We keep hearing that home affordability is approaching crisis levels. While this may be true in a few metros across the country, housing affordability is not a challenge in the clear majority of the country. In their most recent Real House Price Index, First American reported that consumer “house-buying power” is at “near-historic levels.” Their index is based on three components:
- Median Household Income
- Mortgage Interest Rates
- Home Prices
“Changing incomes and interest rates either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases.”Combining these three crucial pieces of the home purchasing process, First American created an index delineating the actual home-buying power that consumers have had dating back to 1991. Here is a graph comparing First American’s consumer house-buying power (blue area) to the actual median home price that year from the National Association of Realtors (yellow line). Consumer house-buyer power has been greater than the actual price of a home since 1991. And, the spread is larger over the last decade.
Bottom LineEven though home prices are increasing rapidly and are now close to the values last seen a decade ago, the actual affordability of a home is much better now. As Chief Economist Mark Fleming explains in the report:
“Though unadjusted house prices have risen to record highs, consumer house-buying power stands at near-historic levels, as well, signaling that real house prices are not even close to their historical peak.”
Since the beginning of the year, mortgage interest rates have risen over a half of a percentage point (from 3.95% to 4.52%), according to Freddie Mac. Even a small rise in interest rates can greatly impact a buyer’s monthly mortgage payment. First American recently released the results of their quarterly Real Estate Sentiment Index (RESI), in which they surveyed title and real estate agents across the country about the impact of rising rates on first-time homebuyers. Real estate professionals around the country have not noticed a slowdown in demand for housing among young buyers; nearly 93% of all first-time homebuyers last quarter were between the ages of 21-35. The largest share of buyers (51%) coming from those aged 26-30. First American’s Chief Economist Mark Fleming had this to say,
“On a national level, mortgage rates would need to hit 5.6%, 1 percentage point above the current rate, before first-time homebuyers withdraw from the market.”
So, what is slowing down sales?According to the last Existing Home Sales Report from the National Association of Realtors, sales are now down 3.0% year-over-year and have fallen for the last three months. If rising interest rates aren’t to blame, then what is? Fleming addressed the cause, saying that:
“The housing market is facing its greatest supply shortage in 60 years of record keeping, according to the Federal Reserve Bank of Kansas City. The ongoing housing supply shortage will make it difficult for first-time buyers to find a home to buy, even when they are financially ready.”Bottom Line First-time homebuyers know the importance of owning their own homes. A spike in interest rates is not going to keep them from buying this year! Their biggest challenge is finding a home to buy!
Cost Across Time
- With interest rates still around 4.5%, now is a great time to look back at where rates have been over the last 40 years to determine cost across time.
- Rates are projected to climb to 5.1% by this time next year according to Freddie Mac.
- The impact your interest rate makes on your monthly mortgage cost is significant!
- Lock in a low rate now while you can!
Homes More Affordable TodayRising home prices have many concerned that the average family will no longer be able to afford the most precious piece of the American Dream – their own home. However, it is not just the price of a home that determines its affordability. The monthly cost of a home is determined by the price and the interest rate on the mortgage used to purchase it. Today, mortgage interest rates stand at about 4.5%. The average annual mortgage interest rate from 1985 to 2000 was almost double that number, at 8.92%. When comparing affordability of homeownership over the decades, we must also realize that incomes have increased. This is why most indexes use the percentage of median income required to make monthly mortgage payments on a typical home as the point of comparison. Zillow recently released a report comparing home affordability over the decades using this formula. The report revealed that, though homes are less affordable this year than last year, they are more affordable today (17.1%) than they were between 1985-2000 (21%). Additionally, homes are more affordable now than at the peak of the housing bubble in 2006 (25.4%). Here is a chart of these findings:
What will happen when mortgage interest rates rise?Most experts think that the mortgage interest rate will increase to about 5% by year’s end. How will that impact affordability? Zillow also covered this in their report: Rates would need to approach 6% before homes became less affordable than they had been historically.
Bottom LineThough homes are less affordable today than they were last year, they are still a great purchase while interest rates are below the 6% mark.
Since the creation of the Veterans Affairs (VA) Home Loans Program, over 22 million veterans have achieved the American Dream of homeownership. Many veterans do not know the details of the program and therefore do not take advantage of the benefits available to them. If you are a veteran or you know someone who is, here is a breakdown of the VA Home Loan benefits that can be used to achieve the American Dream!
Top 5 Benefits of a VA Home Loan
- The greatest benefit of a VA Loan is that borrowers can buy a home with a 0% down payment. In 2016, 82% of all VA Loans put down 0%!
- Primary Mortgage Insurance (PMI) is not required! (Most other loans with down payments under 20% require PMI, which adds additional costs to your monthly housing expense!)
- Credit Score requirements are also lower for VA Home Loans. The average FICO® score of a borrower for an approved VA Loan is 620, compared to 676 (FHA) or 753 (Conventional).
- There is also a limitation on a veteran buyer’s closing costs. Sellers can pay all of a buyer’s loan-related closing costs and up to 4% in concessions in some cases.
- Even with interest rates rising, VA Loans continue to have the lowest average interest rates of all loan types.
Who Qualifies for a VA Home Loan?One of the most important first steps when applying for a VA Home Loan is obtaining your Certificate of Eligibility (COE). “The COE verifies to the lender that you are eligible for a VA-backed loan.”
You Can Apply for a VA Loan if You:
- Serve 90 consecutive days during wartime
- Serve 181 consecutive days during peacetime
- Have more than 6 years in the National Guard or Reserves
- Are the spouse of a service member who has died in the line of duty or as the result of a service-related disability
You Can Use a VA Loan To:
- Purchase a Home
- Purchase a Condo
- Build a Home
- Refinance an existing home loan
- Make improvements to a home by installing energy-related features or making energy-efficient improvements
Bottom LineFor more information or to find out if you or a loved one would qualify to use the VA Home Loan Benefit, let’s get together! Thank you for your service!
With home prices rising again this year, some are concerned that we may be repeating the 2006 housing bubble that caused families so much pain when it collapsed. Today’s market is quite different than the bubble market of twelve years ago. There are four key metrics that explain why:
- Home Prices
- Mortgage Standards
- Mortgage Debt
- Housing Affordability
1. HOME PRICESThere is no doubt that home prices have reached 2006 levels in many markets across the country. However, after more than a decade, home prices should be much higher based on inflation alone. Frank Nothaft is the Chief Economist for CoreLogic (which compiles some of the best data on past, current, and future home prices). Nothaft recently explained:
“Even though CoreLogic’s national home price index got to the same level it was at the prior peak in April of 2006, once you account for inflation over the ensuing 11.5 years, values are still about 18% below where they were.” (emphasis added)
2. MORTGAGE STANDARDSSome are concerned that banks are once again easing lending standards to a level similar to the one that helped create the last housing bubble. However, there is proof that today’s standards are nowhere near as lenient as they were leading up to the crash. The Urban Institute’s Housing Finance Policy Center issues a Housing Credit Availability Index (HCAI). According to the Urban Institute:
“The HCAI measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”The graph below reveals that standards today are much tighter on a borrower’s credit situation and have all but eliminated the riskiest loan products. [caption id="attachment_37442" align="alignnone" width="650"] Housing Credit Availability Index[/caption]
3. MORTGAGE DEBTBack in 2006, many homeowners mistakenly used their homes as ATMs by withdrawing their equity and spending it with no concern for the ramifications. They overloaded themselves with mortgage debt that they couldn’t (or wouldn’t) repay when prices crashed. That is not occurring today. The best indicator of mortgage debt is the Federal Reserve Board’s household Debt Service Ratio for mortgages, which calculates mortgage debt as a percentage of disposable personal income. At the height of the bubble market a decade ago, the ratio stood at 7.21%. That meant over 7% of disposable personal income was being spent on mortgage payments. Today, the ratio stands at 4.48% – the lowest level in 38 years!
4. HOUSING AFFORDABILITYWith both house prices and mortgage rates on the rise, there is concern that many buyers may no longer be able to afford a home. However, when we look at the Housing Affordability Index released by the National Association of Realtors, homes are more affordable now than at any other time since 1985 (except for when prices crashed after the bubble popped in 2008). [caption id="attachment_37443" align="alignnone" width="650"] Housing Affordability Index[/caption]
Bottom LineAfter using four key housing metrics to compare today to 2006, we can see that the current market is not anything like the bubble market.
[caption id="" align="alignnone" width="648"] Home Appreciation[/caption] Home appreciation has risen dramatically over the last twelve months. In CoreLogic’s most recent Home Price Index Report, they revealed that national home prices have increased by 6.7% year-over-year. CoreLogic broke down home appreciation even further into four price ranges, giving us a more detailed view than if we had simply looked at the year-over-year increases in national median home price. The chart below shows the four price ranges from the report, as well as each one’s year-over-year growth from February 2017 to February 2018 (the latest data available). It is important to pay attention to how prices are changing in your local market. The location of your home is not the only factor that determines how much your home has appreciated over the course of the last year. Lower-priced homes have appreciated at greater rates than homes at the upper ends of the spectrum due to demand from first-time home buyers and baby boomers looking to downsize.
Bottom LineIf you are planning to list your home for sale in today’s market, let’s get together to go over exactly what’s going on in your area and your price range.
There are many unsubstantiated theories as to why home values are continuing to increase. From those who are worried that lending standards are again becoming too lenient (data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because of “irrational exuberance” (this is also untrue as prices are not at peak levels when they are adjusted for inflation), there seems to be no shortage of opinion. However, the increase in prices is easily explained by the theory of supply & demand. Whenever there is a limited supply of an item that is in high demand, prices increase. It is that simple. In real estate, it takes a six-month supply of existing salable inventory to maintain pricing stability. In most housing markets, anything less than six months will cause home values to appreciate and anything more than seven months will cause prices to depreciate (see chart below). [caption id="attachment_37411" align="alignnone" width="650"] Home Prices Are Increasing[/caption] According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes for sale has been below six months for the last five years (see chart below). [caption id="attachment_37412" align="alignnone" width="650"] Available Housing Inventory[/caption]
Bottom LineIf buyer demand continues to outpace the current supply of existing homes for sale, prices will continue to appreciate. Nothing nefarious is taking place. It is simply the theory of supply & demand working as it should.
- According to the latest Existing Home Sales Report from the National Association of Realtors, sales grew 1.1% in March to an annual pace of 5.60 million.
- This is the strongest pace since November of 2017.
- Inventory levels dropped year-over-year for the 34th consecutive month and are now 7.2% lower than March 2017 levels, representing a 3.6-month supply.
[caption id="" align="alignnone" width="648"] Home Prices[/caption] This month, Arch Mortgage Insurance released their spring Housing and Mortgage Market Review. The report explained that an increase in mortgage rates and/or home prices would impact monthly payments this way:
- A 5% increase in home prices increases payments by roughly 5%
- A 1% rise in interest rates increases payments by roughly 13% or 14%
What if both rates and prices increase as predicted?The report revealed:
“If interest rates and home prices rise by year-end in the ballpark of what most analysts are forecasting, monthly mortgage payments on a new home purchase could increase another 10–15%. That would make 2018 one of the worst full-year deteriorations in affordability for the past 25 years.”The percent increase in mortgage payments would negatively impact affordability. But, how would affordability then compare to historic norms? Per the report:
“For the U.S. overall, even if affordability were to deteriorate as forecasted, affordability would still be reasonable by historic norms. That is because the percentage of pre-tax income needed to buy a typical home in 2019 would still be similar to the historical average during 1987–2004. Thus, nationally at least, even with higher rates and home prices, affordability will just revert to historical norms.”
What about home prices?A decrease in affordability will cause some concern about home prices. Won’t an increase in mortgage payments negatively impact the housing market? The report addressed this question:
“Even recent interest rate increases and higher taxes on some upper-income earners didn’t slow the market, as many had feared…Short of a war or stock market crash, housing markets could continue to surprise on the upside over the next few years.”To this point, Arch Mortgage Insurance also revealed their Risk Index which estimates the probability of home prices being lower in two years. The index is based on factors such as regional unemployment rates, affordability, net migration, housing starts and the percentage of delinquent mortgages. Below is a map depicting their projections (the darker the blue, the lower the probability of a price decrease): [caption id="attachment_37405" align="alignnone" width="650"] Home Prices[/caption]