Everyone is rightly concerned about the Coronavirus – as well as its impact on the economy and on housing.
But before the Coronavirus took hold, housing was very strong, with both new construction data and existing home sales at 13-year highs.
Believe it or not, we expect the strength to resume in housing when things get better, and I’m quite confident they will get better!
Sure, there might be a slower period as we practice social distancing, but most experts believe that when the economy comes back, it’s going to come back strong.
In addition to that, homes are valued quite fairly; they’re not overpriced…and home appreciation has been steady and sustainable (more on that here…)
Look at this metric: when you take annual rents, the value of a home is about 17 times what annual rents would be. The historical average is 16, so we’re right there.
The peak was 24 times annual rents and we’re nowhere near that level! And if you take a look at replacement costs, home values are 1.59 times the cost to replace the home. The 40-year average is 1.58. It’s nowhere near the peak of roughly 2.
We can expect housing to come back very strong and this may be a great opportunity to buy that home you were looking for and benefit from it well into the future.
Please do reach out to me for more information and to set up your strategy!
Good news for home owners and buyers
alike – home appreciation remains strong.
Interest have moved to historic lows due to multiple factors, including the virus scare.
The Federal Reserve has cut it’s funds rate by .50 basis points in an attempt to “provide a meaningful boost to the economy”, per Chairman Jerome Powell.
With these things in mind, make sure you have a solid game plan to navigate the market right now. Think about inventory, equity in your home, second homes, and investment properties as strategies to build wealth.
It’s also a good time to take a look at refinancing any properties you own, as rates have dropped significantly over the last 2 years.
The housing reporting benchmark, CoreLogic, reported that home prices rose 0.1% in January and 4.0% year over year.
The year-over-year reading remained stable from last month’s report. CoreLogic forecasts that home prices will appreciate by 5.4% in the year going forward, which slightly higher pace. from the 5.2% forecasted in the previous report.
This is great news for would be buyers, as they can expect a great return on their investment!
Do reach out to me to find out more, as it would be my pleasure to help you determine the right strategy for today’s environment.
I work with a wide variety of clients, from first time buyers to seasoned investors…and many in between. However, some of the most frequent questions I receive deal with second home mortgages versus investment property financing.
Interestingly, there are specific rules and regulations for
both, and I’d like to outline a number of major differences between them.
In general, whether you’re buying a vacation home or an investment property, you’ll pay higher mortgage rates and have to meet stricter guidelines to qualify.
Mortgage rates are higher for second homes and investment properties than for the home you consider your primary residence.
In general, second home and investment property interest rates are about 0.625% to 1% higher than market rates for primary homes.
Of course, investment property and second home mortgage rates depend on similar factors as those for your primary home. Each borrower’s situation will vary based on income, credit score, assets, and down payment percentage, just to name a few elements.
Why Are Second Home and Investment Interest Rates Different?
Per Miller, “The home you live in (your “primary residence”)
is seen as the least risky form of real estate. It’s likely to be the one bill
homeowners will pay if times get tough. A vacation home or investment property,
on the other hand, is riskier. Borrowers are a lot more likely to forego those
payments when money is short.
Because of the higher risk second homes pose, they come with
stricter rules about financing.”
Second Home Mortgage Regulations
There are a few key things a buyer needs to know about mortgage requirements if they are considering a second or vacation home. First of all, one you will essentially live in for part of the year, but not full time.
Lenders expect a vacation or second home to be used by you,
your family, and friends for at least part of the year. However, you’re
generally allowed to rent the house out when you’re not using it.
If you plan to rent the property when you are not there, you
cannot use expected income from that property to help income qualify for the
loan.
Down Payment of 20% or More
Most lenders will want at least 20 percent down for a vacation home, however, 25% will get borrowers much better rates and terms . If your application isn’t as strong (say you have a lower credit score or smaller cash reserves), you may have to put 30 percent or more down.
Also, gift funds are generally allowed for a portion of the down payment, but at least 5% of it must come from the borrower’s own funds if bringing in less than a 20 percent down payment.
Credit Score
The purchase of a second home or vacation home requires
higher credit scores, typically in the 640 or higher range. Lenders will look
for less debt and more affordability, think of tighter debt-to-income ratios.
Strong reserves (extra funds after closing) are a big help.
Investment Property Mortgage Regulations
If you are planning on purchasing an investment property
there are specific rules that apply.
If you’re financing a home as an investment property, and
you plan to rent it out full-time, you are not personally required to live in
the building for any amount of time.
Down Payment of 20% to 25%
Down payment requirements for an investment property range from 20 percent for a one-unit property to 25 percent for a two- to four-unit property. You may also be required to make a bigger down payment depending on your application and the type of loan.
No gift funds are allowed for investment property purchases,
so most lenders will require down payment funds “seasoned” for at least 60 days
in the borrower’s personal account.
Using Expected Rental Income to Help Qualify
The good news about utilizing an investment property loan is
that the borrower can use expected rents as income to help in qualification.
Here are some of the guidelines:
If the property is leased, then copies of the current signed lease agreements may be required.
If the property is not currently leased, then the lender may use “market rent” information provided by the appraiser.
When there is no rental income for the subject property on the borrowers tax returns, the rental income will be reduced to 75% of the gross rental income provided on the lease.
Lenders generally require borrowers to have a credit score
above 640 for an investment property loan. With that said, rates can run very
high for low credit scores.
The Bottom Line
When you apply for a mortgage, you are required declare how
you intend to use the property. Lenders take such declarations seriously
because they don’t want to finance riskier investment properties with
residential financing.
Make sure to find a lender who truly understands the differences and requirements between second homes and investment properties. I’d be more than happy to share other resources I have on the subject, so don’t hesitate to reach out to me with your questions!
You might be seeing in the press or hearing from others that owning a home today is less affordable than it has been in the past. Sure, home prices have increased over the last five years and current inventory is tight.
However, that narrative is completely wrong, when you look at the data. Now is the most affordable buying a home has been in the last 30 years.
I’m linking to an article from Caety James at Keeping Current Matters that outlines some of the reasons. You can find the article in its entirety here…
Low Mortgage Rates a Key Driver
James writes: “Homes, in most cases, are purchased with a
mortgage. The current mortgage rate is a major component of the affordability
equation. Mortgage rates have fallen by over a full percentage point since
December 2018. Another major piece of the affordability equation is a buyer’s
income. The median family income has risen by approximately 3% over the last
year.”
Potential buyers really should take the time to find out why now is the time to make that purchase.
Payment as Percentage of Income
The report on the index also calculates the mortgage payment
on a median priced home as a percentage of the median national income. Historically,
that percentage is just above 21%. Here are the percentages since June of 2018:
Again, we can see that affordability is much better today
than the historical average and has been getting better over the last year and
a half.
Bottom
Line
Whether you’re thinking about buying your first home or contemplating a vacation home or investment property, don’t let the false narrative about affordability prevent you from moving forward.
From an affordability standpoint, this is truly one of the best times to buy in the last 30 years. Please do reach out to me to find out more and how I can help!
A strong job market, increased real wages, and historically low mortgage rates should support a solid housing market in 2020, most economists predict.
Believe it or not, the problem will be finding enough homes for buyers, as housing inventory is near all-time lows throughout much of the country.
With low unemployment and interest rates well below
historical averages, the real estate industry is being constrained by shortage
in housing availability, especially at lower price ranges. Not enough homes are
being built, and homeowners are staying put longer, creating a bit of a bottleneck.
With that said, most experts believe it will be a good year
for home buyers – and even better for home sellers.
Let’s take a look at what the insiders are saying about
housing, the Federal Reserve, and mortgage interest rates in 2020….
HOUSING
“The housing market appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years, further bolstering our modest-but-solid growth forecasts through 2021,” said Doug Duncan, Fannie Mae’s chief economist. “In our view, residential fixed investment is likely to benefit from ongoing strength in the labor markets and consumer spending, in addition to the low interest rate environment.”
Affordability
Current research shows that housing has actually become more
affordable this year, despite home appreciation and tight inventory. Affordable
homes are possible thanks to lower mortgage rates and greater purchasing power.
For the average home buyer, month-to-month housing costs are
lower than they’ve been at almost any point in the last three years because
real wages are up and interest rates are down.
The trade association for real estate agents predicts
moderate growth in the housing market and continued low mortgage rates.
They believe that new-home sales are expected to rise to
750,000, an 11 percent increase that puts them at a 13-year high. Existing-home
sales will continue to be held down by lack of supply, rising modestly to 5.6
million, a 4 percent increase.
The national median sale price of an existing home is
expected to grow to $270,400, an increase of 4.3 percent from 2019.
Here’s what CoreLogic sees regarding appreciation for 2020:
Rents Rising
Rents are rising and will likely continue to accelerate in 2020,
according to the latest market report from Zillow.
Apartment rents grew 2.3% year-over-year, driving the median
U.S. rent up to $1,600 per month. At the same time, housing values showed the
lowest growth since February 2013, and inventory of for-sale homes fell.
With fewer homes on the market, national rent growth is
projected to rise in 2020.
Single-family rents rose 2.9% year over year, according to
CoreLogic’s Single-Family Rent Index, which measures rent changes among
single-family rental homes, including condos.
As you might expect, now is not good time to be a renter,
especially when you consider the missed opportunity on home appreciation.
Historically Low Inventory
According to the 2020 National Housing Forecast from
Realtor.com, the national housing shortage will continue in 2020, possibly
reaching historic low levels.
The graphic below shows where inventory is today relative to
other times over the last 35 years:
“The market is still years away from reaching an adequate
supply of homes to meet today’s demand from buyers,” Realtor.com’s senior
economist George Ratiu says. “Despite improvements to new construction and
short waves of sellers, next year will once again fail to bring a solution to
the inventory shortage.”
THE FEDERAL RESERVE
Many consumers believe that the Federal Reserve sets mortgage interest rates. Interestingly, that’s not the case….the Fed doesn’t make mortgage rates, they are driven by the bond market market on Wall Street.
The Federal Reserve surely influences mortgage rates, but they don’t set them. You can find out more on that here…
For the Federal Reserve, manipulating the Federal Funds Rate
is one way to manage its dual-charter of fostering maximum employment and
maintaining stable prices. So, when the
Fed lowers or raises the Fed Funds Rate, interest rate markets generally move
in that direction.
Quantitative Easing and Interest Rate Manipulation
The Federal Reserve started re-purchasing Treasury Bonds in
September of 2019, something which they have not done since 2017.
Blogger Craig Eyermann does a fantastic job of defining Quantitative
easing: “(QE) is an extraordinary monetary policy that the Federal Reserve
implemented during the Great Recession to stimulate the economy after it had
cut interest rates to zero percent by purchasing government-issued debt
securities, such as U.S. Treasury bills and bonds, to get the effect of
additional cuts to interest rates. As a result of its QE policies, the Federal
Reserve became one of the largest single creditors to the U.S. government at a
time when the size of the national debt was surging.”
What many experts generally agree upon is that the Fed has
utilized QE to keep interest rates low, especially considering they lowered the
Federal Funds rate 3 times in 2019.
What all of this means is that, essentially, the Fed is trying to maintain
a relatively low interest rate environment…which should be good for mortgage
rates in general.
Voting Membership Changes
The Federal Open Market Committee (FOMC) consists of twelve
members–the seven members of the Board of Governors of the Federal Reserve
System; the president of the Federal Reserve Bank of New York; and four of the
remaining eleven Reserve Bank presidents, who serve one-year terms on a
rotating basis.
This year, there are four presidents rotating out that voted
in 2019: Boston (Eric Rosengren), Chicago (Charles Evans), KC (Esther George),
St Louis (James Bullard).
The new four presidents that are rotating in for 2020 are:
Cleveland (Loretta Mester), Philly (Patrick Harker), Dallas (Robert Kaplan),
Minneapolis (Neel Kashkari).
The make up of the 2020 Fed is a bit different that 2019, as
three of the new members are generally in favor of lower interest rates, and
only one (Mester) has been open about raising the Federal Funds rate.
Most experts agree that this board will opt for lower rates than
previous administrations.
MORTGAGE INTEREST RATES
The average rate on the 30-year fixed mortgage is hovering
in the low 4% range as we enter 2020, a full percentage point lower than where
it was a year ago. Low rates are boosting already strong demographic demand
drivers in the market.
Many prognosticators are stating the average fixed rate might
well fall into the mid 3% range in 2020.
That would be the lowest annual average ever recorded in Freddie Mac
records going back to 1973.
Why are lower rates expected? Let’s take a look…
Reasonably Low Inflation
As stated earlier, mortgage rates are set by bond investors
who keep a watch on inflation as a gauge of the yields they are willing to
take. Rising inflation eats into their returns and leads to higher mortgage
rates. In a low-inflation environment, like today, they can still make money
while taking low yields, which translates into low rates for borrowers.
Inflation has been extremely low over the last year and a
half – and most experts (including those that sit on the Federal Reserve Board)
are not seeing many new inflationary indicators, either.
This means that interest rates should stay low, unless inflation rears
its ugly head.
Recession Fears
Many, like me, were predicting a recession in 2019 , but it
never really emerged. Unemployment stayed low and corporate profits continued
to rise.
With that said, a recession at end of 2020 still possible,
but may be delayed into 2021 due to some financial engineering by the Federal
Reserve.
A couple of things to keep in mind…
Manufacturing already struggling
Shipments have been declining
Yield curve was inverted earlier this year (this
inversion has happened before every single recession on record)
The key metrics to watch will be an uptick in initial
jobless claims and the overall unemployment rate
When recession eventually comes, rates will significantly decline.
Stocks – Longest Expansion in History
The U.S. is officially in its longest expansion, breaking
the record of 120 months of economic growth from March 1991 to March 2001,
according to the National Bureau of Economic Research.
The economy has been on a growth spurt since June 2009 and
now surpasses the previous record expansion set between March 1991 and March
2001 before the dot-com bubble burst.
The decade-long expansion has been fueled by job growth,
record-low unemployment rates and low interest rates.
There were 21.4 million jobs created during the expansion
after a loss of 9 million during the recession.
Overall household wealth — which includes home values, stock
portfolios and bank accounts minus mortgages and credit-card debt — spiked 80
percent over the last decade.
At the same time, some experts worry that a recession is on
the horizon as history suggests that expansion can’t continue forever. Other
causes for concern are the US-China trade and tariff dispute and a sluggish
global economy.
“It’s unusual to have gone so long without a recession”
when looking at the economic data going back to the 1950s, said David Wessel,
director of the Hutchins Center on Fiscal and Monetary Policy at the
Brookings Institution.
As mentioned previously, if there is a recession, rates will most
definitely come down even more.
In Conclusion
2020 looks to be a positive one for both buyers and sellers,
although the market would clearly be considered a “seller’s market”, because
inventory is so low.
However, because real wages are up, home affordability is
up, and interest rates are forecasted to remain low, buyers are in a great
position to purchase. It just might take
a little more negotiations to agree upon the purchase price!
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
