Are Lending Standards Too Loose, Too Tight, or Just Right?

Are Lending Standards Too Loose…or Too Tight? | MyKCM

 

 

With home values appreciating at record rates, some are concerned that we may be heading for another housing bubble like the one we experienced a decade ago. One of the major culprits of that housing boom and bust was the loosening of standards for mortgage credit.

In a study done at the University of North Carolina immediately after the crisis, it was revealed that:

“Lenders began originating large numbers of high risk mortgages from around 2004 to 2007, and loans from those vintage years exhibited higher default rates than loans made either before or after.”

A study by John V Duca, John Muellbauer, and Anthony Murphy concluded that those risky mortgages caused the housing crisis:

“Our findings indicate that swings in credit standards played a major, if not the major, role in driving the recent boom and bust in US house prices.”

How do today’s mortgage standards compare to those from 2004 to 2007?

The Mortgage Bankers’ Association tracks mortgage standards in their Mortgage Credit Availability Index (MCAI). A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit. While the chart below shows the index going back to that period between 2004 and 2007 when loose standards caused the housing bubble, we can see that, though the index has risen slightly over the last several years, we are nowhere near the standards that precipitated the housing crisis. Indeed, according to their standards, there are qualified buyers whose mortgage needs are not yet being met.

Are Lending Standards Too Loose…or Too Tight? | MyKCM

Bottom Line

While standards today remain fairly tight and credit is not as easily obtained as it was prior to the housing crisis, we need to be careful that we don’t drift too far once again. While we don’t want to prevent qualified buyers from obtaining the mortgage credit they deserve, the percentage of Americans able to obtain mortgage credit is currently at a stable level and should be held to a firm standard. Mortgage availability is a challenge to some buyers. Low inventory and increasing home values coupled with rising interest rates in our area are the real challenge in today’s market. Questions? Please feel free to ask. As always, I’m  here and happy to help!


Posted on June 15, 2018 at 5:32 pm
Liz Bailey | Posted in Uncategorized |

Will Home Prices Fall as Mortgage Rates Rise?

Will Home Prices Fall as Mortgage Rates Rise? | MyKCM

 

Mortgage interest rates have increased by more than half of a point since the beginning of the year, and they are projected to increase by an additional half of a point by year’s end. Because of this increase in rates, some are guessing that home prices will depreciate. And I have clients holding off on making a purchase with that idea in mind. But – is that a good idea?

Some prominent experts in the housing industry doubt that home values will be negatively impacted by the rise in rates. Read on…

Mark FlemingFirst American’s Chief Economist:

“Understanding the resiliency of the housing market in a rising mortgage rate environment puts the likely rise in mortgage rates into perspective – they are unlikely to materially impact the housing market…

The driving force behind the increase are healthy economic conditions…The healthy economy encourages more homeownership demand and spurs household income growth, which increases consumer house-buying power. Mortgage rates are on the rise because of a stronger economy and our housing market is well positioned to adapt.”

Terry LoebsFounder of Pulsenomics:

“Constrained home supply, persistent demand, very low unemployment, and steady economic growth have given a jolt to the near-term outlook for U.S. home prices. These conditions are overshadowing concerns that mortgage rate increases expected this year might quash the appetite of prospective home buyers.”

Laurie GoodmanCodirector of the Housing Finance Policy Center at the Urban Institute:

“Higher interest rates are generally positive for home prices, despite decreasing affordability…There were only three periods of prolonged higher rates in 1994, 2000, and the ‘taper tantrum’ in 2013. In each period, home price appreciation was robust.”

Industry reports are also calling for substantial home price appreciation this year. Here are three examples:

Bottom Line

As Freddie Mac reported earlier this year in their Insights Report“Nowhere to go but up? How increasing mortgage rates could affect housing,”

“As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices.”

Is betting on home values reversing themselves in the near future a good idea? I don’t believe it is, and I believe I’m in good company. Would you like to know more? Please feel free to ask. I’m here and happy to help!


Posted on June 1, 2018 at 10:33 am
Liz Bailey | Posted in Uncategorized |

5 Ways Tax Reform Has Impacted the 2018 Housing Market

5 Ways Tax Reform Has Impacted the 2018 Housing Market | MyKCM

 

Starting late last year, some predicted that the 2018 tax changes would cripple the housing market. Headlines warned of the potential for double-digit price depreciation and suggested that buyer demand could drop like a rock. There was even sentiment that homeownership could lose its coveted status as a major component of the American Dream.

Now that the first quarter numbers are in, we can begin to decipher the actual impact that tax reform has had on the real estate market.

1. Has tax reform killed off home buyer demand? The answer is “NO.”

According to the Showing Time Index which “tracks the average number of buyer showings on active residential properties on a monthly basis” and is a “highly reliable leading indicator of current and future demand trends,” buyer demand has increased each month over the last three months and is HIGHER than it was for the same months last year. Buyer demand is not down. It is up.

2. Have the tax changes affected America’s belief in real estate as a long-term investment? The answer is “NO.”

Two weeks ago, Gallup released its annual survey which asks Americans which asset they believed to be the best long-term investment. The survey revealed:

“More Americans name real estate over several other vehicles for growing wealth as the best long-term investment for the fifth year in a row. Just over a third cite real estate for this, while roughly a quarter name stocks or mutual funds.” 

The survey also showed that the percentage of Americans who believe real estate is the best long-term investment was unchanged from a year ago.

3. Has the homeownership rate been negatively impacted by the tax changes? The answer is “NO.”

Not only did the homeownership rate not crash, it increased when compared to the first quarter of last year according to data released by the Census Bureau.

In her latest Z Report,” Ivy Zelman explains that tax reform didn’t hurt the homeownership rate, but instead, enhanced it:

“We have been of the opinion that homeownership is most highly correlated with income and the net effect of tax reform would be a positive, rather than negative catalyst for the homeownership rate. While still in the early innings of tax changes, this has proven to be the case.”

4. Has the upper-end market been crushed by new State and Local Taxes (SALT) limitations? The answer is “NO.”

In the National Association of Realtors latest Existing Home Sales Report it was revealed that:

  • Sales between $500,000 and $750,000 were up 4.5% year-over-year
  • Sales between $750,000 and $1M were up 15.1% year-over-year
  • Sales over $1M were up 17.3% year-over-year

5. Will the reforms in the tax code cause home prices to tumble over the next twelve months? The answer is “NO.”

According to CoreLogic’s latest Home Price Insights Report, home prices will appreciate in each of the 50 states over the next twelve months. Appreciation is projected to be anywhere from 1.9% to 10.3% with the national average being 4.7%.

Bottom Line

The doomsday scenarios that some predicted based on tax reform fears seem to have already blown over based on the early housing industry numbers being reported. Questions? Please feel free to ask. I’m here and happy to help!


Posted on May 18, 2018 at 6:27 pm
Liz Bailey | Posted in Uncategorized |

4 Reasons Why Today’s Housing Market is NOT 2006 All Over Again

4 Reasons Why Today’s Housing Market is NOT 2006 All Over Again | MyKCM

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. In spite of the concerns, today’s market is quite different than the bubble market of twelve years ago. There are four key metrics that illustrate why:

  1. Home Prices
  2. Mortgage Standards
  3. Mortgage Debt
  4. Housing Affordability

1. HOME PRICES

There is no doubt that home prices have reached 2006 levels in many markets across the country, and this is certainly true in our region. However, after more than a decade, home prices nationwide should be higher based on inflation alone. In our region, rapidly rising prices have only brought us to a level approximately equal with inflation for that time span.

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 STANDARDS

Some 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 notas 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.

4 Reasons Why Today’s Housing Market is NOT 2006 All Over Again | MyKCM

3. MORTGAGE DEBT

Back 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 AFFORDABILITY

With 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).

4 Reasons Why Today’s Housing Market is NOT 2006 All Over Again | MyKCM

Bottom Line

After using four key housing metrics to compare today to 2006, we can see that the current market is not anything like the bubble market. Do you have questions? Please feel free to ask. I’m here and happy to help!


Posted on May 4, 2018 at 3:44 pm
Liz Bailey | Posted in Uncategorized |

Getting Pre-Approved Should Always Be Your First Step

Getting Pre-Approved Should Always Be Your First Step | MyKCM

 

In many markets across the country, the number of buyers searching for their dream home greatly outnumbers the number of homes for sale. This has led to a competitive marketplace where buyers often need to stand out. One way to show you are serious about buying your dream home is to get pre-approved for a mortgage before starting your search. In fact, in our competitive marketplace, no seller will give serious consideration to a buyer who does not have a strong pre-approval letter to accompany their offer. Even if you are currently in a market that is not as competitive, understanding your budget will give you the confidence of knowing your dream home is within your reach. It will also help your real estate professional locate the home that is just right for you.

Freddie Mac lays out the advantages of pre-approval in the ‘My Home’ section of their website:

“It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.”

Did you know the lender you choose matters? It does! Sellers will give more consideration to well-known, local lenders with a reputation for getting the job done on time and with minimal stress on all concerned. Your choice of mortgage company and specific loan officer may make the difference between winning or losing the home of your dreams. One of the many advantages of working with a local real estate professional is that they will have relationships with lenders who will be able to help you with this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.”

Freddie Mac describes the ‘4 Cs’ that help determine the amount you will be qualified to borrow:

  1. Capacity: Your current and future ability to make your payments
  2. Capital or cash reserves: The money, savings, and investments you have that can be sold quickly for cash
  3. Collateral: The home, or type of home, that you would like to purchase
  4. Credit: Your history of paying bills and other debts on time

Getting pre-approved is one of many steps that will show home sellers that you are serious about buying, and it often helps speed up the process once your offer has been accepted.

Bottom Line

Many potential home buyers overestimate the down payment and credit scores needed to qualify for a mortgage today. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so. If you would like a referral to a local lender to initiate the process, please let me know. And if you have any other questions, please don’t hesitate to ask. I’m here and happy to help!


Posted on April 20, 2018 at 6:01 pm
Liz Bailey | Posted in Uncategorized |

House Prices: A Simple Matter of Supply & Demand

House Prices: Simply a Matter of Supply & Demand | MyKCM

 

Why are home prices still rising? It is a simple answer. There are more purchasers in the market right now than there are available homes for them to buy. This is an example of the theory of “supply and demand” which is defined as:

“…the amount of a commodity, product, or service available and the desire of buyers for it, considered as factors regulating its price.”

When demand exceeds supply, prices go up. This is currently happening in the residential real estate market, and dramatically so here in Western Washington.

Here are the numbers for supply and demand as compared to last year for the last three months nationwide (March numbers are not yet available):

House Prices: Simply a Matter of Supply & Demand | MyKCM

In each of the last three months, demand (buyer traffic) has increased compared to last year while supply (number of available listings) has decreased. As long as this situation persists, home values will continue to increase. The lack of inventory, increasing competition, and the rise in home prices coupled with increasing interest rates makes this a challenging market for buyers!

Bottom Line

The reason home prices are still rising is because there are many purchasers looking to buy but very few homeowners ready to sell. This current imbalance is the reason prices will remain on the uptick for at least the short term.

Although challenging, this market is not an impossible one for buyers. Working with an experienced, professional Realtor is one way to win the day! Questions? Please feel free to ask. I’m here to help!


Posted on April 7, 2018 at 10:01 am
Liz Bailey | Posted in Uncategorized |

Where Are Mortgage Interest Rates Headed in 2018? And What Does It Mean?

Where Are Mortgage Interest Rates Headed in 2018? | MyKCM

The interest rate you pay on your home mortgage has a direct impact on your monthly payment. The higher the rate the greater the payment will be. That is why it is important to know where rates are headed when deciding to start your home search.

Below is a chart created using Freddie Mac’s U.S. Economic & Housing Marketing Outlook. As you can see, interest rates are projected to increase steadily over the course of the next 12 months. And while these are only projections and not a certainty, many financial professionals do believe rates will continue to go up this year.

Where Are Interest Rates Headed? | MyKCM

How Will This Impact Your Mortgage Payment?

Depending on the amount of the loan that you secure, a half of a percent (.5%) increase in interest rate can increase your monthly mortgage payment significantly. On a $350,000 purchase with 20% down, your monthly payment will be almost $100 more per month for a loan at 4.75% versus 4.25%. And if you put less down, your costs will be higher.

According to CoreLogic’s latest Home Price Index, national home prices have appreciated 7.0% from this time last year and are predicted to be 4.2% higher next year. In Kitsap County, values have increased even faster.

If both the predictions of home price and interest rate increases become reality, families could wind up paying considerably more for their next home. For those who are ready, buying now, before rates and values increase, makes sense. But what if you’re not ready?

Are Rising Rates Really A Cause For Concern?

While increasing home values and rising interest rates impact purchasing power, the cost of borrowing money should be kept in perspective. Below is a chart that shows 30-year fixed rate mortgage rates over time. Note that we have had and continue to maintain historically low mortgage rates over the past 10 years. From the 1970’s through the early 2000’s, rates were, on average, above 6.5%. A small rise in interest rates now will still keep rates at historically low levels and should not be a cause for concern. In fact, if a rise in rates helps moderate demand and slows the rise in home values, that can help to keep the cost of purchasing a home within the reach of more buyers.

Bottom Line 

An increase in interest rates this year, coupled with rising home values, could impact your family’s wealth. Would you like to know more? Let’s get together and talk about strategies for your future. Do you have questions? Please ask. I’m here and happy to help!


Posted on February 9, 2018 at 6:23 pm
Liz Bailey | Posted in Uncategorized |

The Impact of Tight Inventory on the Housing Market

The Impact of Tight Inventory on the Housing Market | MyKCM

The housing crisis is finally in the rear view mirror as the real estate market moves down the road to a complete recovery. Home values are up, home sales are up, and distressed sales (foreclosures and short sales) have fallen to their lowest points in years. It appears that the market will continue to strengthen in 2018.

However, there is one thing that may cause the industry to tap the brakes: a lack of housing inventory. While buyer demand looks like it will remain strong throughout the winter, supply is not keeping up.

Here are the thoughts of a few industry experts on the subject:

National Association of Realtors

“Total housing inventory at the end of November dropped 7.2 percent to 1.67 million existing homes available for sale, and is now 9.7 percent lower than a year ago (1.85 million) and has fallen year-over-year for 30 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace, which is down from 4.0 months a year ago.”

Joseph Kirchner, Senior Economist for Realtor.com

“The increases in single-family permits and starts show that builders are planning and starting new construction projects, that’s a good thing because it will help to relieve the shortage of homes on the market.”

Sam Khater, Deputy Chief Economist at CoreLogic

Inventory is tighter than it appears. It’s much lower for entry-level buyers.”

My take on this? In Kitsap County, the push from the Seattle-side market continues to drive prices up while inventory remains at historic low levels. Demand is outpacing supply at unprecedented levels, and new housing starts aren’t meeting the needs of buyers seeking homes at entry- to mid-level price points. Unsold inventory in our County is at approximately a 1-month supply level, far below the national average. Rising interest rates may slow demand slightly, encouraging sellers to put homes on the market. But until existing home sales improve, the market will continue to be extremely challenging for buyers!

Bottom Line 

If you are thinking of selling, now may be the time. Demand for your home will be strong at a time when there is very little competition and buyers are not yet limited by interest rates. That could lead to a quick sale in a strong seller’s market for a really good price. Questions? Feel free to ask. As always, I am here and happy to help!


Posted on January 12, 2018 at 6:24 pm
Liz Bailey | Posted in Uncategorized |

The Real Reason Home Prices are Increasing

The Real Reason Home Prices are Increasing | MyKCM

There are many theories as to why home values are continuing to increase. From those who are worried that lending standards are again becoming too lenient (current 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. You will see that across all markets, whether homes for sale or items in the local grocery store.

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 1).

The Real Reason Home Prices are Increasing | MyKCM

According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes has been below six months for the last four years (see chart 2). And while nationwide the average is 3.9 months of inventory, here in North Kitsap we are at just over one month’s supply of inventory and have an historical low number of homes for sale.

The Real Reason Home Prices are Increasing | MyKCM

Bottom Line

The answer is simple. If buyer demand outpaces the current supply of existing homes for sale, prices will continue to appreciate. When demand lessens, prices will stabilize (or even go down) to entice buyers. In North Kitsap, we currently have the lowest available inventory of homes for sale anyone has seen, and this continues to drive values up! What we are seeing in our current market is the theory of supply & demand working as it should. Questions? Please feel free to ask. As always, I am here and happy to help!


Posted on December 4, 2017 at 1:59 pm
Liz Bailey | Posted in Uncategorized |

The Importance of Home Equity in Retirement Planning

The Importance of Home Equity in Retirement Planning | MyKCM

I share information from time to time on the difference in family wealth between homeowner households and renter households. Much of that difference is the result of the equity buildup that homeowners experience over the time that they own their home. In a report recently released by the nonpartisan Employee Benefit Research Institute (EBRI), they reveal how valuable equity can be in retirement planning.

Craig Copeland, Senior Research Associate at EBRI, recently authored a report, Importance of Individual Account Retirement Plans and Home Equity in Family Total Wealth, in which he reveals:

“Individual account retirement plan assets, plus home equity, represent almost all of what families have to use for retirement expenses outside of Social Security and traditional pensions. Those families without individual account assets typically have very low overall assets, so they have almost nothing to draw from for retirement expenses.”

The report echoed the findings of a working paper, Home Equity Patterns among Older American Households, authored by Barbara Butrica and Stipica Mudrazija of Urban Institute. Fannie Mae highlighted these findings for their blog The Home Story this past winter, quoting Butrica and Mudrazija:

 “For most adults near traditional retirement age, a home is their most valuable asset — dwarfing retirement accounts, other financial assets, and other nonfinancial assets. Although relatively few retirees tap into their home equity, having it provides financial security… In fact, many retirement security experts argue that the conventional three-legged stool of retirement resources — Social Security, pensions, and savings — is incomplete because it ignores the home.”

USAToday interviewed two area experts to comment on the EBRI report. Randy Bruns, a private wealth adviser with HighPoint Planning Partners, agreed with the findings:

“Social Security and home equity are major pieces of the retirement puzzle.”

Wade Pfau, Professor of Retirement Income at The American College of Financial Servicesand author of Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement, said having the equity without a plan to use it won’t help:

“Home equity is a very important asset for American retirees, and so it is important to think about how to make best use of home equity in retirement planning.”

Bottom Line

Times have changed, and financial planners are viewing home equity in a different light than in the past. Whether you help finance your retirement by using the equity in your home through a reverse mortgage or by selling and downsizing to a less expensive home, it should be a crucial piece of your retirement planning. Interested in knowing more? Just ask. As always, I’m here to help!


Posted on November 17, 2017 at 6:06 pm
Liz Bailey | Posted in Uncategorized |

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