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Buying Myths

47% of New Buyers Surprised by How Affordable Homes Are Today

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47% of New Buyers Surprised by How Affordable Homes Are Today | Simplifying The Market

Headlines matter. Right now, it’s hard to read about real estate without seeing a headline that suggests homes have become unaffordable for most Americans. In reality, there’s hard evidence that shows how owning a home is more affordable than renting in most parts of the country, as record-low interest rates are keeping monthly mortgage payments about 23% lower than the typical payment of 20 years ago. Despite the facts, misleading headlines persist, and they impact how hopeful homebuyers perceive the market.

In a recent survey by realtor.com, home shoppers indicated they were surprised by what they could actually afford when buying their first home. In fact, 47% discovered their budget was larger than they expected. George Ratiu, Senior Economist at realtor.com, explains:

“For first-time buyers, especially, the drop in the 30-year mortgage rate…has provided unexpected leverage. Lower rates allowed many buyers to stretch and buy more expensive homes while keeping their monthly budget the same.”

So why do these negative headlines that cast doubt on affordability continue to exist?

Most analysts only look at two of the three elements that make up the affordability equation: price and income. It’s true that incomes haven’t kept up with the price of houses. However, affordability is about the cost of the home, not just the price. For that reason, mortgage rates, the third element of the affordability equation, are important to consider.

For example, here’s the typical mortgage payment for assorted dates going back to 2000, as calculated by CoreLogic:47% of New Buyers Surprised by How Affordable Homes Are Today | Simplifying The MarketOutside of the housing crash (when short sales and foreclosures drove prices down), it’s more affordable to buy a home today when you consider all three elements of the affordability equation: price, income, and mortgage rate.

Bottom Line

Whether you’re a first-time buyer or a move-up buyer, don’t let the headlines scare you away from your dream of homeownership. Instead, connect with mortgage and real estate professionals to determine what you can afford and what’s available at that price. Like almost half of the buyers in the survey, you may be pleasantly surprised.

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3 Reasons We’re Definitely Not in a Housing Bubble

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3 Reasons We’re Definitely Not in a Housing Bubble | Simplifying The Market

Home values appreciated by about ten percent in 2020, and they’re forecast to appreciate by about five percent this year. This has some voicing concern that we may be in another housing bubble like the one we experienced a little over a decade ago. Here are three reasons why this market is totally different.

1. This time, housing supply is extremely limited

The price of any market item is determined by supply and demand. If supply is high and demand is low, prices normally decrease. If supply is low and demand is high, prices naturally increase.

In real estate, supply and demand are measured in “months’ supply of inventory,” which is based on the number of current homes for sale compared to the number of buyers in the market. The normal months’ supply of inventory for the market is about 6 months. Anything above that defines a buyers’ market, indicating prices will soften. Anything below that defines a sellers’ market in which prices normally appreciate.

Between 2006 and 2008, the months’ supply of inventory increased from just over 5 months to 11 months. The months’ supply was over 7 months in twenty-seven of those thirty-six months, yet home values continued to rise.

Months’ inventory has been under 5 months for the last 3 years, under 4 for thirteen of the last fourteen months, under 3 for the last six months, and currently stands at 1.9 months – a historic low.

Remember, if supply is low and demand is high, prices naturally increase.

2. This time, housing demand is real

During the housing boom in the mid-2000s, there was what Robert Schiller, a fellow at the Yale School of Management’s International Center for Finance, called “irrational exuberance.” The definition of the term is, “unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors.” Without considering historic market trends, people got caught up in the frenzy and bought houses based on an unrealistic belief that housing values would continue to escalate.

The mortgage industry fed into this craziness by making mortgage money available to just about anyone, as shown in the Mortgage Credit Availability Index (MCAI) published by the Mortgage Bankers Association. The higher the index, the easier it is to get a mortgage; the lower the index, the more difficult it is to obtain one. Prior to the housing boom, the index stood just below 400. In 2006, the index hit an all-time high of over 868. Again, just about anyone could get a mortgage. Today, the index stands at 122.5, which is well below even the pre-boom level.

In the current real estate market, demand is real, not fabricated. Millennials, the largest generation in the country, have come of age to marry and have children, which are two major drivers for homeownership. The health crisis is also challenging every household to redefine the meaning of “home” and to re-evaluate whether their current home meets that new definition. This desire to own, coupled with historically low mortgage rates, makes purchasing a home today a strong, sound financial decision. Therefore, today’s demand is very real.

Remember, if supply is low and demand is high, prices naturally increase.

3. This time, households have plenty of equity

Again, during the housing boom, it wasn’t just purchasers who got caught up in the frenzy. Existing homeowners started using their homes like ATM machines. There was a wave of cash-out refinances, which enabled homeowners to leverage the equity in their homes. From 2005 through 2007, Americans pulled out $824 billion dollars in equity. That left many homeowners with little or no equity in their homes at a critical time. As prices began to drop, some homeowners found themselves in a negative equity situation where the mortgage was higher than the value of their home. Many defaulted on their payments, which led to an avalanche of foreclosures.

Today, the banks and the American people have shown they learned a valuable lesson from the housing crisis a little over a decade ago. Cash-out refinance volume over the last three years was less than a third of what it was compared to the 3 years leading up to the crash.

This conservative approach has created levels of equity never seen before. According to Census Bureau data, over 38% of owner-occupied housing units are owned ‘free and clear’ (without any mortgage). Also, ATTOM Data Solutions just released their fourth quarter 2020 U.S. Home Equity Report, which revealed:

“17.8 million residential properties in the United States were considered equity-rich, meaning that the combined estimated amount of loans secured by those properties was 50 percent or less of their estimated market value…The count of equity-rich properties in the fourth quarter of 2020 represented 30.2 percent, or about one in three, of the 59 million mortgaged homes in the United States.”

If we combine the 38% of homes that are owned free and clear with the 18.7% of all homes that have at least 50% equity (30.2% of the remaining 62% with a mortgage), we realize that 56.7% of all homes in this country have a minimum of 50% equity. That’s significantly better than the equity situation in 2008.

Bottom Line

This time, housing supply is at a historic low. Demand is real and rightly motivated. Even if there were to be a drop in prices, homeowners have enough equity to be able to weather a dip in home values. This is nothing like 2008. In fact, it’s the exact opposite.

Content previously posted on Keeping Current Matters

Do I Really Need a 20% Down Payment to Buy a Home?

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Do I Really Need a 20% Down Payment to Buy a Home? | Simplifying The Market

Is the idea of saving for a down payment holding you back from buying a home right now? You may be eager to take advantage of today’s low mortgage rates, but the thought of needing a large down payment might make you want to pump the brakes. Today, there’s still a common myth that you have to come up with 20% of the total sale price for your down payment. This means people who could buy a home may be putting their plans on hold because they don’t have that much saved yet. The reality is, whether you’re looking for your first home or you’ve purchased one before, you most likely don’t need to put 20% down. Here’s why.

According to Freddie Mac:

“The most damaging down payment myth—since it stops the homebuying process before it can start—is the belief that 20% is necessary.”

If saving that much money sounds daunting, potential homebuyers might give up on the dream of homeownership before they even begin – but they don’t have to.

Data in the 2020 Profile of Home Buyers and Sellers from the National Association of Realtors (NAR) indicates that the median down payment actually hasn’t been over 20% since 2005, and even then, that was for repeat buyers, not first-time homebuyers. As the image below shows, today’s median down payment is clearly less than 20%.Do I Really Need a 20% Down Payment to Buy a Home? | Simplifying The Market

What does this mean for potential homebuyers?

As we can see, the median down payment was lowest for first-time buyers with the 2020 percentage coming in at 7%. If you’re a first-time buyer and putting down 7% still seems high, understand that there are programs that allow qualified buyers to purchase a home with a down payment as low as 3.5%. There are even options like VA loans and USDA loans with no down payment requirements for qualified applicants.

It’s important for potential homebuyers (whether they’re repeat or first-time buyers) to know they likely don’t need to put down 20% of the purchase price, but they do need to do their homework to understand the options available. Be sure to work with trusted professionals from the start to learn what you may qualify for in the homebuying process.

Bottom Line

Don’t let down payment myths keep you from hitting your homeownership goals. If you’re hoping to buy a home this year, let’s connect to review your options.

Content previously posted on Keeping Current Matters

Want to Build Wealth? Buy a Home This Year.

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Want to Build Wealth? Buy a Home This Year. | Simplifying The Market

Every year, households across the country make the decision to rent for another year or take the leap into homeownership. They look at their earnings and savings and then decide what makes the most financial sense. That equation will most likely take into consideration monthly housing costs, tax advantages, and other incremental expenses. Using these measurements, recent studies show that it’s still more affordable to own than rent in most of the country.

There is, however, another financial advantage to owning a home that’s often forgotten in the analysis – the wealth built through equity when you own a home.

Odeta Kushi, Deputy Chief Economist for First American, discusses this point in a recent blog post. She explains:

“Once you include the equity benefit of price appreciation, owning made more financial sense than renting in 48 out of the 50 top markets, with the only exceptions being San Francisco and San Jose, Calif.”

What has this equity piece meant to homeowners in the past?

ATTOM Data Solutions, the curator of one of the nation’s premier property databases, just analyzed the typical home-price gain owners nationwide enjoyed when they sold their homes. Here’s a breakdown of their findings:Want to Build Wealth? Buy a Home This Year. | Simplifying The MarketThe typical gain in the sale of the home (equity) has increased significantly over the last five years.

CoreLogic, another property data curator, also weighed in on the subject. According to their latest Homeowner Equity Insights Report, the average homeowner gained $17,000 in equity in just the last year alone.

What does the future look like for homeowners when it comes to equity?

Here are the seven major home price appreciation forecasts for 2021:Want to Build Wealth? Buy a Home This Year. | Simplifying The MarketThe National Association of Realtors (NAR) just reported that today, the median-priced home in the country sells for $309,800. If homes appreciate by 5% this year (the average of the forecasts), the homeowner will increase their wealth by $15,490 in 2021 through increased equity.

Bottom Line

As you make your plans for the coming year, be sure to consider the equity benefits of home price appreciation as you weigh the financial advantages of buying over renting. When you do, you may find this is the perfect time to jump into homeownership.

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What’s the Difference between an Appraisal and a Home Inspection?

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What’s the Difference between an Appraisal and a Home Inspection? | Simplifying The Market

If you’re planning to buy a home, an appraisal is an important step in the process. It’s a professional evaluation of the market value of the home you’d like to buy. In most cases, an appraisal is ordered by the lender to confirm or verify the value of the home prior to lending a buyer money for the purchase. It’s also a different step in the process from a home inspection, which assesses the condition of the home before you finalize the transaction. Here’s the breakdown of each one and why they’re both important when buying a home.

Home Appraisal

The National Association of Realtors (NAR) explains:

“A home purchase is typically the largest investment someone will make. Protect yourself by getting your investment appraised! An appraiser will observe the property, analyze the data, and report their findings to their client. For the typical home purchase transaction, the lender usually orders the appraisal to assist in the lender’s decision to provide funds for a mortgage.”

When you apply for a mortgage, an unbiased appraisal (which is required by the lender) is the best way to confirm the value of the home based on the sale price. Regardless of what you’re willing to pay for a house, if you’ll be using a mortgage to fund your purchase, the appraisal will help make sure the bank doesn’t loan you more than what the home is worth.

This is especially critical in today’s sellers’ market where low inventory is driving an increase in bidding wars, which can push home prices upward. When sellers are in a strong position like this, they tend to believe they can set whatever price they want for their house under the assumption that competing buyers will be willing to pay more.

However, the lender will only allow the buyer to borrow based on the value of the home. This is what helps keep home prices in check. If there’s ever any confusion or discrepancy between the appraisal and the sale price, your trusted real estate professional will help you navigate any additional negotiations in the buying process.

Home Inspection

Here’s the key difference between an appraisal and an inspection. MSN explains:

“In simplest terms, a home appraisal determines the value of a home, while a home inspection determines the condition of a home.”

The home inspection is a way to determine the current state, safety, and condition of the home before you finalize the sale. If anything is questionable in the inspection process – like the age of the roof, the state of the HVAC system, or just about anything else – you as a buyer have the option to discuss and negotiate any potential issues or repairs with the seller before the transaction is final. Your real estate agent is a key expert to help you through this part of the process.

Bottom Line

The appraisal and the inspection are critical steps when buying a home, and you don’t need to manage them by yourself. Let’s connect today so you have the expert guidance you need to navigate through the entire homebuying process.

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Financial Fundamentals for Homebuyers [INFOGRAPHIC]

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Financial Fundamentals for Homebuyers [INFOGRAPHIC] | Simplifying The Market

Financial Fundamentals for Homebuyers [INFOGRAPHIC] | Simplifying The Market

Some Highlights

  • When you’re thinking about buying a home, there are a few key steps to take before you even start to look at houses.
  • From saving for your down payment to getting pre-approved for a mortgage, you’ll want to make sure you keep your financial plan on track from the beginning.
  • Let’s connect today to make sure you have an introduction to a trusted lender and the best possible real estate guidance as you begin your homebuying process.
Content previously posted on Keeping Current Matters

Owning a Home Is Still More Affordable Than Renting One

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Owning a Home Is Still More Affordable Than Renting One | Simplifying The Market

If spending more time at home over the past year is making you really think hard about buying a home instead of renting one, you’re not alone. You may be wondering, however, if the dollars and cents add up in your favor as home prices continue to rise. According to the experts, in many cases, it’s still more affordable to buy a home than rent one. Here’s why.

ATTOM Data Solutions recently released the 2021 Rental Affordability Report, which states:

“Owning a median-priced three-bedroom home is more affordable than renting a three-bedroom property in 572, or 63 percent of the 915 U.S. counties analyzed for the report.

That has happened even though median home prices have increased more than average rents over the past year in 83 percent of those counties and have risen more than wages in almost two-thirds of the nation.”

How is this possible?

The answer: historically low mortgage interest rates. Todd Teta, Chief Product Officer with ATTOM Data Solutions, explains:

“Home-prices are rising faster than rents and wages in a majority of the country. Yet, home ownership is still more affordable, as amazingly low mortgage rates that dropped below 3 percent are helping to keep the cost of rising home prices in check.”

In 2020, mortgage rates reached all-time lows 16 times, and so far, they’re continuing to hover in low territory this year. These low rates are a big factor in driving affordability. Teta also notes:

“It’s startling to see that kind of trend. But it shows how both the cost of renting has been relatively high compared to the cost of ownership and how declining interest rates are having a notable impact on the housing market and home ownership. The coming year is totally uncertain, amid so many questions connected to the Coronavirus pandemic and the broader economy. But right now, owning a home still appears to be a financially-sound choice for those who can afford it.”

Bottom Line

If you’re considering buying a home this year, let’s connect today to discuss the options that match your budget while affordability is in your favor.

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Should I Wait for Lower Mortgage Interest Rates?

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Should I Wait for Lower Mortgage Interest Rates? | Simplifying The Market

Historically low mortgage rates are a big motivator for homebuyers right now. In 2020 alone, rates hit new record-lows 16 times, and the trend continued into the early part of this year. Many hopeful homebuyers are now wondering if they should put their plans on hold and wait for the lowest rates imaginable. However, the reality is, acting sooner rather than later may be the actual win if you’re ready to buy a home.

According to Greg McBride, Chief Financial Analyst for Bankrate:

“As vaccines become more widely available and a return to normal starts to come into view, we’ll see mortgage rates bounce off the record lows.”

While only a slight increase in mortgage rates is projected for 2021, some experts believe they will start to rise. Over the past week, for example, the average mortgage rate ticked up slightly, reaching 2.79%. This is still incredibly low compared to the trends we’ve seen over time. According to Freddie Mac:

“Borrowers are smart to take advantage of these low rates now and will certainly benefit as a result.”

Here’s why.

As mortgage rates rise, the increase impacts the overall cost of purchasing a home. The higher the rate, the higher your monthly mortgage payment, especially as home prices rise too. Sam Khater, Chief Economist at Freddie Mac, says:

“The forces behind the drop in rates have been shifting over the last few months and rates are poised to rise modestly this year. The combination of rising mortgage rates and increasing home prices will accelerate the decline in affordability and further squeeze potential homebuyers during the spring home sales season.”

What does this mean for buyers?

Right now, the inventory of houses for sale is also at a historic low, making it more challenging than normal to find a home to buy in many areas. As more buyers hit the market in the typically busy spring buying season, it may become even harder to find a home in the coming months. With this in mind, Len Keifer, Deputy Chief Economist for Freddie Mac, recommends taking advantage of both low mortgage rates and the opportunity to buy:

“If you’ve found a home that fits your needs at a price you can afford, it might be better to act now rather than wait for future rate declines that may never come and a future that likely holds very tight inventory.”

Bottom Line

While today’s low mortgage rates provide great opportunities for homebuyers, we may not see them stick around forever. If you’re ready to buy a home, let’s connect so you can take advantage of what today’s market has to offer.

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Things to Avoid after Applying for a Mortgage [INFOGRAPHIC]

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Reasons to Hire a Real Estate Professional [INFOGRAPHIC] | Simplifying The Market

Things to Avoid after Applying for a Mortgage [INFOGRAPHIC] | Simplifying The Market

Some Highlights

  • There are a few key things to make sure you avoid after applying for a mortgage to help make sure you still qualify for your loan at the closing table.
  • Along the way, be sure to discuss any changes in income, assets, or credit with your lender, so you don’t unintentionally jeopardize your application.
  • The best plan is to fully disclose your intentions with your lender before you do anything financial in nature.
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Reasons to Hire a Real Estate Professional [INFOGRAPHIC]

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Reasons to Hire a Real Estate Professional [INFOGRAPHIC] | Simplifying The Market

Reasons to Hire a Real Estate Professional [INFOGRAPHIC] | Simplifying The Market

Some Highlights

  • Choosing the right real estate professional to work with is one of the most important decisions you can make in your homebuying or selling process.
  • The right agent can explain current market conditions and break down exactly what they mean for you.
  • If you’re considering buying or selling a home this year, let’s connect so you can work with someone who has the experience to answer all of your questions about pricing, contracts, negotiations, and more.
Content previously posted on Keeping Current Matters