3 Reasons Why Rates are on the Rise

As expected, the Federal Reserve raised the Fed funds rate in March - the first of three expected rate hikes for 2018.  It’s the sixth rate increase since the Fed starting pushing the rate back up in January of 2016 (from basically zero to now a tad over 1.5% - pushing the Prime Rate from 3.25% to 4.75%)

In short, the federal funds rate helps determine short-term market rates, as well as the interest rate borrowers pay on car loans, credit cards, personal loans and home equity loans. And although the Fed’s interest rate hike doesn’t directly affect mortgage rates, it influences other factors, such as the 10-year Treasury Bond – that do affect mortgages. And while these changes may only really indicate the mindset of the Fed with regard to where we are headed economically in the long-run, the point to grasp here is that our economy has human characteristics like emotion and is always moving. So we have to adapt and prepare. The questions we need to answer are what should we expect and how are we to properly advise our clients in navigating such murky economic waters?

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Recently I came across a vlog (which you can find here) by mortgage industry executive, Barry Habib, who, in his video, highlights the 3 reasons why he believes rates are on the rise. In an effort to educate my colleagues and their clients, I’d like to share those very reasons.
 
Number 1. The Federal Reserve is going to be buying a lot less mortgage bonds and treasuries.While this began in October of last year, the Fed certainly ramped up this practice a few months ago during January, which puts an incredible amount of pressure on the market.
 
Number 2. Stock prices – which have recently been on the decline, could be due for an upward run. Bonds tend to move like a seesaw with stocks. When the price (or yield) goes up for one, it will go down for the other - and vice versa; which means that when stocks go up in value, bonds are hurt. This essentially affects interest rates for consumers. Barry believes the stock market is due for another decent run up – his advice? Keep an eye on the S&P – if we see it surging, that could mean higher mortgage rates.
 
Number 3. Inflation:  It’s the arch enemy of interest rates. It eats away your buying power and is the bond market’s worst enemy.  Barry believes we are due for a report later in April that will indicate higher inflation numbers – and just hearing it could spook bond markets.
 
So what can we do? Act now, but proceed with caution. Tread carefully and stay informed. As part of my dedication to the education of my clients and colleagues, it is my passion to advise others during uneasy economic climates. And it’s my goal to do all that I can to protect homeowners and potential home-buyers from finding themselves vulnerable to losses.

Will the New Tax Law Save You Money... or Cost You?

It's official:  The new tax law, which is now in effect, may affect potential and current home-buyers… in more ways than one. American homeowners may be facing a lower threshold on the mortgage interest deduction, a cap on the state and local deduction, and a higher standard deduction. So will the new tax law save us money… or cost us money? The answer depends on a complex array of factors that touch on just about every aspect of our financial lives. And Senior Moody Analytics economist Adam Kamins claims, “States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead”.

Good news, Middle Tennessee that means we may be in the clear.

The mortgage interest tax deduction is a great way to make homeownership more affordable. It cuts federal income tax that qualifying homeowners pay by reducing their taxable income by the amount they pay towards mortgage interest. And luckily, via the new tax law, homeowners with existing mortgages may continue to deduct interest on a total of $1 million of debt for their first and second home. But for new buyers, the $1 million limit fell to $750,000 for a first and second home.

For example, if I already have a $750,000 mortgage on a first home and a $200,000 mortgage on a second home, then I can continue to deduct the interest on both on Schedule A. But what if I already have one home with a $750,000 mortgage and want to use a new $200,000 mortgage to buy a second home this year? Well, in this case, I couldn’t deduct the interest on the second loan.

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"States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead."

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While the new tax law doesn’t affect just homeowners or individuals wishing to finance a home, a few other caveats, such as a moving expense deduction overhaul, exist. For example, under the former tax law, you could deduct some moving expenses when you moved for a new job. You had to meet complex criteria involving distance and timing of the move. But as of the beginning of 2018, only active-duty members of the armed forces will be allowed to deduct moving expenses.

So if you came out ahead on the tax bill with respect to housing or any other aspect of the bill, congratulations! If not, don't worry. Since 2018 is an election year, I wouldn't be at all surprised to see beneficial tweaks in the tax law via new legislation.

Remember that while taxes may be permanent, the size and distribution is always changing. And as far as the potential effects such changes may have on the housing market, I have no fear. Owning a home is part of the American dream, and maybe even the pursuit of happiness. According to Logan Mohtashami, a spokesperson for AMC Lending Group, “In general, people buy homes because they want to raise their family, they want to own something, forced savings,” he continues, “and not have to deal with a landlord.”

Cracking the Credit Code: How to Supercharge Your Score

If you’ve ever been in the market for financing, chances are your full financial profile was examined by a lender. And if you’ve ever been prequalified for a loan, the inspection of your employment income, credit, assets, and debt-to-income ratio most likely laid the groundwork in determining your candidacy. But despite all four items, did you know your credit has the most pull in determining your eligibility (or ineligibility) for financing?

While your credit score is just a number, chances are it’s already had a measurable effect on your wallet. And when it comes to borrowing money, your credit score is one of the most important factors in determining which rates you will pay on everything from a business loan to a mortgage. Doesn’t seem too scary, right? Well, look at it this way: If you have a poor credit score, you could end up paying hundreds (or even thousands) more in interest over time on anything from credit cards to an auto loan. So how can you tell if your credit score is “good”, and what should you do if it’s in need of some serious improvements?

If you’ve never actively worked to improve your credit, a credit score may seem mysterious or enigmatic. You may understand that scores run from 300-850, but that’s where the credit knowledge of most consumers ends. And when you don’t quite understand the way something works, it’s easy to assume you have little control over it, or in this case, where you fall on the credit score spectrum. In reality, however, your credit score is based on very real and measurable criteria… and you have the complete power to change it. In fact, most consumers are in a position to improve their credit with very little effort. 

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The breakdown.

FICO is the biggest name in town when it comes to credit scores. Most major card issuers and lenders in the U.S. use FICO’s traditional model to decide whether to extend credit to consumers and at what interest rate. Using the information in a borrower's credit report, FICO breaks that information into categories. Those five components each get different weights.   

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Recently I came across an article titled, “How Your Credit Score is Calculated” by personal finance writer Miriam Cross of Kiplinger Magazine. Miriam’s article, which you can access here, outlines each credit-affecting factor in your financial life, and details how to positively steer each factor in the direction of an improving credit score. It also proves to be the most concise credit guide I’ve ever had the pleasure of finding and I felt compared to share it with you.

Let me ask you something— when was the last time you checked your credit score? And if your answer is, “I haven’t”, did you know that several credit card issuers and personal finance websites such as Credit Karma allow their users to frequently check their credit score at no cost? Seriously. It’s free. It’s also seriously imperative to understand how to go about improving your credit score, especially if it’s not up to par (and there’s always room for credit score improvement, anyway).

As a mortgage advisor and loan originator who aims to educate, advise, and inspire, it is my goal is to do all that I can to help potential borrowers find their footing along the path to home-ownership. And with that, I’d like to share some important tips, many requiring little effort, that allow potential borrowers, or anyone in need of financing, increase their credit score. You may also reference the linked article above for a more detailed explanation of each:

1. Make your payments on time and for the right amount – every month.
2. Avoid over-extending your credit, and stay away from unsolicited credit cards as they won't benefit in any way to your credit score.
3. Don't ignore your overdue bills, and if you face any problem regarding repaying your debt, contact your creditor for repayment arrangements.
4. Be sure of what type of credit you have, as credit from some financing companies can affect your score in a negative way.
5. Try keeping your outstanding debt as low as possible – particularly on revolving debt (credit cards). Extending your credit close to your limit constantly is considered to be bad and will reflect negatively in your score.
6. Restrict your number of credit applications as a credit report having many hits (credit inquiries) is viewed poorly.  In other words, the more times you let people pull your credit, the worse your score is likely to be.  But not all hits are considered to be negative, like monitoring of accounts, prescreens, etc., are viewed positively.

Your credit score plays an important role in your life that can put you on the right path towards financial success, or even simply veer you off course.  When you improve upon your credit score, you are also improving upon your confidence… and with confidence comes the power to seek out and follow through with the goals you strive to meet. Besides, if you are one of the 8 in 10 Americans who consider owning a home as part of the American dream, are you really going to let something as easily changeable as a credit score hold you back?

What do you want them to say about you?

As we head into a new year, everyone is excited to turn the page and get a fresh start – a “do-over” if you’ll permit that expression.  New Year’s resolutions are commonplace – whether health, finance, exercise, family, etc…, most everyone wants to do better next year.  Which is a great thing!  But what do we need to do to make sure those pledges that we make to ourselves stick? 

Where we fail most often with our New Year’s resolutions (and any other goal for that matter) is in execution.  We have this grand idea of what we want to happen, but lack the gumption to execute.  To execute, there must be discipline.  And for there to be the kind of discipline needed to promote the execution that accomplishes the resolution, there must be passion behind the “why” to the resolution.  So we need to dig a little deeper and determine what the “why” is behind the goal and use the passion and energy created from the “why” to make the change.

I was given an exercise about 15 years ago from a business coach I had hired to help me with my work/family balance.  The first thing he asked me to do was get in a room by myself, with no distractions, for a couple of hours while I wrote my own eulogy.  In other words, he asked me to write down what I would want my friends/family to say about me when I’m gone.  When I did that, it gave me the fuel to change everything about my actions that needed changing.  I was able to focus on the things that needed to be done to allow what I wanted said about me to happen.  I got to the core of what was important to me and let that be the motivator for everything, both big and small, that needed to change in my life.  So ultimately, the things I wanted said about me when I’m gone not only could be said, but would be.

So figure out what it is that you want said about you when you are gone and design your life (daily routine and activities) around making that happen.  May 2018 be your best year ever!

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Part 2 | Quick Market Review

Friday morning the President signed into law the biggest tax code overhaul in more than thirty years. Its centerpiece is a cut in the corporate tax rate from 35% to 21, plus cuts in individual tax rates.

Critics of the bill say lower taxes will raise the deficit, supporters claim the boost in economic growth, jobs and wages resulting from the tax cuts will ultimately increase government revenues. Part of the new package includes the Tax Cuts & Jobs Act. For homeowners, the capital gains exclusion on home sales, and the mortgage interest deduction on existing mortgages were left unchanged. But the interest deduction on new mortgages is only available up to $750,000 (down from $1 million). 

Time will tell the ultimate benefit of the new legislation.  For now, the housing market continues to boom.  I can’t help but think that we are in for higher interest rates in the near future.  For now, we continue to trade in this tight range (near the bottom of the range) that we’ve been in since the end of March.  If/when the mortgage bonds break through the bottom of this channel, higher rates are likely.

Industry Updates

As you have probably heard by now, the conventional loan limit will be increasing effective January 1st, 2018 (for any closing taking place after that date).  The former limit has been $424,100 and will now be $453,100.  The expanded limit for both Fannie and FHA will now be $494,500 versus the old figure of $466,900.  So borrowers will now be able to go up to $453,100 on both conventional and FHA loans at standard pricing and will be able to go up to $494,500 with a small pricing bump (typically .25% - which is pretty standard for typical jumbo pricing).  So a nice feature now will be that someone could go to $550,000 in price and basically do a 90% conventional loan versus having to go jumbo and put 20% down.  And basically all borrowers can now go up ~$30,000 in price/loan amount to stay at equivalent conforming rates.

There is still LIFT money available.  This program is pretty narrow, but you may have a client that could take advantage of it.  Property has to be in Davidson, Wilson, Sumner or Rutherford and unless the borrower is a first responder, military or teacher, the income limit is basically $55,000 per year.  But if eligible, there is a $15,000 down payment assistance fund available.  FHA still requires a 3.5% down payment from borrower, but the conventional 97% Home Ready will allow the assistance funds to go towards down payment.  It is somewhat of a niche program and funds will run out (was estimated to have been out already).  To read more about the program, go to http://www.ahrhousing.org/neighborhoodlift-program/.

THDA has lowered its rate from 4.625% to 4.25% on the Great Choice program (the one most buyers use).  That helps make this program a little more advisable.

Not really industry news, but I would like to introduce a new member to my team.  Emily Keller started working with me on December 4th and will be in charge of all things related to how my team markets and communicates with our clients and industry partners.  I’ve had a vision for this position for a couple of years and am thrilled to have her on my team!  Emily.keller@myfmbank.com

Rent or Buy? The Answer is in the RATE!

Mortgage rates are at the heartbeat of my business, offering the greatest insight into whether homeownership is affordable.  So it’s no surprise that when headlines scream that rates are on the rise while others declare that rates are historically low, borrowers have questions and concerns.  Historic context is key to understanding how rates behave – and the key to understanding where we are today. The downward trend of rates the last 20 years will prove that buying a home truly is a better option than renting.  Sure prices have been on the rise, and that makes buyers freak out.  But that’s just part of the equation.  We’ve talked about the Home Affordability Index before, so not going to beat that drum today (basically, the HAI considers price, rate and income to determine how affordable buying a home is).  And while price certainly plays a role, rate is what is the driving factor in payment – which is what matters when considering affordability and comparing to rent.

Let’s consider a couple of things:

1) Rates have been falling for years

We’ll use the 30-year fixed-rate mortgage as a benchmark since they’re the most popular home loan option in the U.S. and often used as a basis for news and research findings. Take a look at this chart showing the 20 year trend line for the 30 year fixed rate mortgage.

As you can see, rates on 30-year mortgages peaked at just over 8 percent in 2000 (they were as high as 18 percent in the early 1980’s). Rates have been on a steady decline over the last 20 years. Sure, there have been ups and downs — the most dramatic of which was the credit crisis that drove rates to historical lows. But even today we find ourselves in close proximity to where we were then.

2) Buying a home was a bargain back then. It still is today.  What about renting?

In June 2000, the median price of a home was $140,000 and the rate on a 30-year mortgage was 8 percent. If a borrower financed this at a 90 percent , the principal and interest payment was approximately $925 a month. Compare that to 2017 when the median  price of a home is $245,000 and the 30-year mortgage rate is 3.8 percent. If a borrower finances this at a 90 percent, the P&I payment would be approximately $1,025 a month. This shows that in the span of 17 years, the average mortgage payment has increased by just $100 for P&I (an 11% increase).

Rental rates, meanwhile, continue to rise with no sign of slowing down. In 2000, the median rent in the US was $602.  By 2015 that number had grown to $959 (a 60% increase in just 15 years).

The bottom line: Homeownership over time is a better investment and more affordable than renting – and even more so in today’s low rate environment.

Thanks to my friends at Movement Mortgage for this data!

Bonds have trended up a tad over the past week and a half, but still well below our lowest rate point of the year back in late August.  30 year fixed conventional still hanging below 4% and FHA under 3.5% for good credit buyers.

Housing is Still Much More Affordable Than a Decade Ago

Home prices continued to rise nationally in August, up 0.9% from July, in the latest Home Price Index and HPI Forecast from CoreLogic, a global information and analytics firm, putting prices up 6.9% from the year before. But does that mean house prices are becoming unaffordable?  I keep hearing this common theme from buyers – that houses are just getting too expensive.  But are we/they truly looking at this from a proper perspective?  The First American Real House Price Index (RHPI) reported that "while affordability is lower than a year ago, it remains high by historic standards." The RHPI is 38.4% below its housing boom peak of July 2006.  
What does that mean?  House prices are typically reported nominally. In other words, without adjusting for any inflation. Just like other goods and services, the price of a house today is not directly comparable to the price of that same house 30 years ago because of the long-run influence of inflation in the economy. The RHPI helps provide an alternative view of the change over time of house prices in different markets across the country. The three key drivers of the First American Real House Price Index (RHPI) are incomes, mortgage rates and an unadjusted house price index. Incomes and mortgage rates are used to inflate or deflate unadjusted house prices in order to better reflect consumers' purchasing power and capture the true cost of housing.  So when interest rates are low and overall employment/income is improving, higher prices don’t necessarily mean less affordability.  According to CoreLogic, wage growth is outpacing home price growth in about half of all local markets so far this year.  And we know how low rates continue to be.  So when those things are considered, higher housing prices don’t necessarily mean that they are too expensive.
Bottom line – when our current buyers complain about how high the prices of housing has gotten, we can remind them that from an affordability standpoint, we are actually still in a great position.  For more information on this, go to http://www.firstam.com/economics/real-house-price-index/.  It is very interesting.

After about a month and a half of pressure to move rates higher, we may actually be moving back into a better scenario – let’s just hope the activity of the last couple of days continues.
 

Smoke and Mirrors

OK, I’m going to apologize on the front end as this will be a little longer read than my typical update.  But I’m pretty passionate about the topic, so forgive me.  I’m over all of the gimmicks out there designed to pay off your mortgage faster.  Honestly, I think it is the wrong argument anyway, or at least wrong from an execution standpoint, and I’ll get to that shortly.  The two I’m going to pick on today are the bi-weekly mortgage and the concept of using a HELOC in place of a mortgage as strategies for paying off a mortgage faster. 

I’ll start by focusing on the whole concept of what is really required to get a mortgage paid off quickly.  It’s not rocket science.  If you want to pay a loan off faster, and it doesn’t really matter what type of loan it is, you simply pay more than what is required.  There is no magical formula that makes the debt disappear.  It requires discipline and effort.  You want to lose weight?  Eat less calories and get on a treadmill.  You want to save money?  Do a budget and manage your finances by it.  Want to be a better golfer?  Go to the driving range.  You get my point…  The bottom line is that to accomplish anything out of the ordinary, your behavior has to be out of the ordinary.  It’s all about discipline.

A bi-weekly payment plan will definitely help you pay a loan off faster.  You are simply making 26 half payments every year – in essence, one extra principal payment per year.  I don’t have a problem with these plans unless there is a fee involved.  The reality is that you can make that extra payment on your own – either portioned out monthly or annually, and accomplish the same thing with no extra cost.  So why pay a fee (most of the bi-weekly programs out there charge one) to do what you can do by yourself? It’s all about discipline.

Recently I had a client decide he would buy his home using a HELOC to finance it versus a traditional mortgage.  He was wooed by a company’s claim that by using its strategy, he could pay his home off in 7-8 years using a HELOC versus the traditional mortgage.  This concept intrigued me enough to get the book, offered by the company promoting the strategy, and read it.  I was open minded about it hoping to learn something when my natural skepticism hinted that I wouldn’t.  I guess I should have been immediately more skeptical when glancing through the 127 page book, I noticed the last 56 pages were about strategies to make more money and credit repair.  I read it anyway – and was once again confirmed by the fact that if you make anything sound too good to be true, not only is it, but sadly there are those out there that will believe it – and ultimately buy it.  At the end of the day, the concept is nothing more than paying a loan off faster by paying more than is required monthly.  Granted, I believe that a HELOC is a great product and can be used strategically to both grow and protect wealth.  I have one myself.  But the central argument used in the book is that it is all about debt balance and not rate.  I couldn’t disagree more.  Banks make money based on the rate.  You eliminate balance by paying principal.  They faster you pay principal, the less interest (rate) you pay – that’s the whole point, to pay less interest.  You can definitely get your loan paid off faster using this strategy, but it is just another gimmick.  You are simply paying more than what is required versus a traditional mortgage.  There is actually a real danger here and that is you are using an inferior product (a loan with a rate that fluctuates) to accomplish what can be done on your own – paying extra on the debt.  And I’m sure there is probably a pretty good sized fee from the company touting the strategy to help you get everything set up.

But are we really even focusing on what is in my opinion the more important concept?  I agree that it is all about getting out of debt.  But what does that really mean?   Most would say that it means owing no money to anyone.  I disagree.  I’ve stated for years that being debt free isn’t really about having no debt – it’s about having the ability to pay off the debt anytime you want to.  In other words, it’s about having more financial resources than money owed.  If you have $200,000 in a safe investment and owe $150,000 on your mortgage, you have the ability to pay that loan off anytime you want – you are debt free, you just choose strategically to have debt.  I used to crack up listening to The Money Game back in the early 90’s with Dave Ramsey and Roy Matlock.  They used to argue about this concept.  Back then mortgage rates were around 8% and the rate of return on equity investments was around 12%.  Dave wanted people to pay off their mortgage and Roy argued that it made more sense to invest the money versus paying off the mortgage – an alternative to the traditional thought of being “debt free”.  I love Dave, but I was always on Roy’s side when they argued this topic.

I’ll give you a simple example related to the whole HELOC versus mortgage concept – and I’ll be generous to the HELOC concept assuming that the rate never changes.  The last two times the Fed started increasing the Fed Fund rate (that prime is tied to), prime topped out around 8%.  Prime is currently 4.25%, so we’ll use that figure.  The 30 yr mortgage is at 3.75% right now, so we’ll use that figure as well.  We’ll assume a $200,000 mortgage and that the payoff target is 8 years.  The P&I payment on the mortgage is $923 per month.  We’ll assume an average of $4,250 per year of interest on the HELOC (that is averaging the interest over 8 years with constant rate assuming the balance will be paid down to zero by the end of 8 years).  To pay off the loan on a monthly basis would require a payment of $2,392 ($2,038 in principal dividing $200,000 by 96 (8 years) plus $354 in average interest).  So the first 8 years will require an additional payment of $1,469 versus the 30 yr mortgage.  If the person with the mortgage invests that extra $1,469 over the 8 year period at 6% (very conservative as pretty much any 10 year period in the history of the equity markets provides a return of 8%+), the total saved/earned will be $181,337.  By the way, his principal balance at this point is ~$163,000, so he’d have the cash needed to pay off the balance if he wanted to at that point – with some left over.  But here is where the real magic exists.  Let’s say that the person that did the HELOC and paid his loan off in 8 years now invests the $923 per month (the amount the mortgage guy will still be paying) over the next 22 years.  His investment will grow to $506,687. Let’s assume that the guy with the mortgage, who invested his money over the first 8 years, continues to pay his mortgage and never pays an extra penny towards his investment or paying his mortgage early (I’m keeping the amount paid by each the exact same for the full 30 years). The investment he grew over the first 8 years will be worth $653,454 by the end of the 22nd year.  He comes out $150,000 ahead.  So who was the real winner? And all of this assumes the HELOC rate never changed, the investment return was below average, and isn’t considering the tax benefit of the interest paid.  Thank you compound interest – the only real magic in this entire equation.

So I guess my point is that regardless of strategy, and I believe I’ve proven that investing versus paying down the mortgage (particularly in this low rate environment) makes more sense, what doesn’t make sense is to use gimmicky options, especially if there is any type of fee involved, to pay the mortgage off early.  If you want to do that, get a safer fixed rate option and just pay extra.  Or, in my opinion, invest the difference and work towards having the cash available to pay the loan off when you want to.  Either way, it’s all about discipline – not a hokey strategy.

We’ve seen a couple of dips since we started our run to better rates at the beginning of July.  But the one we had last week took us out of the upward moving channel for the first time.  It will be interesting to see if that continues over the days and weeks to come, but we’ll keep you posted.

Make Your Argument Against FSBO’s

In a market as hot as ours, selling a home should be as easy as putting a sign in your yard and waiting for offers to come in – right???  That seems to be a common thought among many home sellers – particularly those who are needing to net the maximum amount from their sale and are looking for all advantages to make the most money possible (and what better way to start than to eliminate 6% right from the beginning by selling without representation?).  Obviously we know better.  You know how much work is involved.  You know that NAR studies prove that comparable FSBO’s sell for ~ 7-13% less than homes represented by a Realtor (depending on price and location).  You know the value of the service you provide.  But are you doing a good job of letting your clients know that?. 

If you don’t already have this, why not put your service model in writing?  Have a defined description of why the service you provide is not only better than your competitors, but is also persuasive enough to make any potential seller realize that selling without representation is a losing proposition?  I’m sure you can come up with even more reasons than this, but this article below from Realtor.com is a good start.  It gives 5 compelling factors (listed below) that sellers likely don’t understand or are not giving full consideration to when attempting to sell on their own.  Certainly you can add to this, but I believe a drawn out, then well-executed strategy, will help your clients immediately recognize the benefit of your service.

1.      Marketing your home isn’t as easy as you think

2.      Homes for sale by owner could be priced wrong

3.      You could underestimate (or over estimate) how much money to spend on curb appeal

4.      Showings are a drag

5.      Preparing your own paperwork can be tricky

http://www.realtor.com/advice/sell/why-fsbo-sales-fail/  (scroll to bottom of page)

The bond market continues its upward swing (lowering rates).  Since July 6th, the bonds are up almost 125 basis points.  I’ve been able to lock a few clients in recently at 3.75% on conventional 30 year fixed and 3.25% on FHA 30 year fixed.  So low rates are certainly still favorable for buyers right now.

Affordability Defined

I saw an interesting statistic last week I thought worth sharing.  I keep hearing about how continued price appreciation is making buying a home less and less affordable for the average homebuyer.  I certainly won’t argue the fact that it’s easier to buy something priced cheaper than something more expensive.  But I think the term “affordable” might need a little clarification in our concern about rising prices. 

Right now, prices are simply being driven by supply and demand – there is more demand than supply and that naturally drives prices up.  And while we may be feeling this a little more intensely right now here in Nashville, it is a common issue nationwide.  Pending home sales declined in March and April, meaning closing numbers in June/July will likely be lower as well.  But the issue is not a lack of buyers (or a willingness to pay the higher prices), it is simply a lower supply than what is needed (inventories are down 9% nationwide from a year ago).

But back to the statistic I found most interesting: if you go back to 2000 and 2006, the last two times prices seemed to get “unaffordable”, and you adjust prices for interest rates and increased average incomes, we are currently 9.3% lower than where we were in 2000 and a whopping 32.5% lower than the peak in July, 2006 from an affordability standpoint.  So while it does feel at times that prices are getting too high to be considered affordable, particularly in a few markets around town,  the reality is that with the current interest rate environment and the increase in wages over the last 10+ years, buying a house is quite a bit more affordable than the level reached in either of the last two periods of significant price increases.

So if anything, that should be an encouragement to our clients to get out there and buy now before rates go up and prices continue to climb.  But then we are back to the old supply/demand issue where there just isn’t enough supply to meet the demand – and that’s really the issue more so than homes being unaffordable.  I guess the other thing I would suggest at this point, and it probably goes against everything that is going on right now, is a simple reminder that real estate is a commodity – the prices will certainly go back down at some point.  Let’s not get caught thinking that because we are in the hottest market in the country that it will stay like this forever.

Loan Limits - Movin' On Up!

Welcome to the New Year!  For the first time in over a decade, Fannie Mae is increasing its loan limits for conventional loans.  It is nothing drastic, but certainly a move in the right direction.  For quite some time, the maximum loan amount for a conventional loan in the Nashville MSA has been $417,000 – anything over that amount went into the “jumbo” category.  The new number for Fannie is now $424,100.  But maybe what is the better news from Fannie is that they moved their loan limit for their expanded program (High Balance Agency product) up to $466,900.  The expanded program has a slight rate bump (typically .125% for 30 year fixed with no more than .25%), but also allows up to 95% loan to value.  So in essence, someone could put 5% down on a home priced at $491,450 with only a slight bump to the rate.  Remember that jumbo loans require 20% down and typically have a rate bump of .25-.375% above the Fannie rates.  So this is a nice option.

Also, and probably even better news than the Fannie loan limit increase, is that FHA is also increasing their loan limits.  The new limit for the Nashville MSA (which now includes Maury County) is $466,900.  So with a 3.5% down payment, someone could buy a property at $484,000 and still do a maximum FHA loan.  This becomes an even bigger benefit for a buyer with a sub-720 credit score (and dramatically for a sub-700 score).  So keep that in mind when you have a client with minimal down payment but who qualifies for close to $500,000 in price.  These options could come in handy – and we always have the combo option available (where we keep the first mortgage at the Fannie limit and do a second mortgage up to 90% so that a buyer can buy a more expensive home and only put 10% down (versus taking a jumbo loan and putting 20% down).  You are welcome to call me if further explanation is needed.

Lastly, I want to touch on rates very quickly.  Hopefully the jump in rates post-election wasn’t a shock to anyone – we’ve been discussing it for several months.  The 30 year conventional fixed rate jumped about .75% in the 2 weeks after the election.  The big question now is whether or not we are done with the rate jumps.  My personal opinion, and this is based solely on instinct and how the charts read from a technical standpoint, is that we will see rates hanging between 4% - 5% throughout 2017.  I think we’ll push 5% by summer and then drop back down into the mid 4’s by year end.  But I definitely believe that the sub 4% rates on conventional loans are likely a thing of the past.  Not to worry – sub 5% rates should not slow down our market at all.  It will be another very good year for real estate in Middle Tennessee!

The Government Finally Figured Out a Way to Make Money

When our Federal Government bailed out Fannie Mae and Freddie Mac back in 2008, the bailout was an estimated $187 billion.  Granted, it was a move that saved the two entities and provided some stability to a housing market that was sinking fast.  Personally, I’m grateful that the two were seen as “too big to fail” because it kept the mortgage lending industry in business and ultimately prevented the recession from becoming a depression.  But what has happened since is anything but fair. 
 
Over the past 8 years, Fannie and Freddie have paid back the government in the form of their profits being seized.  The amount exceeds the bailout by over $50 billion!  That’s right, Fannie and Freddie have paid the government over $237 billion since the bailout. 
The funny thing is that they are no closer to paying back the debt than they were when they got bailed out.  For us math nerds, that is about a 16% annual return on the “loan” that our government made to Fannie/Freddie.  What would your investment portfolio look like if you had similar returns over the past 8 years? 
 
In 2012, Congress changed the rules on the bailout and in effect, made it impossible for Fannie and Freddie to ever pay back the money owed.  Uncle Sam decided that the only way to “protect the American consumer” was to provide Fannie and Freddie with their own liquidity instead of allowing the two institutions to once again build up their own capitol and operate on their own as free standing companies.  They’ve just been keeping the profits that Fannie and Freddie could have been using to re-capitalize.  The one thing we can’t accuse the government of here is not knowing a good thing when they have it. 
 
It is estimated that Fannie and Freddie would have been the most profitable companies (if they were still operating as individual companies) in the world over this time period.
Please don’t take this as a bash against our government.  There is nowhere else I would rather live than here in America and I love my country.  Yesterday was one of my favorite holidays where we honor the men and women who have bled and died for us to live in this great country.  But I’m here to tell you, at least from a financial perspective, that Fannie and Freddie are now permanent fixtures as GSE’s (Government Sponsored Entities) – they will never be privately owned again.  And unfortunately, in my opinion, this is another step our government has taken in the wrong direction.  And one, like many others, that is forcing the American people to be overly dependent on their government.  I’m pretty sure it’s not what John Hancock, John Adams, Ben Franklin, and Thomas Jefferson had in mind when they signed the Declaration.

Bubble or Not? Warren Says "No"

I keep getting the same question – “Is Nashville experiencing a real estate bubble?” While it certainly feels like it, and anyone who has been in a contract battle with 10 other prospective offers on the same property – that winds up selling thousands of dollars over asking price might agree, I’m not sure we should consider it a “bubble”.  The reality is that real estate nationwide continues to improve from the low point reached in 2012 and Nashville just happens to be a market that is more desirable than most. 

If you look at the first chart below, you will see that nationwide, average prices are still below the high’s reached in 2007 – which would indicate that we still have room, at least from a national perspective, for prices to move up just to reach the pre-recession levels.  And the second chart, which represents the median home prices in the Nashville market for the past 16 years, shows a steady increase that is still under a 5% annual appreciation rate over that time period.  So while we are certainly outpacing the rest of the country on average, I’m not sure that warning signs of a bubble about to burst should be going off.

The weekend before last, Warren Buffett spoke at his company's annual meeting and the "Oracle of Omaha" asserted that the housing market is on stable footing. He said the likelihood of another crisis brought on by falling home prices is "very low." "I don't see a nationwide bubble in real estate right now at all. In Omaha and other parts of the country, people are not paying bubble prices for real estate." A leading real estate information firm agrees. They reported home prices were up 6.7% year-over-year in March and the firm forecasts that prices will come in 5.3% ahead, year-over-year, in March 2017.

I do think that sooner than later we will see some leveling and some of the “irrational exuberance” (to use a quote from Mr. Greenspan) will diminish.  And I do hope that homebuyers remember that homes are a commodity, subject to ebbs and flows in pricing.  We do ourselves a disservice when we start to think, like we did in 2004-2007, that real estate is isolated from drops in value.  It can and will happen at some point in the future.  But I believe, as Warren does, that we are not about to walk off of a cliff any time soon.

Median Home Prices for Nashville, TN (from Trulia)

The New Fannie Mae Home Ready Program is Awesome!

Fannie Mae has a new program out and it is a homerun!  Granted, it may not fit everyone, as there are potential income limits depending on where the property is located. But for those folks that fit within the income limit and are looking to put minimal down (program goes up to 97% loan to value), it could be perfect for them.
Here are the highlights:

• Pricing – when the credit score is 680+, there are no pricing bumps (so someone borrowing 97% with a 680 credit score could in effect get the same rate as someone with a 760 score putting 20% or more down).  Today the rate would be 3.625% for a 30 year fixed with no points, as an example.
• Mortgage insurance – the coverage for this product is 30 basis points lower than a typical 97% loan to value (for those with a 680+ credit score, the MI is cheaper than FHA on a monthly basis and has no up-front MI like FHA does).  The monthly mortgage insurance is cancelable when the proper loan to value has been reached after paying it for two years (so just like any other conventional loan) – unlike the MI for an FHA loan that is permanent.
• Down Payment – Only 3% is required and it can be a gift.  There is no minimum investment from the borrower required.
• Seller contributions are allowed for closing costs and prepaids.
• Income limits – depending on the location of the property, there will likely be income limits.  It is completely driven by the census tract of the property being purchased, so each property has to be looked up individually.  For properties falling within a designated census tract, there is no income limit (you’d be surprised – there are more in Nashville than you think, particularly in areas like the Nations that are up and coming). If the property is not in a designated census tract, the income limit is 80% AMI (average median income) which for most of our area will be $53,520 annually.
• Property must be a single family residence for the buyer to be eligible for 97% financing.
• The buyer does NOT have to be a first time homebuyer.  But they can’t own any other property at the time of closing.
• Condominiums follow standard Fannie guidelines for approval (so doesn’t have to be on FHA list for qualification).

Here is a good comparison for someone with a 720 credit score buying a home priced at $200,000 comparing FHA to Home Ready:

Down payment:  FHA - $7,000Home Ready - $6,000
Payment (P&I and MI):  FHA - $993.75Home Ready - $997.91
The loan amount is less on Home Ready versus FHA ($194,000 versus $196,377 due to FHA’s up-front MI premium) thus less to pay off when time to sell.  And if the buyer keeps the property long term, he/she has the opportunity to get out of the monthly MI and lower the payment (in this case by $113 per month).
Granted, FHA is still a great program and is a super option for our buyers – particularly with credit scores between 620 and 680 or when income exceeds the Home Ready limit.  But for those that fit the income limit (or house in designated census tract), have good credit and want an option with minimal down, Home Ready is definitely worth a look.

Now is Still a Great Time to Buy

Since 2012 I’ve been talking about the home affordability index and why buying a home now is a great option (prices of homes being lower, interest rates continuing in all-time low ranges, all combined with stable to rising income levels).  Granted with the increase we’ve seen in housing prices over the past 2-3 years, the affordability index is not as good as it once was.  But the lower interest rate environment is still giving us a great opportunity.  As a simple example, if a home can be purchased today at $200,000 with a 30 year fixed rate of 4%, it would provide a payment that is $271 lower per month versus buying that same home 2 years from now if the value of the home has increased to $216,000 (4% appreciation rate) and rates have increased to 5.5%.  I know you see stats like that all of the time.  But that is a pretty significant number – especially when the example given here is pretty conservative (I could easily see homes appreciating at a 4% clip over the next two years and rates could easily be at 5.5%, which is still very low, two years from now).  It’s almost the equivalent of adding a car payment to the mortgage when you think about it in relevant terms.

So I thought it would be great to provide a couple of really good visuals that you are able to share with clients who are debating buying a home right now.  The first chart shows the average interest rate per year for the past 30 years and the second chart shows the appreciation rate by state from September 2014 through September 2015.  It’s very eye opening when seen in this manner.

Click Here for the 30 Year FHLMC Rates On 30-Year Fixed-Rate Mortgage Chart

Click Here for the Housing Prices Chart

This will Likely be the Week

 has been 8 years since the Fed lowered the Fed Fund Rate to .25%, thus dropping the Prime Rate to 3.25% (December 16th, 2008 to be exact).  It hasn’t moved from that point since that time eight years ago.  The Fed meets this week (ironically on December 16th again) and I believe for the first time in a long time there will be a change in the Fed Fund rate.  The economy added 211,000 Nonfarm Payrolls in November, handily beating expectations. Plus, October's number was revised upward by 27,000 payrolls. This confirmation that October was a solid month for jobs is significant, because monthly employment data is volatile and can get hit with big downward revisions.  The Unemployment Rate held at 5.0%, the labor force grew by 273,000, and Hourly Earnings, up 0.2% in November, are now up 2.3% over a year ago. Home builder payrolls jumped by 32,000, their biggest monthly gain since 2005. Investors felt this data indicates the economic recovery is robust enough to withstand a rate hike from the Fed in December.  My guess is that we will see the rate move up .25%.
So what does that mean for mortgage rates?  In my opinion, not a lot – at least not immediately.  For the most part, I believe the long term markets, such as the FNMA mortgage bonds, which mortgage rates follow in step, have already built into their data the fact that this is going to occur.  Over the longer term, I still don’t see rates moving much above 5% (on the 30 year fixed), particularly in 2016.  Keep in mind that the Fed Fund Rate, that impacts the Prime Rate, is a short term rate and the primary focus of raising the short term rates is to stave off inflation – which is the real threat to longer term rates.  If you go back to the last time the Fed Fund Rate was in an upward trending environment, the Fed increased the rate over 4% between 2004 and 2006.  In that time period, mortgage rates increased less than 1 full percent.  Granted each scenario and time period is different, so there is always a question mark.  But the best way to predict the future, particularly with markets, is to look at the past.  Assuming we stay in line with what occurred before, we should see rates staying below 5% out into the near future (I’m thinking through 2016 at least).
The reality is that if the Fed is finally confident enough to start increasing short term rates, it is a good sign that our economy is finally on its feet again and that there is belief that it can once again stand on its own without all of the stimulus from the Fed.  We’ve enjoyed a great run here in middle Tennessee.  So let’s hope they are right.

Sales Numbers

On a national level, we hear reports that tried to make October's 3.4% drop in Existing Home Sales prove that the housing recovery has firmly changed direction. October may have been down, but the 5.36 million unit annual rate puts Existing Homes Sales up 3.9% over a year ago. Housing data can be volatile from month to month and many observers expect sales growth to return next month. I think that the supply shortage is the bigger issue right now, as total inventory was down 2.3% at the end of October. But the median price was up 5.8% over a year ago, the 44th straight month of price gains, which should draw more sellers into the market.
At the local level, there were 3,030 home closings reported for the month of October, according to figures provided by the Greater Nashville Association of REALTORS. This figure is up .5 percent from the 3,015 closings reported for the same period last year. Year-to-date closings for the Greater Nashville area have increased 11.9 percent. And to further my point about supply, inventory is down almost 15% compared to last October here in the mid-state.
We did get nice headline numbers on the new homes front nationally. New single-family homes sales shot up 10.7% in October to a 495,000 annual rate, up 4.9% versus a year ago. This performance was a strong rebound from the drop in September, one more example of monthly volatility. The important thing again is the trend in sales, which has been up, and many analysts expect it to stay there in the coming year. Other data continued to show housing is an appreciating investment. The FHFA index of homes financed with conforming mortgages was up 0.8% in September and up 6.1% over a year ago. The Case-Shiller home price index was also up 0.2% in September and up 4.9% from the year before.
An interesting tidbit on those seeking a mortgage: All-cash sales of existing homes are down 7.7% versus a year ago, while sales with a mortgage are up 8.1%, so a good sign for home buyers seeking financing.

TRID is Here

This will be the last week of files getting into process with the old GFE, TIL and HUD-1.  Starting next Monday we will be under the new TRID guidelines where the GFE and TIL will be replaced by the Loan Estimate and the HUD-1 will be replaced by the Closing Disclosure.  I’m not going to rehash what has already been expounded upon over and over the past 6-9 months.  But here is my thought in a nutshell:  DON’T FREAK OUT.  Sure the 3 day deal is going to be a challenge and there will be some delays along the way.  But the CFPB finally did something right as it relates to disclosure (what the documents cover, the simplicity of understanding them, matching initial paperwork with final paperwork, etc….).  So we take the good with the bad and we move on.

Speaking of moving on, thought I’d give you some suggestions related to the things you can do when advising your clients when they need a mortgage (most of these apply specifically to Realtors, but are worthy recommendations to any client you may be advising from a financial standpoint):

Top 5 things that you can do to help your lender with your client’s mortgage process

1.  Encourage your clients to be on a 48 hour alert – any time the lender asks for documentation or sends disclosure forms to sign, return within 48 hours (24 if possible, but never more than 48 hours).  Lenders will not ask for documents or disclosures unless they need it.  Prep your clients to be ready to respond efficiently.
2. Encourage your clients to get their homeowner’s insurance lined up as soon as the home is under contract (and on FHA transactions, get termite inspection done and letter to lender within 2 weeks of contract acceptance).
3. Only work with title companies that are awesome - agree to have the title work done within 1 week of home being under contract and are all over getting closing figures (used to be HUD-1’s) back to the lender quickly after receiving instructions from the lender.
4. Provide complete contract (including all addendums – like FHA/VA) to lender the moment all signatures are obtained.  TN Property Disclosure or exemption is required on all loan transactions.  Include a copy of the earnest money check.
5. Set the actual closing date and time with the attorney within a week of contract acceptance and basically get everyone involved (in your specific transaction as well as any that might be a part of yours from a “domino effect”)

Why TRID is Really a Good Thing

Let me say first that I get the challenges that we are going to face once the new rules go into place.  Getting the HUD (or I guess to use updated terminology, the Closing Disclosure) into the buyer’s hands three days before closing is going to require all of us to really step up our games.  But why is that a bad thing?  Shouldn’t we always be looking for ways to get better – particularly in the way we serve our customers?  And isn’t giving a buyer more time to review the numbers to the biggest financial investment that he or she is going to make, a good thing?  Personally, I probably would have set the number at 1 or maybe even 2 days that the closing disclosure should be delivered prior to closing, as 3 days is probably a bit excessive.  But in principal, I agree with this direction and think it is a good thing for our borrowing clients.
And speaking of what is good for the customer, I personally believe that the CFPB really got this one right from a disclosure creation standpoint.  We all know that when the government gets involved, specifically when their intent is to make things easier for the borrowing public, it normally goes in the opposite direction.  We need to look no farther than their first attempt at making a mortgage lender’s Good Faith Estimate better for the borrowers.  It even confused me when it was originally rolled out.  But this time, I think the powers that be have hit a home run.  The Loan Estimate (which now replaces the Good Faith Estimate and Truth in Lending disclosures) is much easier to follow and better explains to a buyer what their costs will be and does so in a format that is much easier to understand.  And the new closing disclosure is equally impressive from an ease of understanding standpoint.  And best of all, it mirrors the Loan Estimate.  So now instead of having a HUD-1, which clearly spells out the costs, but is in a completely different format than anything the buyer has seen to that point, the new Closing Disclosure follows the same format as the Loan Estimate.  So the client is not seeing something for the first time at the closing table, and trying to figure out how it matches what they’ve been provided.  Below are examples so you can see exactly what I'm talking about.

Personally, I’m on board with these new changes.  I think it is great for our customers and that it will make us better at what we do.  Those that can’t step up to the challenge just won’t get the business.

TRID Closing Disclosure (1)

TRID Loan Estimate (1)

D.A.N.G.E.R Report

D.A.N.G.E.R. Report

(Definitive Analysis of Negative Game changers Emerging in Real estate)

The GNAR released this report, that was prepared for NAR by the Swanepoel/T3 Group, a couple of weeks ago.  It’s 166 pages long, so I don’t suspect that you took time to read it – and I don’t expect that you will do that now either.  But I thought it would be good to provide you a summary of what the report says, or at least hit what I perceive as the high-lights that impact us directly as agents.  The full report is available by clicking the link below.  The purpose of the report, which was done by interviewing many of the top industry minds, is to give us a description of what are to be the challenges (or “threats” to use the report’s term) that we’ll face in real estate in the years to come.  It addresses threats to Agents, Brokers, Associations, and the MLS.  There are 10 listed for agents directly.  I’m going to high-light what I think are the top five and some suggestions to counter the threats.

1. Masses of Marginal Agents Destroy Reputation – the real estate industry is saddled with a large number of part-time, untrained, unethical, and/or incompetent agents.  This knowledge gap threatens the credibility of the industry.  This one hits close to home for me because I’ve seen it in the mortgage industry as well.  All it takes is the notion that there is an easy buck to be made doing something and everyone wants to do it.  As a group, we need to make it harder for individuals to enter our profession.  That alone would cut down on the people entering just to make “easy money”.  The other thing we can all do as individuals is differentiate ourselves with better knowledge and service platforms.  The better I am at what I do, the less likely I am to lose business to those that are marginal – even if the marginal competitor happens to be friends with the client.
2. Commissions Spiraling Downward – a variety of powerful forces exert significant downward pressure on real estate commissions.  Discount brokers are becoming more and more commonplace.  With the availability of information that is now at the consumer’s disposal, we have to do more today to earn our commissions than ever in the past.  If we don’t start thinking outside of the box, and creating value to provide our clients, then what we give them will become worth less, and we don’t deserve the commissions we are paid.
3. The Decline in the Relevancy of Agents – the role, function, and perceived value of agents deteriorates as agents fail to properly assess and respond to changing consumer demands and expectations.  Whether it is dealing with new technology or with what the different generations want from a home, it is our job to be relevant and needed.  We will only become obsolete if we let ourselves become so.  What is your value proposition to your client?  Are you trying to do business today like you did 10 years ago?  Staying relative is a conscious choice and one we must all make if we want to see our businesses progress.
4. Commissions Concentrate Into Fewer Hands – a very small group of very efficient and effective agents discover the winning formula and secure a disproportionate market share.  Everyone is familiar with the 80/20 Rule, where 20% of the people do 80% of the business.  To me, this is a concept that has been around forever and will continue to be so.  I think the bigger question here is simply:  What are we doing individually to be in the 20% that is closing 80% of the deals?  Emulate those that are already there.  No need to reinvent the wheel – learn from those that are where you want to be.
5. The Agent is Removed From the Transaction – a tech company cracks the code and connects enough of the dots to conduct real estate transactions without the need of an agent.  FISBO’s have always been a part of our business.  There are always going to be those that think that selling on their own is a more cost efficient manner of selling.  And while we might think that the Millennial Generation, who are more technologically advanced than any before (and more than most real estate agents), would make this number grow, I would argue, as the report does to a degree, that they are in more need of help, primarily because of their financial situation, than any generation before.  They need guidance more than anyone.  We just need to understand that and create a service platform for them that meets their need.  Again, it is about being relevant to the client.

The other threats to agents listed in the report were: Agent Teams Threaten the Survival of Brokerages, The Agent-centric Era Ends, The IRS Forces Exodus of Independent Contractors, The Housing Finance System Fails, and The Commoditization of Residential Real Estate.  These are all definite threats to our individual businesses going forward.  But to a large degree, they are things that are out of our individual control.  Not that we can’t make an impact – like voting in an election.  But the reality is that by myself, I can’t keep the housing finance system from failing nor can I keep an institutional investor from coming into Nashville and buying up 100+ homes to rent.  But I can all focus on how well I am doing my job – Are we up to date technologically?  Do we understand the latest rule changes that impact our clients?  Are we communicating well?  Do we give exceed our client’s expectations and do we even know what they are?  And most importantly – Am I doing all of these things better than my competition?  When we focus on getting better ourselves, the rest takes care of itself.

https://s3.amazonaws.com/dangerreport.com/Danger+Report+-+Item%23E135-107.pdf