By Ryan McGinnis
For many people, last summer was a puzzling time. Coronavirus began to spike, again. Unemployment claims continued to rise. State and Federal moratoriums kept thousands in their apartments, and an alarming number of homeowners relied on CARES Act mortgage forbearances to avoid foreclosures. Yet, despite all the volatility, for anyone looking to buy a home in Reno, the competition was the fiercest it’s been in memory.
“If you didn’t already see a home the first day on the market, you were too late,” Lee Pfalmer, a longtime Reno resident said, while describing his home buying experience. He started home shopping in 2019 and closed on a purchase recently, after placing eight bids and browsing 40-50 homes of interest.
For mortgage advisor Shivani Peterson of All Western Mortgage, this is the first time in her eight-and-a-half-year career as an advisor where she’s seen people make 10 offers and not get the house.
“You’re going to need thick skin and act quickly in this market to be successful,” she said.
The competition is best captured in numbers. Data collected by the house-hunting website Movoto showed that Reno housing inventory fell as much as 60% from last year. The Reno Realty Blog documented even tighter inventory, down 72% year-over-year as of Jan. 6.
Strained inventory, met with increasing demand post spring lockdowns, and suppressed mortgage interest rates all factored into record median home price sales in the Reno market, standing at $456,000, according to data collected by the National Association of Realtors.
To the glancing eye, such competition would suggest a major decline in our region’s affordability.
However, the NAR local market reports help put this buying frenzy into perspective to help anyone stuck on the seemingly paradoxical fact that job security is being jeopardized by the pandemic while home prices are soaring to record highs.
Reno is more affordable than one might think
Affordability is an equation that’s proportional to every individual market. It’s a difficult judgement to make on median home prices alone because there are a slew of variables that determine housing affordability — and seldom do they move harmoniously together. The coronavirus (and the economic responses thereof) was a cacophonous echo to the orchestra that brought momentous change, fast.
This mainly manifested in a sharp inventory drop and historically low interest rates, according to Peterson.
For anyone on the fence about moving to Reno from California, “2020 sealed the deal,” Peterson said, which explains partly why there was a flood of buyers coming into the market last summer. Their impact on the region’s competition, however, muddies what conclusions can easily be drawn about affordability.
That’s because there’s a second variable in the equation: historically low mortgage interest rates. According to the mortgage finance provider Freddie Mac, the interest rate on a 30-year fixed rate mortgage dropped to 2.95% in the third quarter of 2020, down from 3.67% a year earlier — an all-time low.
This deceivingly small numeric change gives homebuyers roughly $70,000-$100,000 more buying power, according to Peterson, which balances out many of the perceived risks to affordability in Reno’s market.
In fact, the NAR uses a scorecard to reconcile the competing effects of median income, median home sales, mortgage interest rates and inventory on state-wide affordability. A score of 1 is a perfect market equilibrium between buyers and sellers. An affordability score under 1 determines what percentage of median income homebuyers can afford the median home price.
Their findings indicate Nevada’s affordability actually improved from 2017 to 2020. Inventory catching up to demand and suppressed mortgage rates are two of the stronger contributors to these scorecard improvements, fluctuating from a low of .6 to a recent high of .77 in recent months.
Comparatively, California fluctuated between .5 and .6 during the same timeframe.
Inflection point
However, Peterson notes that continued demand has the potential to offset what progress has been made in affordability in recent years. The psychological upper band of home prices has the ability to stay high due to the economic effects of suppressed mortgage interest rates (which are believed to stay low due to Federal Reserve monetary policy in response to the coronavirus), in addition to the buyer power of out-of-state demand.
And while inventory has improved considerably over the years (the NAR estimates the 12-month sum of building permits are 33.4% above the long-term average), current housing demand is a challenge to those figures.
These conditions add up to what Peterson describes as a possible “inflection point.” Specifically, these factors stress the down payment equation to affordability to a far greater degree than the mortgage component. Because affordability is judged in relationship to its own market, outside competitors can have a disproportionate amount of buying power compared to local residents, considering their relative incomes and equity.
“You’re going to need thick skin and act quickly in this market to be successful.”
To understand this competitive imbalance, one needs to compare appreciation growth across markets. The NAR’s local reports compare home appreciation to the national average. Over the past five years, the average American household has gained $80,000 of equity in their home.
However, that figure is dwarfed by Reno’s average $200,000 gain in equity.
And dwarfed again by San Francisco’s $400,000 gain.
Such speed of appreciation is what’s burdensome for first-time homebuyers, especially when Reno’s market has a considerable number of out-of-state buyers that can purchase a median priced home from previous equity alone.
If no such competition existed, Pfalmer should have had relatively painless property search instead of the nearly two year process he endured. He was fortunate to have two home assets that could be reinvested into a down payment — the timing of which was nearly perfect.
He bought his first home in 2011, at the very bottom of the housing downturn, with little financial knowledge and a hunch that property prices couldn’t fall much below current levels — insight gained through a happenstance conversation he had with a local builder. Even though he sold that property several years ago (and didn’t reap the full extent of appreciation other homebuyers garnered), his wife owns a townhome with enough equity to reinvest an additional portion toward their down payment.
But, the leg up wasn’t considerable in today’s market environment.
Pfalmer described the house hunt as an “emotionally draining” exercise. Many of his offers were outbid by buyers paying cash, at times site unseen. The problem wasn’t necessarily affordability alone, rather one of disproportionate competition with not enough inventory to satisfy everyone.
Eventually, Pfalmer found a property in a family-friendly northwest Reno neighborhood. It’s big enough to comfortably fit his wife, his young son and even an office.
The story ends on a positive note, but leaves an important question about affordability, one that Pfalmer and his wife pondered in the months leading up to their eventual find. If there’s not enough inventory to satisfy everyone, how many people will compromise by living further and further away from expensive property close downtown and the Sierra Nevada? For many, the commute defeats the purpose of living here.
Compromises
These tough compromises are ultimately what make the post-pandemic housing market tenuous for first time homebuyers. There are many reasons for buyers to look at homes as something more than a financial asset. Where we live is oftentimes where we want to start a family. It’s a reflection of where we work, of social status, of friend circles, of recreational hobbies and more.
However, increasingly, it’s important to see a home as an investment opportunity, according to Peterson. Most young people will not be able to afford their dream home today, but compromising on location or size is a means of floating amongst a rising tide of home prices, so one has the ability to buy the home they want to have in the future.
Make no mistake: that’s still a daunting decision and one that needs prudent financial planning. The pandemic, unfortunately, has been burdensome, and, perhaps, unnecessarily defeatist for individuals who think they’re further away from being a homebuyer than they really are. If any reminder is to be had, it’s a wake-up call to start planning altogether.
In 2011, when Pfalmer bought that home in Midtown, closing costs were less than $10,000. Today, he said those figures sound magical. But the same rules of appreciation are what helped him find a family home almost 10 years later. Today, first-time homebuyers are waging a similar bet of their own…albeit a more difficult one, given how expensive the market is today.
“I really want to help locals win,” Peterson said. “This is our town and they deserve to have a home here.”
There are a number of grants to help first time home buyers with down payment assistance. Readers should look into grants provided by the Nevada Housing Division, Home-at-last and eHousingPlus.com.
