Homebuyers Face Less Competition

From my perspective as a mortgage lender, anecdotal evidence shows there is less competition for those homes listed for sale now, relative to the last few years. Buyers now often offer contracts at or slightly below list price, whereas in 2021 and early 2022, buyers had to offer tens of thousands over list price to win the contract. I now see buyers winning some seller contributions to closing costs, and contracts often include reasonable finance and appraisal contingencies to protect the buyers.

But how much less competition is there, really? I found Redfin’s “Compete Score” on their website. This score measures how competitive an area is for home buyers. The Compete Score ranks geographic areas on a scale of 0 to 100, where 100 is the most competitive. Redfin calculates the score primarily using four key data points: number of days on market, sale to list ratio, number of competing offers, and waived contingencies. For the Atlanta area, Redfin separates the data further, into “Core City” and “Suburb” components. Let’s look at the data for each, starting with the Core City area.

In February 2020, the Core City area earned a 60 score. This dropped to 55 in 2021, then to 53 in 2022, and down to 52 in February 2023. So, the competitiveness of the Core City housing market has dropped each year, and by 13% over this three-year period.

In February 2020, the suburbs earned a 66 score. This increased to 67 in 2021, then jumped to 73 in February 2022. The Compete Score has dropped all the way back to 57 in February 2023. This is a 14% drop from 2020 and a surprising 22% drop in the last year.

We are left to figure out “whys” behind the data. Why is the Compete Score consistently higher in the suburbs? My first thought is Covid-19. With the 2020 pandemic, more people wanted homes with more yards, more rooms / square footage, etc. Housing is less dense in the suburbs, so it makes sense that more people would want to buy homes in the burbs, thus increasing competition there. Other factors could be the construction of more Core City rental units, making the supply lower and pushing more buyers to the suburbs. Differences in home prices in the Core City vs. suburbs areas could also play a role.

A much easier question is “Why have the Compete Scores dropped in the last year?” The quick answer is mortgage interest rates. Home prices rose significantly in the last few years, and yet people were buying homes as fast as they went on the market. The downward trend of home purchases and those applying for pre-approvals began when mortgage rates jumped. And, wow, have mortgage rates jumped in the last 14 months. These higher interest rates have caused many people to put their home purchase plans on hold, which is driving the lower competition for homes.

That means less competition for those who can and still want to buy a home. And now we can measure that drop in competition. In both Core City and Suburb areas, competition has dropped significantly, in general, in the last 12 months. The drop has been more significant in the Suburbs, but there is still greater competition for homes in the Suburbs than in the Core City areas.

Looking to buy a home in Georgia? Now is a great time to buy – read this post to better understand why. It’s still a seller’s market, though. If you want a lender who has tools to help you win the contract, give me a call, and let’s get you ready to make the most competitive offer possible.

Positive News for Homeowners

With all the recent negative economic news – high inflation, Fed rate increases, stock market declines, etc. – I really need some positive economic news. There’s nothing like good news to shift your perspective, at least temporarily, right? So, here’s some bit of good news…

ATTOM Data Solutions recently released its second-quarter US Home Equity and Underwater Report. The report showed that 48.1% of US mortgaged homes were considered “equity-rich.” This shows an increase from 44.9% in 2022 Q1 and from 34.4% one year ago.

The definition of an “equity-rich” home is one where the current loan to value ratio is 50% or lower. Home equity is the difference between the home’s value and the existing liens on the home. So if a home is worth $400,000 and the current mortgage balance is $200,000, the owner has $200,000 of equity and is considered “equity-rich.”

This report marked the ninth straight quarterly rise in equity-rich homes. Other good news is that only 2.9% of mortgaged homes are now considered seriously underwater, which means that the value of the loans linked to the home exceeds the home’s value by 25% or more.

An ATTOM executive stated the obvious, “After 124 consecutive months of home price increases, it’s no surprise that the percentage of equity-rich homes is the highest we have ever seen.”

What does that mean for future home values? Thus far, home values are holding up even though the pace of home sales is decreasing. Due to higher interest rates and home prices, homebuyer demand has decreased, and lower demand should put a downward impact on prices. However, we still have a lower than normal supply of available homes to purchase. This means that supply and demand impacts have been offsetting and keeping home values flat. To this point, we have not seen a significant drop in home values.

Even with higher mortgage rates, people are still buying homes. Do you know someone who wants to buy a house in Georgia? Tell them that some finance experts are saying home prices will not decrease soon. They might as well buy now and earn some appreciation on their home investment. I can help buyers in Georgia get a competitive interest rate in this market, and I can help them win the contract in this sellers’ market. Tell the home buyer you know to call me at 770-634-0992.

FHA Expands Eligibility

The Federal Housing Administration (FHA) recently published guidance to mortgage lenders with the goal of expanding mortgage eligibility for borrowers who experienced a pandemic-related employment gap or income reduction. FHA defines a COVID-19 related economic event as “a temporary: (1) loss of employment, (2) reduction of income, and/or (3) reduction of hours worked during the Presidentially-Declared COVID-19 National Emergency.” FHA representatives have stated that this change will benefit salaried workers, hourly workers, and the self-employed who were affected by COVID-19.

The key requirement for the new FHA guidance is that the borrower’s current income must be “stable.” Stable income has long been a requirement for FHA loan approval. In my opinion, since the major negative economic impacts from COVID-19 happened roughly two years ago and employment rebounded pretty quickly, this new guidance seems too late to have a major impact on loan approvals.

For salaried workers, we underwrite income using current pay stubs. An employment gap over 12 months ago has never really been an issue, so I don’t see this helping salaried borrowers at all.

For hourly workers, if we have twelve months of consistent verifiable income (using pay stubs and W2 forms), we can underwrite and verify income. So again, I don’t see this change as really helping hourly workers now because if they have earned consistent income for 12 months, low income or an employment gap from 2 years ago should not be an issue anyway.

This guidance could be helpful for self-employed borrowers whose income was negatively impacted by the pandemic. FHA underwriting for the self-employed requires verifying two years of income documented on tax returns. If a borrower’s income dropped in 2020 but then rebounded in 2021, I assume that this new guidance will allow us to discount the impact of the lower 2020 income and focus more on the higher 2021 income for underwriting. That could help some borrowers. (Note that since we are more than halfway through 2022, underwriters will want to verify that 2022 income is consistent with 2021 income, using a year-to-date profit and loss statement.)

Ultimately, I think FHA has good intentions with this new guidance, but I don’t expect it to have a significant impact. If FHA really wants to help home buyers, I think they should lower their mortgage insurance premiums and make the monthly insurance premiums temporary for all borrowers. (Right now, FHA monthly mortgage insurance is permanent for borrowers who make less than a 10% down payment.) In my opinion, this change would benefit more borrowers. (Read more about this topic in a recent Mortgage Blog post.)

If you want to buy a home in Georgia, give me a call and let’s discuss your loan options to determine the best mortgage for you. We will review interest rates and mortgage insurance premiums based on your circumstances, and then decide if your best mortgage option is FHA, conventional, VA or even non-QM. It’s still a competitive market with more buyers than sellers. We can help you win the contract with a TBD underwrite to make your offer more attractive to sellers.

Finance Expert Says Now Is the Time to Buy a House

On a recent episode of The Ramsey Show, personal finance author and speaker Dave Ramsey stated that “now is the best time to buy a house in the next five years.” Please see the video link below, and if you are in a hurry, scroll forward to the 2:30 mark of the video and begin watching there.

To me that seems like a very bold statement, but as I listen to him explain, as a mortgage professional, I agree with his analysis. Here is a summary of Ramsey’s reasons for this statement.

• Prices will not go down. The rate of home price appreciation will slow but the actual prices will not decrease. He basically says, “If you are waiting for prices to come down before you buy, it is not going to happen.”
• Since prices will not decrease over the next five years, prices are better now than they will be any time in the next five years, so buy now.
• Regarding the current relatively high interest rates, Ramsey says buy the house now, and refinance it to a lower interest rate if rates decline in the future.
• Economic data shows that there is a housing shortage. Since demand exceeds supply and housing starts are not enough to make up for the shortage, home prices will not go down.
• Ramsey also says that this is the best time to sell a house in the next five years. If you want to sell a house, your house should sell quickly for a really good price right now.

I basically agree with everything he said in this show segment. I have a client who was interested in buying a house in 2021. As prices rose, he decided he was going to wait for prices to drop. He’s still waiting, while people who purchased homes at the time he was looking have seen their home values rise by 15% to 20%.

Regarding higher interest rates, the biggest challenge is the stress it puts on a home buyer’s budget. Many buyers have to settle for lower priced homes given the higher mortgage rates. Others must simply adjust their monthly payment / budget expectations and accept the fact that their monthly payments will be higher than they hoped. In the worst situations, the higher rates may force some would-be home buyers out of the home purchase market as they cannot now afford the payments for a market priced home. But if you can afford to buy now, then I totally agree with Ramsey’s logic of “buy now and refinance later if interest rates decrease.”

Do you know someone who wants to buy a house in Georgia? Tell them there’s no wise reason to wait. Finance experts are saying home prices will not decrease soon. They might as well buy now and earn some appreciation on their home investment. I can help buyers in Georgia get a competitive interest rate in this market, and I can help them win the contract in this sellers’ market. Tell the home buyer you know to call me at 770-634-0992.

The Cost of Refinancing is Going Down

The Federal Housing Finance Agency recently announced that Fannie Mae and Freddie Mac will eliminate the “Adverse Market Refinance Fee” for mortgage refinances delivered beginning August 1. Fannie and Freddie implemented this fee in late 2020 to mitigate losses expected from the Covid-19 pandemic. (Click here to learn more about the announcement of that fee.)

In the official press release, FHFA stated “To allow families to save more money, lenders will no longer be required to pay the Enterprises a 50-basis point fee when they deliver refinanced mortgages. The fee was designed to cover losses projected as a result of the COVID-19 pandemic. The success of FHFA and the Enterprises’ COVID-19 policies reduced the impact of the pandemic and were effective enough to warrant an early conclusion of the Adverse Market Refinance Fee. FHFA’s expectation is that those lenders who were charging borrowers the fee will pass cost savings back to borrowers.”

Ending this fee will lower the costs for homeowners seeking mortgage refinances going forward. Typically, mortgage lenders included the 50-basis point fee in their interest rate calculations for refinances. This means that future refinances could receive slightly lower interest rates than they would have received with the fee. But note that the difference is small enough that homeowners who refinanced with the fee will not benefit financially from refinancing again, now that the fee will be eliminated. The fee is not large enough to justify the cost of another refinance.

The FHFA press release included other good news highlighting the economic recovery following the pandemic. Only 2% of single family home mortgages guaranteed by Fannie and Freddie remained in a forebearance status in April 2021. This is down from a high of 5% recorded in May 2020.

Has your post-pandemic financial situation improved so that you want to buy a home or refinance your current home? If yes, please contact me. I’ll work through the details with you to make sure you can compete in this market and still obtain a great interest rate.

Home Prices Keep Rising

I have great news for current homeowners, the S&P CoreLogic Case-Shiller index showed that US home values increased at a 13.2% annual rate on average.  So homeowners continue building their wealth rapidly.  This was up from 12.0% in February. The biggest winners are in Phoenix, San Diego, and Seattle, where home price rose at 20.0%, 19.1%, and 18.3% respectively. Homeowners in the Atlanta realized increases of 11.2% annualized.  That ranks #17 out of the top 20 US metro areas.

While this news is great for current homeowners, it poses a challenge for homebuyers.  With prices rising and the intense competition for available homes, it’s even more difficult for homebuyers to win a contract.

Recent Mortgage Blog posts have covered techniques home buyers can use to win.  The strongest technique for buyers who need mortgage financing is to make offers without a financing contingency.

A Realtor recently explained to me that he now coaches his clients to make smaller down payments to keep more cash in reserve to cover potential appraisal shortfalls. Most houses Atlanta are now selling at prices higher than originally listed. But a high offer price, by itself, may not be attractive to sellers when mortgage financing is involved.

(Yes, I have used this cartoon recently, but I love the smiles on the sellers’ and their Realtor’s faces, so here it is again!!)

Here’s why, the mortgage LTV is calculated based on the lower of the contract purchase price or the appraised value.  If a home appraises for lower than the contract price, the mortgage amount will be based on the LTV using the lower appraised value, not the contract price.  An offer above the list price is not really convincing unless the buyer commits to cover any appraisal shortfall. And, in this rapidly appreciating market, it can be challenging for appraisal values to keep pace. The appraisers must look back in time to find comparable homes that have already closed. So appraisal values can lag market prices.

My Realtor friend has seen lower cash offers beat out higher financed offers when the financed offers did not include a commitment to cover an appraisal shortfall. So homebuyers with cash available to make larger (say 20%) down payments may want to plan to make 5% to 10% down payments and hold the remaining cash in reserve to cover a possible low appraisal. 

This type of environment is VERY challenging for homebuyers who can only afford a small down payment. Buyers with only enough cash to make 5% (or less) down payments have little room to cover appraisal shortfalls. My recommendation is this, talk with parents, grandparents, and in-laws about their ability and willingness to make cash gifts in the event of a low appraisal. Blood relatives can give home buyers cash for closing. This can be a great way to help young adults with little available cash actually win in this environment.

Do you know someone who wants to buy a home in Georgia? Are they uptight thinking about this crazy market? Please refer them to me. I’ll work carefully with them and do everything a lender can do to help them win the contract.

Inflation is coming

Inflation is coming… but how much damage will it do?

When considering inflation (and its negative impact on mortgage rates), we have to remember that not all sectors see inflation rising simultaneously. For example:

• currently the energy sector is seeing a rebound in prices (see oil) as the world economy picks up steam from its shut down last year due to Covid
• the housing market has also seen some big jumps in value, which is mainly attributed to the low supply of homes available to purchase versus the demand from the number of people wanting to purchase a home. This is causing housing supplies (such as lumber) to jump in cost.

So we have seen some things go up in price.

One area where we do not see inflation just yet is wage growth. This has been steady mainly because the job market is recovering. With the economy continuing to recover, there is plenty of room to add more jobs without exacerbating inflation. This is most likely why the Federal Reserve has indicated that inflation is likely to pick up in the short-term, but is not a threat in the long-term picture. At least for now.

Inflation (or the fear of) may keep some up at night. A couple of things to remember:

• the average inflation over the past decade is under 2% (the Fed’s target)
• the main way the Fed fights inflation is increasing the Federal Funds Rate. Well, with it being at 0.000%, they have plenty of room to go up.

Even if inflation starts to get a little higher than the Fed would like, they have resources at their disposal to combat it.

Co-Living Trend Growing Among Millennials

Covid continues to cause interesting (and some perhaps fun) trends in housing.

A January 26 Wall Street Journal article covers a new covid-induced housing trend…Millennials seeking to escape covid risk in urban environments are feeling isolated and lonely, so they are moving to remote co-living spaces.  In these residences, the tenants rent furnished rooms in big shared homes.  Former vacation homes, country manors, farms, or converted hotels are now serving as these communal living spaces.

The trend began in Europe.  One example is in a village outside of Berlin and is described as a “5-acre property, based in a converted manor, includes shared offices, a sauna, a swimming pond, a yoga studio and 20 rooms for guests who get three meals a day and pay less rent than for a Berlin apartment.”  The article states that every room is leased.

This trend’s popularity is also growing in the US, as more large companies announce delayed returns to office work.  A company called Outsite operates multiple US facilities in places like LA, Lake Tahoe, Santa Cruz, and Oahu.  Outsite’s international locations include France, Portugal, and Barbados.  The site in the Canary Islands really got my attention.  Right now, weekly rentals there are listed at $300!  I’m ready to go.  Here’s a photo of the Canary Island location.

As vaccines continue to roll out and the world returns to a more “normal” situation, these trends may fade away. People will likely transition back to more traditional single family living situations.

If you work in Georgia and decide to follow this trend, you might eventually return.  When you do, please contact me if you want to buy a house.  Mortgage interest rates will likely stay near historically low levels for a while.  (They may move up from the current rock-bottom levels, but I suspect they will still be low, from a historical perspective.)  The Dunwoody Mortgage team makes home buying efficient and we help you every step of the way.  We even have tools to help you win a contract in this most competitive buying environment.  Let me know if you want to learn more.  For now, just join me in dreaming of living and working in the Canary Islands for a month!

Home Ownership for Non-Married Couples

The Wall Street Journal recently covered an interesting topic, “How to Buy a Home Together When You’re Not Married.”  I often see this situation as a loan officer, and the article provided what I think are wise recommendations for unmarried (and in some cases, married) couples ready to buy a home.  Here are some highlights…

Be sure to consider the risks of jointly owning a home.  As the article says, “the downside is a big unknown.”  Carefully consider what will happen if a breakup occurs or if one person should die.  One expert recommended signing a simple legal agreement focused solely on the home ownership.  The agreement should spell out (1) the owners’ rights and obligations when the relationship is going well, (2) disposition of the property should a break up occur, and (3) what happens if one of the owners should die.

Before considering a home purchase, it’s wise for partners to discuss how they share money and expenses.  Transparency about all income sources and all debt obligations is wise.  And then the partners should discuss how they will share finances should they pursue joint home ownership.  For example, how will the partners share home ownership expenses like mortgage payments, property taxes, repairs and utilities?  Carefully planning how such joint expenses will be shared can prevent future stress and regrets.

The article then discusses how unmarried couples can have greater mortgage flexibility than married couples.  For example, the individual with the highest income, credit score, and available assets can apply solely for the mortgage.  If one individual can win approval, the higher credit score and less debt may win a better interest rate than if the couple applies jointly.  I will challenge one aspect of the article now.  As a lender, I do this for unmarried couples AND for married couples.  For example, if the husband has a low credit score and high student loan debt, while the wife has a stronger income, low debt, and a great credit score, I may recommend that the wife apply individually for the mortgage.  In my experience, both married and unmarried couples can benefit from this strategy.

If both members of the couple have strong income, strong credit, and low debts, it may make more sense to apply jointly for the mortgage.  Keep in mind that lenders always use the lower of the two credit scores.

One other key consideration is how the couple will title the house.  Even if we do the loan in one individual’s name, the attorneys can title the property in both names.  Choosing “joint tenants with right of survivorship” means that if one party dies, the other receives ownership of the entire home.  Choosing “tenants in common” where the surviving partner is not named as the beneficiary means that, should one die, the survivor could end up jointly owning the home with the deceased’s relatives or designated heirs.

Are you thinking about buying a home in Georgia with someone else?  Give me a call.  We can talk through the details and I can counsel you on how to get the best mortgage possible.

Pandemic Impacts to Self-Employed Borrowers

In the world of mortgage origination and underwriting, the greatest focus is limiting risk.  COVID-19 has caused underwriting guidelines to get a little tighter as millions are unemployed, furloughed, and going into a forbearance status on mortgage payments. Today, I’ll focus on the tighter guidelines for self-employed buyers.

The guidelines can change depending on the lender you use. For example:

• One lender now requires that self-employed borrowers asset statements show 6 months of “reserves” to cover mortgage payments after closing.  That means that the borrower’s bank statements must show enough available cash, after closing, to cover 6 months of mortgage payments.
• One lender now requires an audited profit and loss statement from the most recent month to verify recent business performance (The word “audited” got my attention and I don’t believe I’ll be working with them on self employed buyers anytime soon).
• Another lender now requires the following for self-employed borrowers:
  • Year to date profit and loss statement showing income consistent with previously filed tax returns.
  • Most recent three months of bank statements showing deposits consistent with sales / gross receipts specified on the P&L statement.
  • If the monthly statements show declining deposits, the underwriter will determine if the revenue decline results from an interruption from COVID or some other reason.  Ultimately, the underwriter will want to determine that the income is “stable and likely to continue” before approving the loan.

 

In this economy, it is wise for self-employed home buyers to review their filed tax returns and recent business performance and bank statements with their loan officer before searching for new homes.  A loan originator who understands new underwriting guidelines and will take the time to review details up front can save borrowers time, money, and potential disappointment.

Working at Dunwoody Mortgage, I represent some national mortgage companies that have not implemented stricter standards for the self-employed.  If you know a self-employed person who wants to buy a home in Georgia, please connect that person with me.  I will invest the time needed to best position the self-employed for underwriting approval in this changing and challenging mortgage world.