Tag: depreciated

Bob Schwab: Is the real estate market finally going back to normal?

Our in-house lender Bob Schwab recently sent an article about the housing market and its ups-and-downs over the last decade-plus. He thinks it’s about time that the real estate market goes back to normal.  Here is what is says, with my take at the end!
Image result for real estate market
The housing market has been anything but normal for the last eleven years. In a normal real estate market, home prices appreciate 3.7% annually. Below, however, are the price swings since 2007 according to the latest Home Price Expectation Survey:
After the bubble burst in June 2007, values depreciated 6.1% annually until February 2012. From March 2012 to today, the market has been recovering with values appreciating 6.2% annually. These wild swings in values were caused by abnormal ratios between the available supply of inventory and buyer demand in the market. In a normal market, there would be a 6-month supply of housing inventory.
When the market hit its peak in 2007, homeowners and builders were trying to take advantage of a market that was fueled by an“irrational exuberance.” Inventory levels grew to 7+ months. In this simplified view, with that many homes available for sale, there weren’t enough buyers to satisfy the number of homeowners/builders trying to sell, so prices began to fall.
Then, foreclosures came to market. We eventually hit 11 months inventory which caused prices to crash until early 2012. By that time, inventory levels had fallen to 6.2 months and the market began its recovery. Over the last five years, inventory levels have remained well below the 6-month supply needed for prices to continue to level off. As a result, home prices have increased over that time at percentages well above the appreciation levels seen in a more normal market.
That was the past. What about the future?
We currently have about 4.5-months inventory. This means prices should continue to appreciate at above-normal levels which most experts believe will happen for the next year. However, two things have just occurred that are pointing to the fact that we may be returning to a more normal market.
Listing Supply is Increasing
Both existing and new construction inventory is on the rise. The latest Existing Home Sales Report from theNational Association of Realtors revealed that inventory has increased over the last two months after thirty-seven consecutive months of declining inventory. At the same time, building permits are also increasing which means more new construction is about to come to market.
Image result for real estate
Buyer Demand is Softening
Ivy Zelman, who is widely respected as an industry expert, reported in her latest ‘Z’ Report: “While we continue to expect a resumption of growth in resale transactions on the back of easing inventory in 2019 and 2020, our real-time view into the market through ourReal Estate Broker Survey does suggest that buyers have grown more discerning of late and a level of “pause” has taken hold in many large housing markets. Indicative of this, our broker contacts rated buyer demand at 69 on a 0- 100 scale, still above average but down from 74 last year and representing the largest year-over-year decline in the two-year history of our survey.”
With supply increasing and demand waning, we may soon be back to a more normal real estate market. We will no longer be in a buyers’ market (like 2007-February 2012) or a sellers’ market (like March 2012- Today). Prices won’t appreciate at the levels we’ve seen recently, nor will they depreciate. It will be a balanced market where prices remain steady, where buyers will be better able to afford a home, and where sellers will more easily be able to move-up or move-down to a home that better suits their current lifestyles.
Bottom Line
Returning to a normal market is a good thing. However, after the zaniness of the last eleven years, it might feel strange. If you are going 85 miles per hour on a road with a 60 MPH speed limit and you see a police car ahead, you’re going to slow down quickly. But, after going 85 MPH, 60 MPH will feel like you’re crawling. It is the normal speed limit, yet, it will feel strange. That’s what is about to happen in real estate. The housing market is not falling apart. We are just returning to a more normal market which, in the long run, will be much healthier for you whether you are a buyer or a seller.
Note:  This is a nationwide overview, but there are always micro areas that buck the trend.

Eliminating PMI (private mortgage insurance)

According to my friend Jay Vorhees at JVM Lending, there are three options for eliminating the private mortgage insurance (PMI) obligation associated with a conventional loan plan. We go over his three options below, with a little input from yours truly:

Image result for refinancing

Option #1: Refinancing

If your property appreciates to the point where we can garner a new appraisal to support a value high enough to reduce your loan-to-value (LTV) ratio to 80 percent or less, you can refinance into a new loan with no PMI. This assumes, of course, that rates remain favorable. Keep in mind that most appraisers will correlate to the purchase price for the first six months, making it wise to wait at least this long to start the refinance process.

Option #2: Paying down

You can eliminate PMI by paying your loan down if you notify your servicer with your request, have a good payment history, and are willing to prove to the servicer that your property has not depreciated with an appraisal in some cases. This can help you pay down your loan to an amount equal to 80 percent of the original purchase price.

Option #3: Proving home

If your loan is owned or backed by Fannie Mae or Freddie Mac, you can eliminate PMI by notifying your servicer with your request, as long as your loan has seasoned for two years with a good payment history. You’d also have to provide a current appraisal with high enough value to support a 75 percent LTV. If your loan is more than five years old, your LTV can be 80 percent. If you prove your home has appreciated to the point where the LTV is at 75 percent or less, you can eliminate PMI this way.

As rates increase, the option of refinancing becomes less feasible. There are currently loans called 80/10/10 or 80/15/5 where you take a HELOC (home equity line of credit). The buyer puts down 10 or 15 percent and the HELOC covers the balance and there is no PMI. The only issue is the HELOC has higher rates that tend to move with the market. They work well if one gets abonus or is expecting a pay increase and the HELOC can be paid off quickly. Always speak to your lender about the various options. I know from experience if you work with JVM, you are in good hands!