Why real estate and home sales will rebound in 2015

home for saleThe recent stumble of the housing market recovery has been a head scratcher for many. Surely low interest rates and an abundant number of homes for sale should have been incentive for any home buyer. But alas, many have been disappointed by the 2014 housing trends; even with sparse anecdotes of quick sales and bidding wars. However, many are optimistic about the housing market for 2015 because of the combination of low mortgage interest rates, increased access to credit, and moderating home prices – which could transform reluctant “looky loos” into eager home buyers.

Don’t count on low mortgage interest rates, per se, to incentivize home buyers. Although interest rates have been historically low since shortly after the financial crisis, it seems to not have been an incentive on its own to purchase homes. Industry experts have tried to pinpoint the timing of rate increases since rates first dipped below 5% in 2010. And even though rates were anticipated to have jumped when the Fed tapered its asset purchasing program this year, rates continue to be relative to historical lows. The average mortgage interest rate according to the Freddie Mac Primary Mortgage Market Survey (freddiemac.com) is 4.01% (as of November 13th); yet home sale volume continues to lag behind 2013 figures.

Very low interest rates may continue into 2015. Back in 2012, the Federal Reserve Open Market Committee indicated that interest rates would remain “exceptionally” low through 2014. Fast forward to September’s Federal Reserve Open Market Committee meeting; the October Fed press release (federalreserve.gov) reported the FOMC maintaining the 0 to ¼ percent target rate, even for a “considerable time following the end of its asset purchase program…”

On the other hand, loosening mortgage credit underwriting could help some would-be home buyers; but it is unclear who would take advantage of such programs, and how it will help them. Tightened credit and underwriting standards that resulted from the financial crisis, along with government intervention in the form of the Dodd – Frank legislation, created regulation and stringent lending standards (such as comprehensive validation of financial standing and strict adherence to debt to income ratios); which critics point to as having hampered lenders from making loans. However, some lenders are beginning to introduce less restrictive mortgage programs, which may accommodate the self employed and those with high student loan debt.

Of course, home prices have been a point of contention between home buyers and sellers for a number of years. Home sellers seeking higher prices are sometimes thwarted by home buyers looking for affordability and value. The seeming home price tug-of-war that favored home sellers in 2013, appeared to turn back in favor of home buyers during late summer of 2014. The October 28th release of the S&P/Case-Shiller Home Price Indices (housingviews.com) reported further deceleration of home price appreciation. The National Index showed a 5.1% annual gain, which is lower than the 5.6% annual gain reported in July. The Washington DC region saw a 3.1% annual increase; but a 0% change in August, compared to the 0.1% change in July.

Additionally, the 15% increase in national foreclosure activity, as reported by RealtyTrac (realtytrac.com), could be a wildcard for home prices. It remains to be seen if the 26% increase in foreclosure activity in the D.C. metropolitan area from the previous year is a trend, or just a result of lenders clearing “shadow” inventory.

© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Mortgage Guidelines Get Tougher

by Dan Krell
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Like bears awakening from their hibernation, home buyers are slowly emerging from the holiday season and begin to look for a home to purchase. Many home buyers will find that that the challenge of buying a home this year will be more than finding the perfect home, but finding financing. Many home buyers expecting the mortgage process to be quick and painless may find that it is neither quick nor painless; others, expecting to be approved with a sub-prime mortgage, will be turned down. In the recent past, most home buyers found a way to obtain financing; this year may be different as the mortgage crisis fallout has changed the way lenders underwrite their programs.

Ask anyone in the mortgage industry and they will tell you that the entire mortgage landscape has changed. Some popular mortgage programs are no longer available, while other programs have been significantly changed. It may be a challenge for home buyers to locate a lender that offers a reduced documentation mortgage. These programs still exist, but have more restrictive guidelines; reduced documentation mortgages are requiring more verifications, higher credit scores and larger down payments.

Self employed home buyers will find that the popular “No Doc” is no longer available. The “No Doc” loan required no documentation or verifications from the borrower, hence the name. Although the program typically required a higher credit score, the “No Doc” loan was popular with self employed borrowers because employment, income, or asset verifications were not required.

Home buyers who need a low or no doc loan will have to look hard for alternatives. Most “liar loans” are no longer offered, or are offered with some type of verification. If you come across a stated income mortgage program, be prepared to sign an IRS form 4506 that will allow the mortgage company to verify the stated income. You should also expect a higher down payment and a higher than average interest rate.

As a way to assist home buyers with less than perfect credit, Fannie Mae and Freddie Mac created their expanded criteria programs in the mid to late 1990’s. These programs offered these home buyers a mortgage with minimal down payment and a reasonable interest rate; however the interest rate varied on the borrower’s credit score. However, like other mortgage programs, these expanded programs have also changed their requirements which include, among other items, increasing credit score requirements.

As the sub-prime mortgage industry has all but dried up, the FHA mortgage (HUD.gov) has picked up the pace. But even the venerable FHA loan is changing; FHA approved lenders are also tightening up their lending guidelines (in anticipation of new FHA guidelines). Some of the changes include credit score driven approvals as well as variable loan pricing (the interest rate will vary based on the borrower’s credit score).

For home buyers considering purchasing a home this spring (or any other time), talking to a lender should be their first priority. The mortgage crisis has changed the way mortgage lenders operate, including how lenders view borrowers. Home buyers should be prepared to provide more documentation and information to their lenders, as well as a possible higher down payment.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 14, 2008. Copyright © 2008 Dan Krell.