15 Home-Buying Myths, Busted

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I stumbled upon this Zillow article a little while back and thought it would make for an interesting rundown of things I sometimes see clients struggling with. Some of these things are simply not true. Others are exaggerated. Either way, buyers and sellers need to unlearn certain things about the real estate process before engaging in it. Read on for more.

MYTH: You need a 20% down payment. This hasn’t been required for decades! In fact, you can put as little as 3% down, depending on the loan or the location of the home.

MYTH: Your pre-approval rate is the rate you’ll get when you close. Interest rates adjust every day. So, what you see at pre-approval is based on current market conditions and other factors, and it can’t be “locked in” until you sign a purchase contract with the seller.

MYTH: You should wait to buy a home until prices are lower. Buying a home after prices go up can be risky, but so can waiting. In popular neighborhoods (like many in the Bay Area), it’s often better to go for it and not wait.

MYTH: Buying a home is always cheaper and a better investment than renting. Renting a home can be cheaper than buying in many places! The benefit to owning a home, of course, is that it will appreciate over time and build generational wealth.

MYTH: You should find a home before you apply for a home loan. It’s smart to get pre-qualified for a loan. It will give you more information to shop with.

MYTH: Buying a fixer-upper will save you money. Sure, maybe on the sticker price. But fixer-uppers need a lot more than just a fresh coat of paint. Generally, there are major issues that need to be tackled, not all of which are visible up front.

MYTH: You have to get your loan from the lender who pre-approves you. No, you have no obligation to stay with the lender you start with. Shop competitive offers and find the best fit before you go under contract.

MYTH: You shouldn’t buy until you can afford your ‘forever’ home. Selling a home can be costly, but if you wait to buy until you can afford that dream home rather than invest in a starter home, you may never buy at all.

MYTH: A 30-year, fixed-rate mortgage is always the best choice. Adjustable-rate mortgages (ARMs) can save thousands of dollars of interest over the life of the loan. That’s one example. There are other options!

MYTH: You can’t buy a home if you have student loans. Actually, those loans can hurt OR help your chances of buying a home – it can boost your credit scores but it can also raise your debt-to-income ratio for approvals. Consider every angle.

MYTH: You have to pay the seller’s asking price to buy a home. Definitely not. The seller’s asking price is simply what he or she hopes you’ll pay. Offers and counter-offers will bring you to a point of agreement in the end.

MYTH: You need excellent credit to buy a home. It’s good to have good credit, but there are great home loans and rates available for people with less-than-perfect credit too.

MYTH: Fall and winter are bad times to buy a home. It can actually work to your advantage to buy a home in seasons when most shoppers think it’s “bad.”

MYTH: You cannot buy a home if you are self-employed. The rules for getting a mortgage may be different for those who receive a W-2 from their employers, versus a 1099-NEC for being a gig or freelance worker. But it won’t stop you from buying!

MYTH: All lenders are the same when buying a home. You don’t just shop houses and rates when buying a home. There are also significant differences among lenders and you should find the best fit for you!

Happy House hunting an buying a home you love. We are currently seeing many price reductions, inventory is still low, but rates have come down. Thus if you have been on the fence, now may be a great time to buy with hopefully further rate drops and you can refi at that point. When I bought the home I am currently in, the rate was 8.5%. I ended up refinancing more than 8 times and currently have a 2.75% rate. Call me if you would like to chat about buying a home.

The Big Question – Rates?

My friends at JVM Lending wrote an interesting blog recently, and I wanted to share a summary, plus my input on the topic: “why the Fed can probably never raise interest rates.” Read on:

The Fed Funds Rate is a rate that banks charge each other to borrow “reserves” overnight, which is currently at 0-0.25%. Paul Volcker was a Fed Chairman in the late 1970s and early 1980s who sent the U.S. into a massive recession by raising the Fed Funds Rate to 20%.

The result of Volcker’s actions were a horrible recession, a crashed economy, and 11% unemployment. To recover, it took enormous political will – the likes of which we are in short supply of nowadays (for many reasons).

Last week, the Fed talked about the possibility of raising rates almost two years from now. Stocks tanked and interest rates shot up. Markets reacted negatively because even the mere mention of higher rates down the road causes a reaction. Investors know that our economy can’t afford higher rates.

Here’s the thing: the Fed likely can’t afford to raise the rates. Our total federal debt is about $28 trillion and growing, while State and Municipal debt is approaching $4 trillion. The interest paid by the federal government for its debt this year will be just under $400 billion, with government debt rates around 2%.

So, if rates returned to even 1990s levels (6-8%), interest owed would triple or quadruple and quickly bankrupt the government. Even more concerning, potentially, is corporate debt. There is $11 trillion in corporate debt in the U.S. and many of those corporations could not begin to service their debt if rates went up. They depend entirely upon cheap capital and bailouts.

In terms of real estate, existing mortgages do not depend on low rates. They are long-term and fixed. However, housing itself represents a huge chunk (almost 18%) of the economy, and that sector is now dependent on super-low rates, too. Basically, the entire economy is addicted to low rates and the Fed knows it.

Several pundits expect the Fed to find excuses as to why 2023 is not a good time to raise rates and kick the can down the road yet again. So, we will either see a continuation of a Japan-like situation for a very long time with continued low rates, slow growth, and massive government intervention…or inflation will set in and the Fed will lose control of rates, as investors simply demand higher yields.

Either way, I would not expect the Fed to actually raise rates itself in 2023.

KRISTIN’S TAKE: Nobody has a crystal ball, and if rates do start to edge up, it would take some time for them to get into the 5%+ range. We are also seeing a bit of a reprieve on the buying frenzy. More houses are having price reductions, not as many multiple offers, etc. I am just not sure if it is because everyone hit vacation mode, but if you’re a buyer who got priced out earlier this year, it might be time to start looking again.

[JVM Lending Blog] 4% Rates by June?

The following blog is from my friend Jay Vorhees at JVM Lending. I’ve contributed some of my own insight at the very bottom. Enjoy!

I am always hesitant to predict rate-increases because they so often do not come about. But, because rates have increased over 1/2% over the last few months and because Barry Habib of MBS Highway predicted that increase with amazing accuracy, I listen when Habib predicts additional increases. And that is what he did in his recent commentary and in an interview with economist, David Rosenberg.

BAD NEWS = INFLATION

How Interest Rates Affect Property Value - The Paratto Team

Credit: The Paratto Team

Both Habib and Rosenberg believe inflation numbers will spike up over the next few months. They focus on Consumer Price Index (CPI) numbers, and point out that the CPI is a moving average of the last twelve months of inflation reports.

Hence, we won’t see inflation spike until April, May and June when the price increases we have seen in recent months start to get factored into the average. CPI numbers were in fact released today, showing a 1.7% increase over the last 12 months.

Habib and Rosenberg believe, however, that CPI numbers will be 1% to 2% higher by June, and that will no doubt spook the bond markets and push rates significantly higher. This is because no bond investor wants to be stuck with a 1.6% yield if inflation rates are at 3%.

GOOD NEWS = INFLATION IS SHORT-LIVED

Habib and Rosenberg also both believe that the inflation we will see will be short-lived. This is because they both think the price increases we are seeing now are primarily a result of supply chains being broken because of COVID.

They remind that the same vaccines and potential herd immunity that are freeing up spending and potentially spurring inflation are also the same vaccines that are also opening up supply chains.

They think the benefits of opened supply chains will outweigh upward pressures on prices brought on by increased spending, and we will see tamer inflation numbers later in the year. Rosenberg also points out that all of the government borrowing taking place now is also deflationary.

NO MELTDOWN; PRAGMATIC; ANYTHING COULD HAPPEN

30-year mortgage rates hit highest since July, refis cool | Fox Business

Credit: Fox Business

What I most enjoy about old salts like Mr. Rosenberg is how pragmatic and relaxed they are. The blogosphere is filled with “doom and gloomers” who insist “the end is near” because of our government’s unprecedented and massive monetary and fiscal intervention.

Rosenberg, however, believes those fears are overstated, pointing out how the Japanese central bank and government have been far more activist over the last twenty years without suffering any major consequences.

Rosenberg is finally quick to point out that there is still no certainty with any prediction in today’s volatile world, and he is particularly adamant about not trying to time predictions.

CONCLUSION

Rates will very likely continue to rise over the next few months b/c of inflation concerns. They could also fall again, but there is no guarantee.

Kristin’s two cents:

I also listened to a Barry Habib Zoom call in early February. One of the other things he noted is as debt increases, interest rates decline. What stood out is the current U.S. debt is around $28 trillion. If you decreased it by $1 million a day, it would take about 2,700 years to fully pay it off. The current administration is currently looking a more debt with their infrastructure bill. The good news is if rates go back down and you are just getting into a loan, you can always refinance down the road.

One last thought: The Wall Street Journal just reported that there are more real estate agents in the United States than houses on the market, but that will be a blog for another day!

Fed Rate Cuts Don’t Mean Mortgage Rate Cuts!

NOTE: We will be moving to one post a week (on Wednesday’s) until further notice since we are under lockdown here in Contra Costa County and I can’t go out and explore!

My friend Jay Vorhees at JVM Lending has an interesting take on the latest interest rate cuts by the Fed. Even since he’s written this, the Fed has made yet another cut (because of the government’s response to coronavirus killing the stock market in addition to the Saudi’s dropping the barrel prices), so I’ll try my best to tie the two together at the bottom and make sense of all this:

We were asked a variance of this question over and over yesterday: “I heard that the Fed cut the rate by 1/2 percent; can I lower my mortgage rate by 1/2 percent?” We would respond by explaining that the “Fed Funds Rate” often does not correlate to mortgage rates for a variety of reasons. I touch on this often because the confusion surfaces every time the Fed cuts rates.

When the Fed makes a rate cut, it is to the short-term “Fed Funds Rate,” which does not always impact long-term mortgage rates in the way that most consumers might expect. I blogged about this as recently as August, but here is a brief summary of why mortgage rates not only don’t always correlate to Fed rate cuts, but often go up after the Fed cuts rates:

The “markets” anticipated the rate cut and already adjusted for it. Traders and investors analyze polls, data, and Fed comments to very effectively anticipate changes and the Fed Funds Rate and the markets often adjust long before the rate cuts take place. As a result, very little happens when the Fed Funds Rate is actually cut (or increased).

Short-term rates don’t always affect long-term rates. The Fed is only reducing the Fed Funds Rate, or the rate banks charge each other for overnight loans. This is a very short-term rate and short-term rates don’t always affect long-term (mortgage) rates.

Many factors influence long-term rates besides the Fed, and below are just a few. These factors include economic data; inflation signals; geopolitical crises; and the demand for mortgage bonds. SO WHAT DID RATES DO AFTER THE FED CUT RATES? Rates were about the same after the rate cut as they were the day before.

One day later – in a shocking and surprise weekend move, the Fed cut the Fed Funds Rate to 0% on Monday. See above as to why it might not move mortgage rates. But, the Fed also committed to $500 billion of treasury bond purchases and $200 billion of mortgage-backed security purchases.

This renewed “Quantitative Easing” did push rates down slightly but that didn’t last, as the market is all over the place yesterday and probably today and extremely volatile.

MORTGAGE RATES BARELY MOVE; CAPACITY ISSUES

Despite the massive Fed intervention, mortgage rates barely moved. The reason is capacity.

There are $11 trillion in outstanding mortgages – give or take. The industry is capable of funding about $2 to $3 trillion per year – at most.

When borrowers with $5 trillion worth of mortgages want to refinance over the course of a few months, the industry simply can’t handle the volume.

And – as a result, rates remain on the higher side and are still over 1/2 a percent higher than where they were 10 days ago. The Feds’ rate cut is actually getting a lot of criticism because it will do so little to stimulate economic activity (travel, major events, supply chain issues) offset by the coronavirus concerns. It also leaves the Fed nowhere to go if things get worse. We are in uncharted waters; welcome to the new normal. At the end of the day when this settles, rates will still be low and we may see a listing and buying spree due to the sheltering in place.

Stay safe and healthy my friends!

Home Sales Fall Despite Falling Rates?

Another great blog from Jay Vorhees at JVM Lending! He asks, with home sales falling despite the rates also falling, whether the end is finally here? “We can only hope,” he quips. Read on for more from Jay, and a bit of insight from yours truly at the end!

Tulip Mania

In the 1630s, the Dutch experienced one of the world’s first major financial bubbles – Tulip Mania. They were all convinced that the price of the exotic (at the time) tulip bulbs would increase forever, not taking into account how easy it was to reproduce them and how the ridiculously high prices were clearly not sustainable.

Everyone (even common laborers) was borrowing money to buy as many tulips as they could, trying to get in on the action. At one point, a single bulb cost as much as some of Amsterdam’s most expensive mansions at the time. Then, it all collapsed. There have been many bubbles since, including the 1929 stock market crash, the dotcom crash of the late 1990s, and most recently – the mortgage meltdown of 2008. All those bubbles were partially driven by easy credit, so every time the Fed lowers rates, I am terrified that it is fostering a new bubble.

Home sales fall in June – despite lower rates, higher wages, and lower unemployment

Image result for housing market slowdown

So, that is why I was actually marginally encouraged to see this recent headline and article in the WSJ: U.S. Home Sales Stumble (in June). “Home sales slumped in June as home prices for major West Coast cities decline for the first time since 2012, ending the spring selling season with a thud.”

This is amazing to me because rates were about 1% lower than where they were the previous June, and everyone thinks rates drive housing prices. But, they clearly don’t. Home sales fell in the face of rising wages and decreasing unemployment too, leaving economists perplexed, as those factors are also supposed to drive prices higher.

Sales are probably falling because borrowers are hitting their affordability limit, and because buyers are acting prudently (unlike prior to 2008). While fewer sales overall are never a good thing, it is a good thing to see a potential bubble start to deflate instead of popping – so YAY! (sort of)

I might add that a huge brokerage we work with in Texas is currently projecting a downturn in the near future, telling agents that they need to trim expenses by 20%. So, it is not just the West Coast experiencing a slowdown. And finally, despite the apparent slowdown, numerous agents we work with are still experiencing record years simply because of their relentless marketing. We too have almost tripled our purchase volume year over year by improving our value props and increasing our marketing efforts.

Takeaways from this blog: This slowdown might be averting another bubble-pop! The Fed can’t stimulate everything with low rates. They might call Japan and ask how their low-rate experiment has gone, as 20 years of near-zero rates have not revived Japan’s economy at all. No matter how soft markets get, the overall market remains huge and business can always be found with stellar value props and very aggressive marketing.

Kristin’s insight: Some houses still have multiple offers, usually ones that are updated, and are priced slightly below market or in a highly desired neighborhood. The rest are sitting longer on the market and may see a price reduction or two as buyers become much more discriminant.

Historical rates and the current market

The Kiplinger Letter is the most widely read business forecasting periodical in the world, and lender Bob Schwab sent a recent one that gave me a lot of interesting information. It says:

“We don’t think a recession is imminent, despite a recent warning sign from the bond market. But that doesn’t mean the economy is fine. A substantial slowdown is in the works. “

The letter also hints at the recent slowdown in the European economy, which we touched on in a recent blog. I recently mentioned the inverse yield curve and the Kiplinger Letter noted the rate on short term bills briefly topped long-term yields last month, a situation the presaged recessions in recent decades, though long term rates soon rose again. Bob also mentioned that it was the 1-year treasury note that had a higher yield than the 5-year. It is when the 1-year and 10-year inverse that has led to a recession in the past.

Suddenly, the U.S. doesn’t appear immune to a recession.

Here are the reasons for guarded optimism, as Kiplinger see them…facts about the underlying strength of the U.S. economy that ought not to be overlooked:

The jobless rate is low. Inflation is modest.
The housing market is starting to rebound. (I feel our area is rebounding, just not as robust as a year ago)
Consumers continue to feel fairly confident, though their mood varies as stock prices rise or fall.
A trade deal with China still appears likely to happen later this spring, which would give a badly needed boost to global trade.
The stock market isn’t pricing in a recession yet. Nor are corporate bonds, whose yields relative to safe Treasuries indicate investors aren’t afraid of defaults.

It is also interesting to look at in the context of historical rates, which for buyers is a key motivator to whether they will buy or not. At the end of the day, we still look great, as shown below:

Fed halts rate increases (JVM Lending)

Jay Vorhees at JVM Lending shared an interesting blog recently about the Fed halting rate increases. We’ve posted about the Fed and how it affects the housing market many times in the past, so I wanted to break it down for you again. First, Jay’s blog:

Yesterday, the Fed announced that there will be no more rate hikes in 2019. And many people in the mortgage and real estate industries cheered. But a lot of economists and Fed-watchers are more worried than ever.

Here is just one of many articles (from the WSJ) I read today illuminating serious concerns. The Fed has the toughest job in the world. It needs to build up enough ammo to fight the next recession without actually causing the next recession.

The problem for the Fed is that it needs to lower rates 4-5% to effectively help the economy when a recession hits. But, the Fed Funds rate is only 2.5% today, and if the Fed raises rates any more, they could cause a recession.

So, that leaves more Quantitative Easing as a likely option when the next recession hits. But that too may be less effective because the Fed still holds almost $4 trillion in MBS and Treasuries, down a little from, but still close to, its peak holdings of $4.5 trillion.

So, what does all this mean for those of us in the real estate and mortgage industries? It means the sun will shine a little brighter this year for all of us. But, the more the Fed artificially induces bright sunshine now, the longer the sun will be behind a cloud in the future.

So, like the Portuguese biscuit maker who just keeps making buscuits no matter what the economy does, we should all do the same – as fast as possible. Because our current economically-sunny weather won’t last, and we need to be ready for the cloudy weather that is certain to come and that will likely now last even longer.

Okay, that’s a lot to take in, right? Here is my takeaway: cash is king and save your money to buy when the market dips. Europe is already in a slowdown, we are seeing the tech stocks take a hit, and this past week we now have an inverse yield curve, which in the past indicated a recession in the next year or so. Who knows what will happen (nobody has a crystal ball, but you can save)?

How is the housing market changing?

According to a Zillow Senior Economist, the housing market is changing: “The number of homes on the market is hesitantly inching higher — now approaching the highest level in a year and a half. The first quarter of 2019 is shaping up to be more competitive than the lull we saw as 2018 come to a close.”

I have some thoughts about this! We are seeing the market pick up locally, but I am still seeing price reductions and then some that surprise me. Overall, homes priced right and in turn-key condition will always fare well over the competition.

The number of homes for sale has increased in four of the last five months after years of decreases, but that doesn’t mean there’s suddenly a huge amount of houses available. Don’t get fooled into thinking there is a hot, new market while you’re buying.

Further, mortgage rates are trending downward over the last year, according to Freddie Mac’s Primary Mortgage Market Survey (Feb. 14 week). They cite a “combination of cooling inflation and slower global economic growth” for this drop.

My take on this is that we are truly operating in a global economy and the softening of Europe with their various issues has had an impact. The Fed has stated they now have the least amount of control over mortgage rates than in their entire history. I have no crystal ball on rates, so enjoy them while they stay low. That may be why we are having an uptick since the winter of 2018.

Why borrowers should consider a 30-year mortgage

Jay Vorhees at JVM Lending has written an excellent blog about borrowers and their understanding of liquidity, and why borrowers should consider the lower 30-year mortgage payment. Besides the flexibility it offers, it allows a sort of cushion for any borrowers who may find themselves in personal trouble, and is also usually a good long-term investment. Read on below to get the full picture, with two cents from me – can you say liquidity:

Borrowers often underestimate the importance of liquidity. Especially when times are good. When rates are relatively low (under 8%), we always recommend using financing (obtaining a mortgage) to buy real estate, even if borrowers have ample cash. Similarly, we usually advise borrowers who want lower 15-year rates to take a 30-year mortgage. Even though borrowers can afford the higher 15-year mortgage payment, the lower 30-year mortgage payment offers them more flexibility. There are several reasons why borrowers should value liquidity more:

1. Job Loss, Major Illness, Injury, Legal Troubles, Recessions. People often forget how quickly fortunes can turn (especially those of us in sales), and how important cash is when income dries up. This is particularly the case when the economy turns and financial instruments and hard assets drop in value and become difficult to sell. An abundance of cash during unexpected hard times often means the difference between bankruptcy and muddling through.

2. Ability to Buy Distressed Assets. When the economy turns and asset prices tank, there are often tremendous bargains to be had for anyone with even a little cash. After the mortgage meltdown, for example, one of our clients purchased eight rental properties for around $100,000 each. He was out of pocket less than $250,000 for all of those purchases, and all of the properties cash-flowed from the start. In addition, they are all worth close to $300,000 now. I watched many other clients do the same thing in the stock market after both the dotcom crash and the 2008 meltdown.

3. Investment Returns Exceed After Tax Cost of Mortgage. This does not apply to everyone of course, but many borrowers can often invest money that they do not put into their home and earn a return that exceeds the cost of their mortgage, especially after tax benefits are taken into account. Example: Borrowers A and B both have $250,000. “A” puts down 50% on a $500,000 house; “B” puts down 20% and invests the $150,000 he saves. In the long run, Borrower B will have a much higher net worth and more liquidity along the way if his investment yield exceeds his rate by 2% or more (not difficult over the long term).

Interesting, right? I saw this first hand in the down turn, people with cash bought investment properties. They are usually patient and don’t get caught up in all the hubbub. Many can’t see past the downturn and believe it will never improve, however we are not building any new land and history shows us that what does down, goes back up. Remember cash is king, so start saving and get a leg up on the next down turn.

Why bank statements are so important!

Our friend Jay Vorhees at JVM Lending has shared another important blog recently: why bank statements are so important for borrowing and financing for a home. You’ll want to read on to see what Jay says, especially if you’re in the market for a new home. You’ll find a copy of the (slightly re-formatted) blog copied below:

STRONG BORROWER DENIED FINANCING – WHY?

We once had a borrower who qualified for financing in every way (income, assets, credit, etc.) but she was denied financing. The reason? She had five unexplainable overdraft charges on her bank statements that indicated she could not manage cash.

Every borrower has to provide bank statements for every account used for “cash to close” (down payment and closing costs). There are no exceptions because lenders have to ensure that down payment funds were not recently borrowed or obtained through illicit means.

“Borrowed” down payment funds are not considered “seasoned” and they create debt ratio issues b/c they need to be paid back. In any case, lenders are required to go through every bank statement with a fine-toothed comb to look for every irregularity. Irregularities include overdraft charges, unusually large deposits, and unexplained regular monthly deposits or withdrawals, among other things.

Unusually large deposits have to be paper-trailed and explained or they are assumed to be borrowed funds (and they can’t be used for a down payment/closing costs funds). And unexplained regular monthly deposits and withdrawals often indicate the existence of undisclosed side businesses, support payments or other liabilities.

In any case, borrowers often get frustrated when we ask them to explain so many things that are buried in their bank statements. But, we have to ask because bank statements tell lenders so much more than meets the eye.

This is, in fact, often one of the most time-consuming aspects of the loan approval process.

On a related note, Jay discusses something at the footnote of this blog: rates have climbed recently after a stretch of stability. President Trump’s comments about the Fed raising rates too quickly were the primary cause, but, according to the Wall Street Journal, the Fed may now be more likely to raise rates than it was prior to the President’s comments. This is because it will want to prove its independence from political pressure. How ironic!