It’s not a surprise to anyone to hear that buying a new home in the market in the last few years has gotten more difficult. Rapid appreciation in home values was followed by a rapid rise in interest rates and led to an overall squeeze for new homebuyers. Those factors led a lot of buyers to think now may not be the time to enter the market.
The real story about rates
I’ve heard many people stating that they want to wait for rates to come back down or wait for the “bubble to burst” before they get back in. For people trying to decide if now is or isn’t a good time to buy, there are a couple of key things that you should know.
The first is around interest rates. While rates are up, they are not “high” by traditional standards. Did you know that the average of the 30-year fixed over the last 50 years is 7.77%? It doesn’t feel like that because recently rates have been historically low.
Something to factor in though is what it took for those low rates to happen. To get rates that low, it took an unprecedented global pandemic that shut down the economy, the Fed dropping fund rates to 0% and the government buying mortgage back securities to artificially lower rates to make sure the market didn’t collapse. The likelihood of those items coming back, and dropping rates to what we’ve seen recently, is very low.
The logic there is to look at rates over the long term, and likely excluding the last few years, when taking a perspective on where the market is. When you do that, you see that things aren’t nearly as bad as many people think.
Another factor to think of is whether or not to wait for rates to come down. Most experts are predicting that will happen and likely start in the back half of this year.
While a lower rate is always great, make sure you’re looking at the whole picture when making that decision. If you’re renting, waiting for rates to drop means continuing to pay rent and incurring that monthly expense. Many people think of lower rates as all savings but factoring in the expense of waiting and paying rent is important.
For example, if you looked into a loan of $400,000 and waited for rates to drop a full 1%, from 7% to 6%, you would save over $260 a month. That’s great! But, if you were paying $3,000 a month for a yearly lease, waiting on rates to drop, you would have spent $36,000 in rent that year waiting on it to happen. It would take more than 11 years to recoup the money that you spent on rent in the monthly savings you get with a lower rate ($36,000 in rent divided by the $260/month in savings). That’s not to say buying now is the right decision for everyone, but it’s very important to look at both the savings and expense to receive those savings when making your decision.
Is the bubble going to burst?
The other factor that many are speaking about is the bubble bursting. This is understandably a hot topic because the last market that we experienced hyper appreciation in homes, the early 2000s, was followed by the largest crash since the Great Depression.
As with rates above, it’s important to understand the statistics when making a good decision about how to approach this. The key driver in the real estate crash in 2008 was a massive wave of foreclosures. As more and more foreclosures hit the market, it drove home prices down rapidly and led to the downward spiral that we all experienced. So the real question is: How safe are we from a wave of foreclosures now?
To understand that, it’s best to begin looking at what are the key drives in a foreclosure happening. A foreclosure is generally going to happen when someone can’t afford to make their payments and also cannot sell the home and walk away before the bank forecloses.
Factors that will make that happen would include the inventory of homes being sold in the market (What is my competition to sell?), can you pay off your current mortgage (Do I have any equity?) and my likelihood to not be able to make my payments (Did I get more loan than I can afford?). On all fronts, the market truly is night and day from what we saw in the early 2000s.
From a competition standpoint, we look at inventory in terms of how many months it would take, at the current buying pace, to sell all the homes in the market.
A healthy market is said to be between three and six months of total inventory. Today’s market has only three months of inventory. That’s up from only one month of inventory during the beginning of the pandemic, which was a key driver in having the hyper-appreciation of homes (supply vs. demand in the market). The market in the early 2000s was at 12 months. The market was saturated with available homes, making it very difficult for someone needing to sell quickly to find a buy and thus getting further and further down the foreclosure path.
From an equity standpoint, we’re also in a very strong position. The crash led to a period where there was the least amount of equity in homes than existed in recorded history.
Much of this was driven by the fact that interest-only loans were very prevalent in the market and the assumption was home appreciation would build equity vs. paying down your loan. That painted many sellers into a corner where they couldn’t afford to price their home to sell aggressively and avoid a foreclosure from happening.
By comparison, there is more equity in homes today, even before the appreciation of the last few years, than has ever existed in recorded history. If a life event happened (job loss, etc.) that put someone in a position where they wouldn’t be able to repay their loan, they’re likely in a place where they could price the home to sell and avoid the foreclosure path.
Lastly, the ability to repay the loan. This was a key driver in the crash in the early 2000s. Many lenders and investors put clients in situations where they were either stretched very thin or over their head with the mortgages they were receiving. Loans that were fixed for the first few years and then adjustable (also known as Adjustable Rate Mortgages — ARMs) made up more than half of the loans in the market. Many of these ARM loans were also interest-only. Once the loan became adjustable, the borrower had to pay the principal and interest on the loan and payments doubled or more. This put many buyers in a difficult position and forced them to walk away from their homes.
As a measured statistic for how easy or hard it is to get a loan (rated by the Mortgage Availability index) the early 2000s was the easiest time in history to get a loan and led to many bad loans being written.
By contrast, and as a direct result of the legislation put in after the crash, the market since 2010 is actually rated as the hardest time in history to get a loan. Documentation is more thorough, tighter guidelines are in place and lenders are more heavily regulated to make sure they’re operating in the clients’ best interest at all times. This has led to a much safer market in terms of active loans being repaid and can be seen by the fact that overall foreclosures in the market are historically low.
When you step back and look at the factors (inventory, equity and repayment ability) the market today doesn’t show any signs of repeating what we saw in the early 2000s or an impending crash. If that’s the case, and rates are in a place that historically would be considered “average,” all signs point to it still being a great market to realize the dream of homeownership.
Creative options to help homebuyers in the market today
With that said, this market has made it more difficult for some to find the path because higher prices, and rates, have made it a further reach than what we’ve felt in years past.
In response to that, the industry is seeing more creative financing options come to the market to help out. Programs like the Florida Hometown Heroes offers downpayment assistance to first time buyers in the market and can provide up to $35,000 in funds to help towards closing. The funds are given at a 0% interest rate to help keep the loans affordable and are only due at the time the current loan is paid off (either the sale of the home or a refinance).
The program is eligible to anyone who works at a company that has a physical location in the state of Florida, works at least 35 hours a week, and is at or below the area median income of the county. While the product states it needs to be your first time purchasing a home, they define that as anyone who is purchasing for the first time or anyone who hasn’t had ownership in a home for at least three years.
If you aren’t a first-time homebuyer, or are above the area median income, don’t worry because there are still options for you.
The Federal Housing Administration (FHA) just released a program that also offers assistance for downpayments and does not have either of those restrictions. The caveat is that not all lenders are eligible to offer the program, so you need to make sure you find someone who is approved to offer the financing.
Other creative solutions in the market can involve lowering the interest rate to make the home more affordable.
This can be done in many ways and involve anyone from the buyer, the seller or even the lender helping to make it happen. Buyers can buy “points” on their loan to lower the interest rate. A “point” is basically pre-paid interest on the loan. This makes sense to the investor of the loan because they get the fee at closing, and it makes sense for buyers because the cost for the “point” is offset by the monthly savings over time by having a permanently lower rate.
Sellers can also play a role by offering concessions for fees at closing that can be used to pay “points” for the borrower. Instead of negotiating the price lower, negotiate the reduction in concessions and apply it to your loan for loan term savings.
This can also be accomplished by leveraging products that lenders offer where the introductory rate is lower for the beginning of the loan and then steps up over time to the permanent rate (commonly referred to as a “buydown”). For lending purposes, the client is qualified at the final rate to ensure we avoid putting anyone into a scenario similar to what we experienced in the early 2000s, where they would not be able to afford the payments.
So remember …
In all, it’s more important than ever to stop and talk to a trusted adviser on the real estate and lending side to make sure you know your options.
As I discussed above, rates and the stability of the market are likely much better than most people think and are certainly in a much better position than what we saw in the crash in 2008. While the market in the last few years, with home appreciation and rate increases, has certainly raised the bar to get into a home, there are many creative options to help with downpayments and lowering interest rates that can make ownership much more affordable and attainable to those looking.
Is the market right for you?
