Skip to content

Debunking the Biggest Homebuying Myths

August 16, 2017

Image

The process of buying or selling a home is incredibly complex, especially for those diving in for the first time. That’s why it might not come as a shock to learn that many misconceptions and myths persist regarding various steps of the homebuying process. Here are the most pervasive points of confusion for homebuyers of all stripes:

Down payments

A recent survey of mortgage industry executives from Genworth Mortgage Insurance revealed some surprising insights from real estate professionals related to the typical consumer:

  • 28 percent said most consumers hold the incorrect assumption that the 20 percent down payment is an absolute requirement for any home purchase.
  • At the same time, 41 percent said that even among consumers familiar with low down payment options, it was still common to assume that buying a home was difficult without putting 20 percent down.

Nearly 40 percent of industry professionals surveyed said misconceptions such as these were contributing factors in the lack of demand among first-time homebuyers. This was a notably more common belief among mortgage professionals than the notion that low inventory or excess student debt was to blame for sluggish demand in this sector.

“There are various low down payment options available today that allow prospective homebuyers to reach their dreams of homeownership sooner,” Genworth CEO Rohit Gupta said in a statement. “It is crucial that, as an industry, we proactively educate eligible borrowers about solutions that will enable them to buy a home when they’re ready.”

Buying and selling

Other common points of confusion center around what it takes to facilitate the buying or selling process. Zillow found that younger homebuyers may be led to conclude that they don’t need a real estate agent, and can instead conduct all the necessary research online.

While the internet and new real estate services have made the homebuying process smoother in some ways, they still haven’t replaced the experience and hands-on ability of a good real estate agent.

“It’s no longer about agents having access to the proprietary data — it’s all out there,” Zillow explained. “But since buying a home is such an infrequent transaction in your life, you need someone along on your journey who knows and studies the market, understands the process and can act as an adviser to help you interpret the data.”

In a similar vein, Zillow noted that the practice of hosting an open house for prospective buyers had also been falling by the wayside. This trend may have also been set off by new digital services that offer virtual tours of homes from the comfort of a desktop computer. But of course, this pales in comparison to the experience of seeing a home up close and in-person. After all, this is a place that could be your own for many years to come, so it’s essential to know how it looks and feels.

Buying a home is full of questions but light on easy answers. Working with a trusted professional throughout the process is a great way to ease that burden.

September Rate Hike Unlikely

August 14, 2017

Image

Mortgage rates appear to have gone on a fly-and-flop vacation. We’ve seen little movement over the past week. Even an exceptionally strong employment report for July did little to roil lending rates. Credit-market participants responded mostly with a collective shrug.

It wouldn’t surprise us to see today’s rates hold until Labor Day. Of course, an outlier event (unknown to all) could move the market, but outlier events are in themselves outliers: They happen infrequently. 

Looking further afield, Federal Reserve officials meet again on September 20, but no one expects much. Traders bet there’s a 96% chance of the status quo prevailing. And if it didn’t, it might not matter. 

Consumer price inflation, as measured by the Bureau of Labor Statistics, has gone nowhere. Even if Fed officials did a head fake and raised the fed funds rate next month, it could still be meaningless.

Inflation expectations, more than anything, influence long-term lending rates. If market participants are convinced inflation remains muted, Fed officials can continually raise the fed funds rate (an overnight lending rate) and long-term rates, such as those quoted on long-term mortgages, will remain staid.  

All that said, the Fed’s bias is for higher interest rates. (At least that’s what it is has foreshadowed.) Somewhere over the horizon, they likely loom. This suggests to us that this is as good as it gets. As we’ve noted frequently over the past month, rate dips have provided a good opportunity to lock-in a mortgage rate. Our opinion remains unchanged.

Should We Blame the Old Folks?

Bloomberg featured an article last week titled “Baby Boomers Who Won’t Sell Are Dominating the Housing Market.” The article touches on a couple points most of us know: Millennial first-timers are having a hard time entering the market is one; low supply impeding entrance is the other. 

The article is somewhat anecdotal. It’s peppered with interviews with senior citizens from various U.S. burgs. The feature character, though, is a 23-year-old painter on a home search. The enterprising painter scours older neighborhoods in Philadelphia seeking a home to buy, but to no avail.

Less anecdotal is the trend in older people refusing to sell. Leaning on Trulia data, Bloomberg tells us that those 55-and-older own 53% of owner-occupied houses. This is the largest share since the government started collecting data in 1900. The number has surged 10 percentage points over the past decade.  

On the other end, those ages 18 to 34 own just 11% of owner-occupied homes. Baby boomers (those born between 1946 and 1964) owned twice that level when they were the same age. 

The solution? 

Market solutions are frequently the most sustainable solutions. Builders and lenders have both been weighed down with excessive regulation and restrictions. Entrepreneurship — solving problems profitably — has been stultified.  

If we want to get Bloomberg’s 23-year-old painter into a home, we all need more leeway (and less paperwork) to do our jobs.  We have seen some regulatory easing in recent years, but until we see more Bloomberg’s 23-year-old painter will continue to find the row tough to hoe in his home quest. Just don’t blame the older generation for his excessive laboring.

Homeowner Wealth Continues to Outpace Renters

August 9, 2017

Image

Buying a house is more than simply having some extra space all to yourself – it also serves as an investment. Even with the high costs involved in real estate purchases, that investment is still paying off for most American homeowners…

According to two recent studies, homeowners tend to drastically outpace renters in terms of net wealth and returns on the investment. One comes from the U.S. Census Bureau: As of December 2013, the last time this data was analyzed, the median net worth of U.S. homeowners came in at $199,557. Meanwhile, the median net worth of households renting their home was just $2,208 – 90 times less. Jonathan Lansner, columnist for the Orange County Register, remarked that since the end of 2013, the economy has rebounded significantly, which probably means homeowner net worth is now even higher.

Another similar study of homeowner financial data confirmed these findings. The Federal Reserve found that between 2010 and 2013, the gap between homeowner net wealth and that of renters increased from a $182,000 difference to more than $220,000. Based on the study, Lawrence Yun of the National Association of Realtors concluded that by the end of 2016, homeowner net worth will have likely outpaced renters 45 times over.

How homes pay off

It’s easy to assume that homeowners are more wealthy simply because they had enough money to buy a home in the first place. But since most pay for real estate with a loan, homeowners are technically in debt for quite some time. The difference is that mortgage debt is an investment, unlike personal loans or credit card interest. It’s not just convenient to buy a home with a mortgage, it slowly turns into an investment that really pays dividends. Since home prices are rising at a faster rate than interest on the standard home loan, owners can expect to sell at a decent profit once they have paid off their lender. And before that happens, they are still contributing money to an equity fund that’s tax-advantaged, thanks to the federal income tax break on mortgage interest.

While the wealth gap between homeowners and renters is a concern, it only strengthens the argument that ownership is still a goal worth striving for. Real estate professionals, and hopeful buyers themselves, should take this into consideration as they work toward a great deal.

Pending Home Sales Up; Bipartisan Bill Would Change Credit Scoring

August 7, 2017

Image

Higher home sales could reside in the immediate future. The pending home sales index was up a strong 1.5% in June. This is after three months of consecutive declines. During those months, existing home-sales growth has been tepid. 

Most of us are familiar with the issues plaguing existing-home sales:

Never-ending price increases and continually contracting supply weigh on sales growth, as they have for the past five years. Maybe something will give soon. Trends don’t last indefinitely. 

One trend we’d like to see end is the homogeneity trend that arose in lending after the 2008 financial crisis. Too many pegs, of varying shapes, are still forced into the same round hole these days. Then all the holes are enveloped in reams of paper. We’ve seen the consequences too frequently: the client’s shoulders droop and his head lolls to one side when ask for yet another data point on his financial standing. 

Competition is a good thing. It drives down prices, improves efficiency, and improves service. It appears that competition on credit scoring is on the way. Perhaps this competition will allow us to be more efficient in better serving the client.

The bipartisan-supported “Credit Score Competition Act” before Congress directs the Federal Housing Finance Agencyto create a process that would allow alternative credit-scoring models to be validated and approved by Fannie Mae and Freddie Mac. This is a big deal because Fannie and Freddie purchase most mortgage originations. Fannie and Freddie look only to Fair Isaac (the FICO score) for the scores.

Fair Isaac is a good company, but alternatives are always welcomed. (After all, customers have alternatives to our services.) 

We understand why the wheels came off 10 years ago. This knowledge should allow us to expand the rulebook to allow entrepreneurs to step to the fore to solve problems. One problem that remains is getting buyers financed and into a home who deserve to be in a home. The other problem is making the process more efficient and pleasing to those who already qualify.

Allowing competitors to compete with Fair Isaac is a step in the right direction, but many more steps can still be taken. 

The Cycling Continues

It appears we’re in the “down” section of another mortgage-rate cycle. 

We’ve mentioned in recent missives the cycling that has occurred in mortgage rates through 2017.   Mortgage rates rose from mid-April to mid-May, and then subsequently rolled over in late June. Quotes on a prime 30-year fixed-rate loan were down to 4%. Before that cycle, we saw rates run-up into March and then pullback into mid-April.  A similar cycle, beginning in January, occurred before the March-April cycle. 

Mortgage rates cycled up to a three-month high a couple of weeks ago. Since then, they’ve cycled down to a one-month low. A quote of 4% on a prime 30-year fixed-rate mortgage is the prevalent quote on the national scene. Quotes below 4% have popped up with greater frequency in recent days. 

The question again is to lock or float?

The Federal Reserve passed on raising the federal funds rate last week. No one expects Fed officials to raise the rate at their next meeting in September. (Fed officials meet every six weeks.) Traders are betting a 98% chance that the Fed will hold past September.

Interestingly, the mortgage cycles have occurred over a declining overall rate trend, with rates moving incrementally lower since spring. We noted last week that we still see comparatively less risk in floating a mortgage rate compared with any time over the past six months. Our sentiment hasn’t changed. But we must always account for the outlier event (the unknown). We say, “comparatively less risk.” Risk never goes away.

The New Solar Roof and the Future of Home Tech

August 3, 2017

Image

The concept of a “smart home” has been around since the time of “The Jetsons,” but it’s one that’s increasingly becoming a reality. However, today’s real smart homes might not be exactly what most people imagined half a century ago. While robot butlers and flying cars have not yet penetrated the market, there are some incredible new pieces of home tech that are reshaping homeownership…

One of the most recent and influential innovations comes from Tesla Inc., which made a name for itself designing electric cars. Now, the tech company’s hottest product is one that could pave the way for a new era of home energy consumption. Tesla’s Solar Roof is made of tiles containing photovoltaic cells, which generate electricity from sunlight. While intrepid homeowners have been able to set up a traditional solar panel atop their roof for some time now, Tesla’s tiles promise greater efficiency as well as strength, along with a more appealing form factor.

While the tiles are not currently in mass production and aimed at the luxury market, Tesla reported in early June that pre-sales had already gone out of stock until 2018. Perhaps in response to this high level of demand, other companies like Forward Labs have announced intentions to release solar roof products to compete with Tesla, but at a third of the cost. Clearly, this is one area of home tech that will develop rapidly over the coming years.

In-home tech

Another fast-moving sector of residential technology involves home automation. Utilizing the ability to connect appliances like the thermostat, lighting and security cameras to the internet, companies like Google have been enhancing how homeowners interact with routine home features.

Google recently announced an update to its suite of Nest appliances, which include thermostats, smoke detectors and home security cameras that can be controlled remotely by users. In a forthcoming update, Nest cameras will tap into facial recognition technology to recognize who is home and activate devices based on that information. This could also provide homeowners with the ability to monitor their home while they are away, to ensure the dog sitter is still coming by each day, for example.

While this feature offers the potential for many handy uses, it also represents a hidden cost of advanced home tech. Some expressed concern that with Nest’s new facial recognition abilities, Google or others could use the information to monitor users without their consent. There is also the possibility that video and data collected by the system could be used as evidence in a crime, although Nest has explained that its policy is not to relinquish such information to law enforcement without proper authorization.

Even more examples and uses for smart home tech are sure to come at a breakneck pace in the near future. Despite some concerns, these developments are bound to have a significant impact on how homeowners go about their lives each day.

A Mixed Bag on the Home Front

August 1, 2017

Image

The pending homes index foreshadows the future. The index trended lower over the past couple months. Existing home sales trended lower last month. 

Existing home sales fell 1.8% to an annualized rate of 5.52 million units in June. Sales have found it difficult to gain traction in 2017. Year over year, existing home sales are up only 0.7%. 

Everyone is aware of the problems that plague existing home sales…

Low inventory and unrelenting price appreciation lead the way.

The median price of an existing home at the national level is $263,800, a 6.5% increase in the median price that existed last year. Supply, on the other hand, dipped 0.5%. Year over year, the supply of existing homes for sale is down 7.1%.

If you think your home will command a better price in the future, you’re less likely to list it today. A self-perpetuating dynamic is at work with existing homes: The more prices rise, the fewer existing homes that come to market. 

This dynamic — of rising prices and falling supply — hits hardest on the most important demography. Many young first-time buyers find themselves again priced out of the market. First-time buyers accounted for 32% of existing home sales in June, down from 33% in May. This time last year, they accounted for 35% of sales. 

As for new home sales, they’ve been brisker of late. New home sales rose 0.8% to 610,000 units on an annualized rate in June. New home sales are up 10.9% year over year. 

Lower prices helped move inventory. We’re seeing more discounting with new homes. The median price of a new home is down 3.3% to $310,800. The discounting appears concentrated in the higher echelons of the market. And who would be surprised? Lower-echelon new homes are gone in a New York second because fewer of them are offered for sale. A mere 13% of new homes sold last month cost less than $200,00 compared with 17% in 2016 and 19% in 2015.

Many market watchers view relentlessly rising home prices as a good thing. One market watcher even called rising home prices “the leading strength of the economy.”

It’s more nuanced than that. 

For most of us, our house is really more akin to a consumable good. It’s an asset that we use, as opposed to an investment (rental property) to generate cash flow. We wouldn’t view a relentless rise in other consumables, such as fuel or food, as a good thing. We shouldn’t necessarily view a relentless rise in home prices as a good thing. 

Of course, one could argue that fuel and food are destroyed when consumed; they’re gone forever. That’s true, but a house will always degrade because of use. Regular maintenance and capital improvements are required to ensure that a house remains a usable asset. A house that is used with no concurrent maintenance and improvement will eventually be destroyed. 

We’re not against home-price appreciation. An asset that can maintain its value is generally a good thing. But too much of a good thing can lead to not-so-good things — a stratified market, a distorted market, and even a bubble market.

 

Consider Locking on the Pullback

Mortgage rates have mostly cycled within a tight range for 2017. When rates have pulled back and cycled down, an opportunity to lock in a favorable mortgage rate was usually on offer. 

We highlighted this cycling pattern last week. We observed that it has generally been a good idea to lock when mortgage rates pulled back. Events over the past week support our observation. 

Mortgage rates have cycled mostly lower in July. Quotes on mortgage rates two weeks ago were as low as they have been in two months. In hindsight, they were good rates to lock down. Rates moved higher last week. The move wasn’t dramatic, but it was still annoying.  We’re talking an increase that would cost many borrowers $10-to-$20 more a month. 

The yield on the 10-year U.S. Treasury note recently spiked 10-basis-points higher. The good news is the yield has flattened, which could lead to a rollover. As the yield on the 10-year note goes, so too go mortgage rates. Anyone who missed the opportunity to lock a couple weeks ago could see another opportunity soon.   

What to Consider as a First-Time Homebuyer

July 27, 2017

Image

 

Buying a home for the first time can be intimidating.

Whether you’re fresh out of college or buying for the first time later in life, there are several things potential homeowners need to consider before making a purchase. Making a wrong decision when it comes to buying a home will not only be disappointing, it will be costly.

Here are a few things consumers should keep in mind before signing on the dotted line:

What type of mortgage is best?

Deciding what type of mortgage to pursue is one of the biggest decisions homeowners make before buying their home. Fixed-rate and adjustable-rate mortgages each have their own advantages, but they can be costly for individuals who choose the wrong one. To ensure that doesn’t happen, consumers should consider three things: how long they plan to stay in a home, how much they can afford as a monthly payment, and how high interest rates are at the time they want to purchase.

Fixed mortgages tend to be better for homeowners who plan to stay in their homes for many years. Adjustable-rate mortgages go up over time, which means homeowners in it for the long haul might find themselves making higher monthly payments several years later than when they first started. Individuals who don’t have room in their budget for an increasing payment might consider shying away from this option.

However, adjustable-rate mortgages can be great for homeowners who think they might move in a few years. If an individual purchases a home when interest rates are low, they will likely reap the reward of lower rates on the monthly payments and leave before rates increase. Adjustable-rate mortgages can also be a savvy choice if interest rates are high when a homebuyers move into their home. In this case, as interest rates fall over time, homeowners will also see their monthly payments drop.

How can I impress my lender?

For those who have never applied for a mortgage before, it can be confusing to know what lenders will use to determine a consumer’s eligibility. Simply having a lot of money in the bank won’t guarantee a lender’s approval. An individual’s credit score will hold the most sway over lenders when they are determining whether to approve someone for a loan. Banks will typically look at that score, any unpaid collections, or previous bankruptcies or foreclosures.

To maximize the likelihood of getting approved for a loan, individuals should seek to reduce their debt-to-income ratio and pay down any outstanding debts. This can give a quick boost to a person’s credit score in the month before a lender makes a decision about a loan. If it’s within their budget, individuals who make a larger down payment also increase their chances of approval and getting a lower interest rate from lenders, according to Nerd Wallet.