Despite rising home prices, American housing is actually quite affordable – and now is really a good time to make that purchase.
Housing affordability is measured by comparing household income relative to the income needed to purchase a home.
According to the latest Real House Price Index from First American Title, today’s home buyers have “historically high levels of house-purchasing power.”
According to Mark Fleming, First American’s chief economist, “talk of an affordability crisis is over-stated.” In fact, consumer house-buying power – how much home someone can buy based on average income, interest rate and home price – is actually up over the year.
Ms. Yale in her article notes that home-buying power rose by nearly a full percent from November 2016 to November 2017.
And though real home prices increased 5 percent over the year, they’re still 37.7 percent below their 2006 peak. They’re also more than 16 percent below 2000’s numbers.
Because mortgage rates are lower than historical averages, home-buying power is up, according to First American’s Fleming.
“In fact, consumer house-buying power is 2.3 times higher than it was in 2000, almost two decades ago,” he said. “It’s also only 2.9 percent below the peak in July 2016. Because the long-run trend in mortgage interest rates has been downward, from a peak of 18 percent in 1981, the housing market has benefited from consistently increasing house-buying power”
He continues, “Home buyers today have historically high levels of house-purchasing power, and that’s one important reason why, even as unadjusted house price growth exceeds household income growth, the talk of an affordability crisis is over-stated for now.”
The Solution
One of the great underlying opportunities today is that buying a home is considerably cheaper than renting. Renters interested in reducing expenses and collecting tax benefits should absolutely talk to a mortgage lender prior to signing that next rental contract.
Contact me for more information, as it would be my pleasure to help!
So, you have decided that it’s time to take that big step and are ready to buy a home. Good for you! But what’s next?
Before you hit the web and attempt to navigate all of those home listing websites, there are a few things you need to do first.
Here are five things you should know…so you don’t end up saying “I wish I would have known that before buying a home.”
Know your credit score
Don’t rely on many of the free websites – they don’t use the same metrics to measure your FICO score. Contact your mortgage lender to help you with this step.
The credit score is a direct reflection of your credit history, which is a financial inventory of things you’ve paid for. Credit cards, past loans, government information are all sources that make up your history.
Other information includes the number of credit cards and loans you have and if you pay your bills on time.
Your chosen mortgage lender will help you understand what you need to work on to boost that credit score, if necessary – and in the end, land a more favorable loan.
Obtain a pre-approval
A pre-approval on a loan will give you an advantage when you start to look for that ideal home. You will know the exact loan amount for which you qualify, what your monthly payment will look like and how much taxes and insurance will be.
With a pre-qualification, the loan process will be smoother and your offer will be much stronger.
When pre-approved, your lender provides you with a letter confirming the specific loan amount you can expect to receive. Showing that pre-approval letter along with your offer when you find the home of your dreams will allow you to make the strongest possible offer.
Know the value of a real estate agent
Some home buyers may decide they want to enter the housing market without a real estate agent. They soon find that there is a lot that goes into the house hunting process – from the research, to the paperwork, to the negotiations, it is a long, tedious process.
A good real estate agent has a keen understanding about neighborhoods, recent sales and listings, trends, crime rates and schools. A real estate agent will find listings tailored to your needs and will understand the lending environment.
Most importantly, real estate agents will help you with price negotiations in the current market and protect you by looking out for your financial interest during the process.
It can’t be stressed enough how important the right agent can be!
Research your down payment options
The down payment hurdle you have to clear may be quite a bit lower than you think. Traditionally, lenders have asked for 20% down, but there are many, many low down payment options are available, especially to first-time buyers.
Mortgages guaranteed by the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture can be “no-to-low” down payment loans.
In fact, mortgages backed by the VA and the USDA — for those who qualify — usually don’t require a down payment at all. A funding fee is charged on VA loans, but even that can be rolled into your monthly loan payment.
FHA-backed loans are available with as little as 3.5% down. With that said, buyers will have to pay mortgage insurance to help lenders defray the costs of loans that default.
Conventional loans, which aren’t backed by the government, also offer low down payment programs to first-time buyers. In, fact, down payments of just 3% are common, especially if you are a first-time buyer. Again, buyers really should reach out to lenders that understand these programs and how they work.
Do your home inspection early
Consider getting inspections on the home you are interested in done early after escrow starts to find out if there are repairs needed. This can be beneficial when trying to get a 30-day close.
Once the inspection has been competed, there is less chance at any delays later in the closing process. Many real estate agents are working with their buyers to get those inspections done earlier and earlier to avoid delays.
In Conclusion
Purchasing a new home isn’t necessarily an easy to understand or intuitive process….there really is a lot to wrap your head around when buying a home. Make sure you are aware of these things so you are prepared. And if you have questions, don’t hesitate to contact me!
There has been a slow increase in interest rates since September of 2017 – and a quicker jump in the last few weeks. Bond markets haven’t seen pressures like this in over 4 years – and things are trending higher.
Many potential home buyers and investors are asking why – and what does the future hold?
First, let’s take a look at what the 10 year treasury note has done since September 2017. The 10-year Treasury note rate is the yield or rate of return, you get for investing in this note. The yield is important because it is a true benchmark, which guides other interest rates, especially mortgage rates.
Note the upward slope of the yield on the graph below…and mortgage rates have essentially followed:
OK – so we see the trend line. So why has this happened?
Well, there are 3 main reasons – and all of them are pretty decent economic signs, as a matter of fact.
Increased Employment and Potential Inflationary Pressures
Many investors believe inflation is bound to tick up if the labor market continues to improve, and some market indicators suggest inflation expectations have been climbing in recent months. This is a general reflection better economic data, rising energy prices and the passage of sweeping tax cuts. Many think could provide a further boost to the economy – giving consumers more money at their disposal.
Rising inflation is a threat to government bond investors because it chips away at the purchasing power of their fixed interest payments. As mentioned earlier, the 10-year Treasury yield is watched particularly closely because it is a bedrock of global finance. It is key in influencing borrowing rates for consumers, businesses and state and local governments.
If positive labor and economic news keep pouring out (as most analysts believe things will continue to improve), then the prospect of inflation will put pressure on bonds and interest rates.
‘Quantitative Tightening’ by the Federal Reserve
Between 2009 and 2014, the US Federal Reserve created $3.5 trillion during three phases of what was called “Quantitative Easing”. It was the Federal Reserve’s response to help reduce the dramatic market swings created by the recession about 10 years ago. It used that money to buy $3.5 trillion dollars worth of financial assets – principally government bonds and mortgage backed securities issued by the government-sponsored mortgage entities Fannie Mae and Freddie Mac.
When you really think about it, $3.5 trillion is a pretty large amount of money. When that much money is spent over a six-year period, it would no doubt change the price of anything, bond markets included. By the way, this maneuver has generally been appreciated in the market and (at least at this time) appears to have been a success.
Well, the Federal Reserve has now begun to reduce its balance sheet as the necessity for investment has given way to the possibility of inflation. Over time, the plan is to reinvest less and less – as per the schedule reproduced in the table below – until such a time as it considers its balance sheet ‘normalized’.
Historically, when the bonds owned by the Fed mature, they simply reinvested the proceeds into new bonds. It essentially keeps the size of the balance sheet stable, while having very little impact on the market. However, when quantitative tightening began in October of 2017, the Fed started slowing down these reinvestments, allowing its balance sheet to gradually shrink.
In theory, through unwinding its balance sheet slowly by just allowing the bonds it owns to mature, the Fed can attempt to mitigate the fear of what might happen to yields if it was to ever try and sell such a large amount of bonds directly.
Essentially, the Federal Reserve is changing the supply and demand curve and the result is a higher yield in the 10 year treasury note.
Stock Market Increases – Pressuring Bond Markets
Generally speaking, stock markets and bond markets move in different directions. Because both stocks and bonds compete for investment money at a fundamental level, most financial analysts believe that a strengthening equity (stock) market attracts funds away from bonds.
By all measures, 2017 was a stellar year for the stock market. As we enter a new year, experts are cautiously optimistic that stocks will continue their hot streak in 2018.
Stocks soared last year on excellent corporate profits and positive economic growth. The Dow Jones industrial average shot up by 25%, the S&P 500 grew by 19% and the Nasdaq index bested them both with a 28% gain.
There is clearly more evidence of excitement among investors in 2018. This has everything to do with a strengthening economy and record corporate revenues…and profits that that have been bolstered by the new tax law.
In the short run, rising equity values would tend to drive bond prices lower and bond yields higher than they otherwise might have been.
What It All Means
So, I think it is safe to say that we will continue to see pressures in the bond market and mortgage rates overall. These increases look to be gradual, but consistent.
With that said, home prices are increasing nationally at nearly 6%, so the increase in interest rate will be more than offset by the increasing value of one’s home! Now is a fantastic time to purchase. Contact me for more information, as it would by my privilege to help you.
Now that 2018 is here, let’s take a look at what we can expect in the housing market. Experts are predicting some positive shifts moving into 2018, including an ease in the housing inventory shortage.
The latest report from realtor.com shows the market will begin to see more manageable increases in home prices and a modest acceleration of home sales. Analysts from the real estate listings website also predict Millennials will begin to increase their market share of homeownership in 2018.
Here’s the 2018 Housing Appreciation Forecast from the experts at the MBS Highway:
Here’s the forecast from the National Association of Realtors:
A few highlights:
Inventory shortages will drive the housing market
Low inventory will continue to push up home prices and potentially be a barrier for first-time homebuyers who struggle to save for a down payment. With that said, many low-down payment programs will help this segment.
Many homeowners will remodel rather than sell
In addition to higher housing starts, some experts are saying more homeowners will sell their homes and partially alleviate low inventory issues.
Some homeowners, despite having high confidence about being in a seller’s market, will continue to stay put. Instead of buying a new home, homeowners will refinance and invest in remodeling efforts to make their current homes feel and look brand new.
Builders will turn their focus to entry-level homes
Economists have said over and over again that increased residential housing starts, especially at the starter home level, are the key to bringing home prices down.
Housing starts have been well below the 50-year average of 1.2 million, but many economists expect builders to finally hearken to the call of first-time and lower- to middle-income buyers yearning for more affordable options.
If you have more questions about getting into that new home in 2018, don’t hesitate to contact me, as it would be my privilege to help!
For many would-be buyers, the down payment is the only thing keeping them from owning a home. Most have a good paying and consistent job – some are even working to pay down debt.
Right now, mortgage rates are remarkably low, home prices have been increasing steadily, and rental rates are getting out-of-hand.
If you’re a first-time home buyer, the down payment hurdle you have to clear may be quite a bit lower than you think. Traditionally, lenders have asked for 20% down, but there are many, many low down payment options are available, especially to first-time buyers.
Mortgages guaranteed by the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture can be “no-to-low” down payment loans.
In fact, mortgages backed by the VA and the USDA — for those who qualify — usually don’t require a down payment at all. A funding fee is charged on VA loans, but even that can be rolled into your monthly loan payment.
FHA-backed loans are available with as little as 3.5% down. With that said, buyers will have to pay mortgage insurance to help lenders defray the costs of loans that default.
Conventional loans, which aren’t backed by the government, also offer low down payment programs to first-time buyers. In, fact, down payments of just 3% are common, especially if you are a first-time buyer. Again, buyers really should reach out to lenders that understand these programs and how they work.
Getting help from family members might be another way to go.
If you’re getting a cash gift for down payment, you’ll want to be sure that you “receive” your cash gift properly. Should you receive your gift improperly, your lender is likely to reject your home loan application.
It’s imperative, therefore, that you follow the rules of cash-gifting for a home.
The down payment gift rules are (1) the gift must be documented with a formal “gift letter”; (2) a paper trail must be shown for the gifted monies as they move from the giver’s account to the home buyer’s account; and (3) the gift may not be a loan-in-disguise. Home buyers are permitted to accept up to 6% of a home’s purchase price in the form of a cash down payment gift.
Using retirement accounts
If you have a retirement funds set aside, you should be able to tap a portion of it to help with the down payment. Employer-sponsored 401(k) plans often allow for penalty-free hardship withdrawals or loans.
One option used by many with a 401k is to take out a loan. Generally, your loan can be up to $50,000 or half the value of the account, whichever is less. As long as you can handle the payments (and yes, you have to pay back this loan), this is usually a less expensive option than a straight withdrawal. Though you will pay interest, you won’t pay taxes or penalties on the loan amount.
Contact your 401(k) plan administrator to find out more.
A few things to know about 401k loans:
Since you’re incurring debt and will need to make monthly payments on the loan, your ability to get a mortgage may be affected.
The interest rate on 401k loans is generally about two points above the prime rate. The interest you pay, however, isn’t paid to the company – it goes into your 401k account.
Many plans give you only five years to repay the loan. In other words, if you borrow a large amount, the payments could be substantial.
If you leave your company, you may be required to pay back the outstanding balance within 60 to 90 days or be forced to take it as a hardship withdrawal. This means you’ll be hit with taxes and penalties on the amount you still owe.
If payments are deducted from your paycheck, the principal payments will not be taxed but the interest payments will. Since you’ll be taxed again on withdrawals during retirement, the interest payments will end up being double-taxed.
State and local down payment assistance
There are programs in every state, implemented by government agencies, nonprofits, foundations and even employers. Assistance can have a geographic focus as wide as the nation or as narrow as a city — all the way to hyper-local initiatives targeted as tightly as neighborhoods, and even house by house.
Down Payment Assistance (DPA) programs are designed to make new homes affordable for low to middle income buyers. These mortgage programs can be used whether you are a first time buyer or fifth time buyer (unless there is a state specific program that sets its own rules).
In general, it’s good to keep in mind that many of these programs are government based. Stipulations may be placed on your purchase like, a requirement that the unit remains owner-occupied or when you decide to sell the property or you may only be able to sell it to another qualified low to moderate-income buyer. Also, the interest rates for these programs are generally higher than other options.
Programs change often; they’re funded, defunded and sometimes re-funded.
Going old-school and saving
There’s always the spend-less-than-you-earn-and-save-it strategy to building a down payment fund.
More than likely, it may take a combination of strategies to get you into a home with a decent down payment — and still have a little left over to cover those unexpected home-ownership expenses. Make sure to reach out to me for more information!
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.
The views expressed are my own and do not necessarily reflect those of Starlight Mortgage.
Ms. Yale in her article notes that home-buying power rose by nearly a full percent from November 2016 to November 2017.
