The health crisis we face as a country has led businesses all over the nation to reduce or discontinue their services altogether. This pause in the economy has greatly impacted the workforce and as a result, many people have been laid off or furloughed. Naturally, that would lead many to believe we might see a rush of foreclosures this fall like we saw in 2008. The market today, however, is very different from 2008.
The concern of more foreclosures based on those that are out of work is one that we need to understand fully. There are two reasons we won’t see a rush of foreclosures this fall: forbearance extension options and strong homeowner equity.
1. Forbearance Extension
Forbearance, according to the Consumer Financial Protection Bureau (CFPB), is “when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause paying your mortgage.” This is an option for those who need immediate relief. In today’s economy, the CFPB has given homeowners a way to extend their forbearance, which will greatly assist those families who need it at this critical time.
Under the CARES Act, the CFPB notes:
“If you experience financial hardship due to the coronavirus pandemic, you have a right to request and obtain a forbearance for up to 180 days. You also have the right to request and obtain an extension for up to another 180 days (for a total of up to 360 days).”
2. Strong Homeowner Equity
Equity is also working in favor of today’s homeowners. This savings is another reason why we won’t see substantial foreclosures in the near future. Today’s homeowners who are in forbearance actually have more equity in their homes than what the market experienced in 2008.
The Mortgage Monitor report from Black Knight indicates that of all active forbearances which are past due on their mortgage payment, 77% have at least 20% equity in their homes (See graph below):Black Knight notes:
“The high level of equity provides options for homeowners, policymakers, mortgage investors and servicers in helping to avoid downstream foreclosure activity and default-related losses.”
Many think we may see a rush of foreclosures this fall, but the facts just don’t add up in this case. Today’s real estate market is very different from 2008 when we saw many homeowners walk away when they owed more than their homes were worth. This time, equity is stronger and plans are in place to help those affected weather the storm.
A lot is happening in the world, and it’s having a direct impact on the housing market. The reality is this: some of it is positive and some of it may be negative. Some we just don’t know yet.
The following three areas of the housing market are critical to understand: interest rates, building materials, and the outlook for an economic slowdown.
1. Interest Rates
One of the most important things to consider when buying a home is the interest rate you will be charged to borrow the money. In our recent post we posed the question, “Are Low Interest Rates Here To Stay?” The latest information from Freddie Mac makes it appear they are. We are currently at a 21-month low in interest rates.
2. Building Materials
Talk of tariffs could also affect the housing market. According to a recent article, the National Association of Home Builders reports that as much as $10 billion in goods imported from China are used in homebuilding. Depending on the outcome of the tariff and trade discussions between several countries, there could be as much as a 25% boost in the cost of building materials.
3. Economic Slowdown
In a prior blog post on this topic, we began the year with many economic leaders thinking we could expect a recession in late 2019 or early 2020. As spring approached, we reported that economists had started to push that projection past 2020. Now, three leading surveys indicate that it may begin in the next eighteen months.
We are in a strong housing market. Wages are increasing, home prices are appreciating, and mortgage rates are the lowest they have been in 21 months. Whether you are thinking of buying or selling, it’s a great time to be in the market.
If you have saved up your down payment and are ready to start your home search, one other piece of the puzzle is to make sure that you have saved enough for your closing costs.
Freddie Mac defines closing costs as:
“Closing costs, also called settlement fees, will need to be paid when you obtain a mortgage. These are fees charged by people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction. Closing costs are typically between 2 and 5% of your purchase price.”
We’ve recently heard from many first-time homebuyers that they wished that someone had let them know that closing costs could be so high. If you think about it, with a low down payment program, your closing costs could equal the amount that you saved for your down payment.
Here is a list of just some of the fees/costs that may be included in your closing costs, depending on where the home you wish to purchase is located:
Government recording costs
Credit report fees
Lender origination fees
Title services (insurance, search fees)
Tax service fees
IS THERE ANY WAY TO AVOID PAYING CLOSING COSTS?
Work with your lender and real estate agent to see if there are any ways to decrease or defer your closing costs. There are no-closing mortgages available, but they end up costing you more in the end with a higher interest rate, or by wrapping the closing costs into the total cost of the mortgage (meaning you’ll end up paying interest on your closing costs).
Home buyers can also negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees in order to get the deal finalized.
Speak with your lender and agent early and often to determine how much you’ll be responsible for at closing.Finding out you’ll need to come up with thousands of dollars right before closing is not a surprise anyone is ever looking forward to.
Headlines spotlight the fact that buying a home is less affordable today than it was at any other time in more than a decade. Those headlines are accurate.
Understandably, buying a home is more expensive now than immediately following one of the worst housing crashes in American history. Over the past decade, the market was flooded with distressed properties (foreclosures and short sales) selling at 10-50% discounts. There were so many that this lowered the prices of non-distressed homes in the same neighborhoods. As a result, mortgage rates were kept low to help the economy.
Prices have since recovered. Mortgage rates have increased as the economy has gained strength. This has impacted housing affordability. However, it’s necessary to give historical context to the subject of affordability.
Two weeks ago, CoreLogic reported on what they call the “typical mortgage payment”. As they explain:
“One way to measure the impact of inflation, mortgage rates and home prices on affordability over time is to use what we call the ‘typical mortgage payment.’ It’s a mortgage-rate-adjusted monthly payment based on each month’s U.S. median home sale price. It is calculated using Freddie Mac’s average rate on a 30-year fixed-rate mortgage with a 20 percent down payment…
The typical mortgage payment is a good proxy for affordability because it shows the monthly amount that a borrower would have to qualify for to get a mortgage to buy the median-priced U.S. home…
When adjusted for inflation, the typical mortgage payment puts homebuyers’ current costs in the proper historical context.”
Here is a graph showing the results of CoreLogic’s research:
As the graph indicates, the most recent calculation remained 28% below the all-time peak of $1,275 in June 2006. That’s because the average mortgage rate at that time was 6.68%. As seen in the graph, both today’s typical payment and CoreLogic’s projection for the end of the year are less than it was in January 2000.
Even though home prices are appreciating at a slower rate, home affordability will likely continue to slide. However, this does not mean that buying a house is an unattainable goal in most markets. It is still less expensive today than it was prior to the housing bubble and crash.
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The last thing in the world you would ever want is to spend a bunch of time searching for a home, finding that perfect place, and then not being approved for your mortgage. There are also many common mistakes homebuyers make that could make the process much more painful than it has to be.
1) Don’t overestimate your budget.
Ever heard the expression “House poor“? Many homebuyers overestimate what they can actually afford and end up with very little wiggle room financially. Before jumping into buying, make sure you have a realistic idea of the yearly costs involved with owning a home.
Remember, there is your mortgage, property taxes, utilities, insurance and repairs. All of this before you even think about making upgrades. Factor in all the costs and leave yourself some room.
2) Don’t let your emotions run wild.
Buying a home is one of the biggest decisions of your life. It’s normal to be excited and fall in love with a home. However, try to keep a level head. Falling in love with a home can cloud your judgement or end in disappointment. This can happen if unforeseen issues are exposed in the inspection or if someone puts in an offer before you.
If you don’t find a home… don’t get discouraged. Home searching can be a lengthy process. It will be worth it when you find the winner.
3) Don’t talk to sellers about plans for the house.
As much as you are excited to get in and put your personal touch on the home, it’s best to keep this to yourself. Sometimes home buyers meet and get to know the home owners. This is fine, but remember that the current owner will have an emotional attachment to the property.
It’s best not to make them feel like you’re going to come in and completely change the place. If you make conversation with the owners, just keep the conversation light.
4) Don’t withdraw or deposit a lot of cash.
Going further with your financial history, cash withdraws and deposits also play a part in your mortgage approval rate. Large quantities of cash going in or out of your accounts signals a warning sign that you do not have stability. Avoid any sporadic withdraws or deposits of large sums of cash.
5) Don’t apply for more credit.
The amount you are approved for on your mortgage comes down to your capital. How much money do you have at your disposal? Applying for extra credit increases your debt. This extra debt decreases the amount you will be approved for on a mortgage.
6) Don’t co-sign a loan.
While a loan may not technically be yours – it will still equally count towards your overall debt. Co-signing a loan can have an impact on not only the amount of your mortgage but approval rate in general. Avoid co-signing any loans until you have purchased your home.
7) Don’t finance a car or furniture.
As financing is again a loan, it is therefore debt. Stay away from financing a car or furniture for the above mortgage approval reasons.
8) Don’t switch or leave your job.
Financial stability is one of the most important factors considered when a bank is approving your mortgage. The key to financial stability is having a dependable income. If you switch or leave your job, often or before applying for a mortgage, this may signal red flags.
If you are thinking about a move, hang tight with your job until after your mortgage is approved.
Ensure you don’t make these mistakes
There are many important things to consider when purchasing a home. It is one of the biggest decisions of your life.
In order to ensure that you get the house you want, when you want it, you need to understand and follow those above tips. Doing so will increase your chances of finding that perfect home and getting it. Remember that financials are very important when it comes time to apply for a mortgage. Make that your priority.
Also keep in mind the emotional aspects of purchasing a home and try to stay cool. It can be a draining process, but it will be worth it when you get the keys to the castle! Contact one of our Sales Agents today to help you through every step of the home buying process.
Choosing whether to rent or buy a home is not an easy decision. It requires you to carefully examine the factors and costs associated with each option. Which is better? That depends.
Your unique economic situation, lifestyle and goals play the largest part in deciding what is better for you. It’s important to go into your calculations with open eyes. As much as you want a home, you may not be able to afford it. Or it may not be the right decision for the way you like to live.
Factors To Consider When Buying/Renting a Home
The following four points are the largest factors to consider when weighing the pros and cons of home ownership vs. rental.
1) What are the total costs?
Many people look at the economics of home-ownership as a mortgage payment only. In reality there are insurance, repairs, property tax, homeowners association dues etc. that all have to be factored in to your monthly costs. Check out this calculator from the New York Times to see more.
Use a calculator and compare to see if:
- The monthly cost as a homeowner is less than renting.
- You can afford the monthly cost (if it works out more than renting in your area)
- Saving a 10-20% down-payment is feasible for you
If owning a home definitely the way to go for you, you need to be able to answer the above questions definitively.
2) What is important to you?
Are you more interested in building for the future, or reducing your financial risk until you can figure out a plan? You may want to own if you are thinking about starting a family. But as someone who is single, you may enjoy your freedom and having less financial debt. (Even if it is building your net worth in the long run)
Undoubtedly, buying a house only makes sense if you plan to set up roots. If you plan to move within (or every) 5 years, your transaction costs will likely bring the equity you build in your house to zero. Thus diminishing your upside while carrying all of the liabilities that come along with home ownership. Owning a home is a smart decision if you plan to stay for 10 years or more.
3) What is your preferred lifestyle?
Do you want to build a career in a specific city or travel around? Do you have long-term goals in mind? It’s okay if you don’t. The most important part is being aware of where you are at. You may want to get some international work experience or try your luck in another part of the country. Or not.
Really think about what you want. You could lose some serious money if you buy a house and sell within a few years because you decide it isn’t for you.
4) What are the opportunity costs?
Think about the pros and cons of home-ownership. On one hand, you will always have a home base. On the other, you have a property that ties you down to a geographical location. Can you make more money in another city? With a home, you can’t move to pursue those opportunities.
If rent is equal to monthly payments as an owner, think about the opportunity costs of having all of your money tied up in the house. For example, some investors may rent and opt to invest their money in the stock-market or other investments in their portfolio. Can you make higher percentage returns yearly with the money you would be using for a down payment?
The above were things you will want to consider. If you need to be realistic to make the right decision about renting vs owning a home. The below two situations may help if you aren’t able to come to a conclusion.
When is Renting a Home Better?
Despite popular belief, owning a home is not always the best decision. Let’s not be black and white. It depends on your particular situation.
You may want to rent if:
- You want to travel and set-up shop in different places every few years.
- You do not have the job or financial security to (realistically) guarantee payments for years to come.
- You have demonstrated the ability to make better financial returns through other investments.
There are other factors. However, this is a good starting point to help you determine your argument for renting versus owning a home. The benefit of renting is not being tied down to a geographic location and being able to leave when your lease runs up.
When is Owning a Home Better?
Owning a home is the long-term game. You need to have your goals in mind and understand if you can afford it.
You may want own if:
- You are okay with staying in one place for 10 years or more.
- You have the financial stability to afford the home (and float payments if you lose your job)
- You want to leverage your home as an investment property down the line (through rental)
Owning a home gives you an anchor. It helps you stay grounded by having a home base. At the same time, you can increase your upward potential by leveraging the home as an investment property.
Some food for thought
Choosing to rent or own your home is a big decision. It depends on your individual situation and vision for the future. In short, owning is traditionally the better long-term strategy. However, that’s not to say that you can’t do as good or better with the right investment portfolio.
Before jumping into anything, analyze yourself. Think hard about where you are and what you want for the future. Speak to a realtor and see if they have any advice for your individual situation.
If you are looking at purchasing property in the area, give Green Team Realty a call. We’d love to discuss your options and see if buying is the right path for you.