If you're on the sidelines, at least get ready...

If you're on the sidelines to buy a home, there are things you can do to be ready when you do get back in the game.

Improve your credit score to qualify for the best mortgage rate available which are reserved for those with the highest scores.  Get a copy of your current credit reports from all three of the main credit bureaus: Equifax, TransUnion, and Experian.  You can get them at AnnualCreditReport.com without paying for them.

While you won't see a credit score on these reports, you will see a history of your available credit accounts.  According to the Federal Trad Commission, one in five people have at least one error on one of their credit reports which can lower your score or increase the cost or likelihood of receiving new credit.  Identify and correct these mistakes. 

Explain in writing the error in the report and include copies of documents that support your dispute.  Both the credit bureau and the business that supplied the information must correct the information that is in error.  There will not be a fee to correct it.  You can get specific info for the process on each credit reporting companies' website and from the FTC Consumer Advice.

There is a term call "credit utilization" which describes how much of your available credit on each revolving account is currently being used.  If the limit on one card were $10,000 and you had a $5,000 balance, the utilization ratio is 50%.  Amounts above 30% can negatively impact your credit score even if you do pay the balance each month.

Any delinquent items that may appear on your credit report need to be cleared up.  Regardless of whether there is a legitimate reason, it needs to be explained to the credit bureau.  Beginning in 2023, medical collections less than $500 will no longer be reported on consumer credit reports.

Continue to save for a down payment because mortgages less than 80% of loan-to-value require mortgage insurance which increases the monthly payment.  The exception to the rule is for VA loans which do not require it.  The cost of mortgage insurance could add 0.5% to 2% or more to the payment.

Lower your debt-to-income ratio by paying off installment loans for cars, boats, and other things.

While there are legitimate credit repair services available, you may be able to get excellent advice from a trusted mortgage professional.  You'll eventually want to be pre-approved before you start looking at homes.  Your real estate agent can make a recommendation to connect you with someone who will get you ready to get back into the game.

Negotiating Your Position

The seller wants the most for their home and the buyer wants to pay the least possible.  From the very beginning of the homebuying process, there are adversarial positions between the principals.  If you happen to be in a multi-offer situation, it just complicates things further.

Then, there are the emotions that tend to cloud the decision making on both sides of the transaction.  Sellers have lived in the home for years, possibly, with cherished family experiences and maybe, having put considerable effort and money into capital improvements.

On the buyer side, they may have lost out on several homes due to competing offers and now, this year, interest rates have doubled, and the discretionary funds required to pay for a home could be causing cuts in their budget in other areas.

A year ago, buyers were waiving contingencies for financing, appraisals, inspections, and other things just to be competitive.  Today, to make the home more affordable with the higher mortgage rates, buyers need the seller to make financial concessions but who is going to make their case to the seller for them?

The role of a third-party negotiator played by the real estate professionals has always been valuable to the success of the transaction but now, it may even be essential.  Sellers enjoyed an extraordinary market in their favor for the past two years with incredible appreciation and so many buyers chasing so few homes, the sellers were able to write their own ticket.

Inflation and mortgage rates have put the brakes on the market, eliminating over 15 million mortgage-ready buyers.  The buyers who are still in the market need to be cautious, so they don't overextend themselves and overpay for a home.

The agents can assist both the buyers and sellers in seeing things in an objective way that reflects the current market and not the way it was a year ago.  All parties must be reasonable and not expect too much.  They need to consider facts and not feelings.

Negotiating the sale or purchase of a home is a competition; for one person to get something, someone must give something up.  If a person doesn't feel comfortable with this, it is important to work with an agent who can bring their skills to the table on your behalf.  As your advocate, they can champion your position and put transactions together that would not have been possible if it were left to the principals alone.

Negotiation skills are acquired through training and experience.  When interviewing an agent, ask them what role negotiation plays in their marketing plan if you're a seller and purchase plan, if you are a buyer.  An agent who cannot defend their position in the transaction may not be the right person to defend yours.

Buy Now, Refinance Later

The dilemma facing would-be buyers today is to wait until things settle down or move ahead in this unsettling economic environment.  More specifically, the question should be, what are you waiting to settle down: mortgage rates, or prices or both?

Mortgage rates haven't been this high since 2002, so it could be considered plausible that the high rates are temporary.  That leads to the question of how long before they do start coming down.  If we look back further, the average 30-year fixed-rate mortgage, dating back to April 1971 is 7.81%, so the current rate is lower than the 50-year average.

The other variable is waiting for prices to come down.  That one is probably not as likely to happen.  We have seen some softening of prices for homes on the market which is due to a decline in sales based on affordability and the resulting increase in inventory. 

Sales reached a seasonally adjusted annual rate of 4.09 million in November which is down 35.4% from one year ago, conversely, inventory has increased to 3.3 months from 2.1 months one year ago according to the NAR Housing Snapshot of Existing Home Sales.

While listing prices may be coming down, sales prices are still rising from the same month a year ago.  The National Association of REALTORS� reported the median sales price for November 2022 is up 3.5% from November 2021.

Homes are expected to continue to appreciate and not come down in value albeit at a much lower rate than was seen in 2021, and even currently in 2022.  Historically, homes have appreciated at 4% annually on a national basis. 

Nationally, the NAR reports 42% of homes are selling at or above list price while 58% of homes are selling for less than list price.

Lawrence Yun, Chief Economist for the National Association of REALTORS� at their recent annual conference, forecast home price appreciation for 2022 at +10%, for 2023 at +1% and 2024 at +5%. 

Some experts are calling for a decrease in prices.  Ivy Zelman, of Zelman & Associates, expects national home prices to fall 4% in 2023 and 5% in 2024.  Goldman Sachs is expecting a 5-10% decrease in home prices from its peak. Fannie Mae is expecting a 1.5% drop in home prices for 2023.  Freddie Mac predicts a 0.2% decrease in values.

Some consumers are anticipating another wave of foreclosures like the Housing Crisis in the Great Recession of 2008.  While the number has increased, it is not expected to reach anywhere near those previous levels.

Homeowners facing difficulties with the labor market and affordability have a significant advantage over those during the housing crisis over a decade ago.  Homeowners currently have record amounts of equity which give them options to borrow against the equity or to sell the home for more than is owed.

Returning to the dilemma facing many would-be buyers, "Wait until things settle down or forge ahead now?"  Being able to afford a mortgage at today's rates certainly factors into the decision.  If inflation is brought under control and rates do return to "normal", or at least the new normal, a buyer would be able to refinance the home at the then, current rates.

Home price appreciation has been close or beaten inflation in each of the past five decades.

Decade	Home Prices	Consumer Prices
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
Source ... NAR & Bureau of Labor Statistics

 

First time homebuyers represent 26% of sales in 2022 down from 50%, its high in 2009.  This is the lowest it has been since NAR started the Profile of Home Buyers and Sellers in 1981.  Desire to own a home is the prevalent reason 62% of first-time buyers cited.

Holding onto cash during high inflationary times is not good because the purchasing power of the cash dwindles because the same dollar is able to buy less.  Moving money into hard assets, like real estate, allows the person to benefit from the inflation on a large asset.  The leverage from using borrowed funds to finance the purchase creates leverage that additionally works in favor of the buyer.

Download our updated Buyers Guide and connect with your agent to discuss your options.

Does high inflation discourage your from buying a home?

Inflation devalues the purchasing power of money and the interest earned on savings is almost always less than inflation.  Tangible assets like your home consistently become more valuable over time.  In inflationary periods, a home is a good investment and a hedge against inflation.

Borrowing money at fixed rates during times of inflation can be very advantageous...like buying a home.  The rate stays the same over the term of the mortgage and so does the payment instead of going up at the rate of inflation.

In September 2022, rents rose by 7.2% according to NAR Chief Economist, Lawrence Yun and "rents are accelerating to higher figures with each passing month."  The annualized rate for this year is 10.6%.  Buying a home allows you to avoid rent increases while enjoying property appreciation.

The housing shortage that is fueling the price appreciation, as well as increases in rent, is something that has existed for over ten years, yet American home building has not kept pace with population growth.

When you are repaying the mortgage, you are using dollars that are worth less and less due to inflation.  Home Price Appreciation has been close or beaten inflation in each of the past five decades.

Decade	Home Prices Average Annual Increase	Consumer Prices Average Annual Increase
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
22	13.4%*	8.2%

*Revised predictions for 2022 home price appreciation are: Fannie Mae estimating 16%; Freddie Mac 12.8%; NAR 11.5%.  Average of three projections is 13.4%

 

The funds for the down payment and closing costs that are sitting idle in a bank, while an otherwise qualified buyer waits to see what happens in the market, are having their value eroded by inflation.  At the current rate of inflation, $48,000 would be worth $39,073 in three years.  In seven years, it would be worth $29,697.

A 90% mortgage at 6.3% for 30-years on a $400,000 home that appreciates at 4% a year will have an estimated equity of $202,000 in seven years due to appreciation and amortization.  That is a 22.8% annual rate of return on the down payment plus $8,000 closing costs.  That is a significant hedge against a current inflation of 7.1%.

The borrowed funds in the mortgage produce leverage for the homeowner to enjoy the benefits as the value of the home goes up while the unpaid balance goes down with each payment made due to amortization.

Every day, a renter, who is otherwise qualified to purchase a home, is faced with a decision to continue renting or buy a home.  Renters will ultimately be facing an increase in their rent, feeling an erosion of the purchasing power of their funds, and experiencing an opportunity cost by not benefitting from the appreciation and amortization benefits of buying a home.

Let's connect and talk about what opportunities are available now and options that could benefit you, even considering the volatile economic atmosphere we're all facing.

Did you know this about your credit?

Credit scores are used to assess risk and determine whether a borrower is approved or declined for a mortgage, credit card or some other type of credit.  The score is a numerical value ranging from a low of zero to a high of 850 or 900 depending on the credit bureau.

The higher the score, the more likely the lender will be repaid in a timely manner.

1. A higher credit score could help you get a lower interest rate
2. You can get a free credit report from all three major bureaus at www.AnnualCreditReport.com.
3. Your credit score doesn't have to be perfect to get a loan ... most lenders want buyers to have a minimum of 620 but FHA will consider as low as 500
4. Credit utilization, the percentage of credit used compared to what is available, should be kept below 30%; amounts higher could negatively affect your credit score.
5. There is a difference between a soft and a hard credit pull.  The former doesn't hurt your score, but the latter can lower it a few points.  Try to avoid multiple hard inquiries.
6. Credit cards, bank loans, car loans and home loans are considered "good credit" and a mixture of different types is helpful compared to only a car loan.
7. Opening new credit accounts after you apply for a mortgage can hurt or even prevent you from being approved on the mortgage.

There are five components to making up a credit score.  35% of the weighted average is determined by payment history like paying on time.  The next highest item is the amount owed and counts for 30% of your score.  This component deals with credit utilization which is expressed as a percentage of what you owe divided by what is available.

The length of time you have had credit established accounts for 15% of the score.  New credit and the types of credit accounts are weighted at 10% each.  Opening several accounts in a relatively close period will negatively affect your score.  While it isn't necessary to have all types of credit like credit cards, installment loans, finance company accounts and mortgage loans, the types of credit in the mix are evaluated.

If you need help increasing your score, a trusted lender that provides your pre-approval can also make suggestions that would improve your credit.  Contact your real estate professional to get a personal recommendation of a trusted mortgage lender.

Waiting for the Mortgage Rates to Come Down

Waiting for the mortgage rates to come down before you buy a home may not be a good decision.

If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be devoured by the appreciated price increase.

As of 12/8/22, the 30-year fixed-rate was at 6.33% which is close to the highest level since mid-2008.  If the rate drops to 4.7% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.

An increasingly, popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.00% rate for five years.  Then, refinance to a fixed rate when rates come down.

Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.

Mortgage rates have increased over 3% in the first three quarters of this year.  Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates could lower the monthly payment. 

The lower adjustable-rate could save a buyer $300 a month during the first period of five years.  At any point during that period, they could refinance at a better interest rate should it become available.  However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.

Mortgage rates have been low since the housing crisis that caused the Great Recession.  The government kept them low to build the economy.  Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster it which led to inflation which is what is causing the rates to increase currently.

When inflation is under control and back to acceptable levels, the rates should lower.

Home prices are a different situation.  The recent rise in mortgage rates has caused home prices to moderate because it affects affordability.  Inventories are still low and there is a pent-up demand for housing from purchasers unable to buy during the pandemic.

This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise.  The rate of appreciation could even increase when rates come down which would also affect affordability and demand.

Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.

Downsizing Options

Opportunities exist for a subset of homeowners, possibly in their 60's to 70's, who want to downsize to smaller homes for convenience, less maintenance, change of lifestyle, or to save money.  These homeowners are more likely to have large equities and will not feel the same constraints that are keeping younger owners in their homes due to the substantial increase in mortgage rates in the past year.

In some cases, there may be enough equity in their relinquished home to pay cash for the replacement.  In other situations, the loan-to-value may be so low that even with higher mortgage rates, it won't be as expensive as purchasing with a minimum down payment.

Some downsizers may be moving from a high-cost area to a lower-cost area where they can get more home for the dollar and may even be able to free up cash for investment or special projects.

It is more likely that older homeowners are living in a property above the median price.  If a seller has a $750,000 home with no mortgage and they're wanting to downsize to a $400,000 home, 7% mortgage rates are probably no concern at all because they're going to pay cash.  In a situation like that, even considering sales costs on the relinquished home and acquisition costs on the replacement home, there will be cash proceeds available.

If you're considering downsizing, or possibly, have parents in this situation, feel confident that you have different options than first-time buyers becoming a homeowner.  Your equity and the fact that you're buying a smaller home can help you achieve your objectives even in a volatile market.

Let's connect and explore the different options that are available.