. The answer (in rough numbers) was about $15,000. Obviously some great savings in that scenario, but it’s probably not going to make or break the bank in the scheme of a large (or even a small) project. When we look at all material costs, you can see where it all starts to add up. Virtually everything is in high demand and is experiencing some sort of shortage. Appliances, tile, drywall, copper, plumbing materials, whatever. When you add it all up, it’s pretty significant.

Labor
As mentioned, the cost of living and therefore the cost of labor trickles down to costs; and can have a pretty significant impact on them. If a concrete company’s cost of labor goes up 20% because the cost of living is up 20% (realistically more) the contractor can’t just absorb that cost. Here again, concrete, framing, roofing, mechanical/electrical/plumbing… the list goes on. The biggest contributor to the issues described?

Supply and Demand
Supply of rental homes is extremely low. Supply of existing homes for sale is low. Materials, labor, contractors, everything is in low supply. Demand? You guessed it, through the roof – pun intended. While the lack of supply has a direct impact on the cost of materials and labor, there are indirect costs as well. If I can sell my used car for 10% more than I paid new, I am absolutely going to do that. In addition, I think there is likely some price gouging going on out there. Regardless, the bottom line is that people in small communities make their living when the economy is doing well. I’m not just speaking for myself when I talk (or think) about slow times.

What gives?
It’s interesting to read articles about economic cycles and what seems to be a universal opinion that times are different in terms of a potential real estate recession. Supply is still extremely low today. However, while leading up to the recession in the mid-2000s, supply was out of whack. Regardless, I’ll never make a steadfast economic prediction – and I’ll never promise that a recession won’t happen. That said, I do believe that rising interest rates will create some affordability issues (who am I kidding, there are already pretty significant affordability issues) that will tamp down the demand for construction which is already expensive. I also believe that notwithstanding prices rising so quickly, I do believe the pandemic created some shelter, keeping things in control because costs increased so significantly. With these changes in our economy, we can only hope to see some relief to balance the market. If this occurs, it will undoubtedly help stabilize some of these crazy construction prices.

Okay, I’m done blabbing about the stuff you probably already know.

So what’s it cost?
I didn’t reread my article, but I recall building my first project pretty affordably, keeping in mind that I did so much of that work myself. Costs obviously went up in 2017, and I do remember it getting more difficult to line up contractors – there was quite a bit more construction happening then. A few other considerations, some builders calculate a basic garage in their square footage cost estimate and I think you could accomplish that with the numbers below assuming modest construction, keeping in mind that Teton Valley’s modest construction tends to be a little on the “higher end” side of things including better heating systems, insulation, etc. Most of the contractors here use 5/8 drywall, 12 gauge wiring, and so on.

The Numbers

2015: $250/SqFt
2017: $310/SqFt
2022: $420/SqFt

2021 Residential Year End Sales Report

February 16, 2022 By Tayson Rockefeller Leave a Comment

While the number of residential sales is down compared with 2020, the average sales price is a completely different story. Almost unbelievably, the average sales price in Teton Valley has more than doubled since year end of 2018, and has surged above $1m by the 3rd Q ’21.

Building Costs
Building costs have played a major role with respect to residential home prices, keeping inventory low and not giving spec home builders a confidence to meet the demand of new buyers to the area. It’s hard to quantify how much building costs have risen, but personal experience and interviewing with a few builders confirms my thoughts of somewhere in the range of 50 to 60% since 2020, somewhat consistent with the increase in the average sales price from 2020 to 2021.

2021 Year to Date
As with all market reports it’s important to look at both average sales prices as well as median sales prices that better indicate realistic numbers for middle of the road properties. A few key takeaways include the average sales price growing steadily quarter by quarter in 2021, but the median sales price reducing slightly in the fourth quarter, which is consistent with what we saw with 2021 land sales as well. Here are the numbers:

2021 Average Sales Price
Q1: 694,900
Q2: 966,655
Q3: 1,005,521
Q4: 1,093,040

2021 Median Sales Price
Q1: 558,429
Q2: 664,000
Q3: 724,950
Q4: 649,000

Predictions
This will probably sound a lot like all of those National news articles you’ve been reading, but most expect these unusual market increases as well as demand to subside back to normal rates sometime in 2022 due to supply chains catching up and interest rates increasing. With respect to our micro market, it’s hard to say when that will happen. Building costs remain high, lumber futures are again on the rise, and most builders are backlogged for the next 18 months or more. If we do see stabilization throughout the Nation, my suspicion is that it will take some time for Teton Valley to follow suit.

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