Once the housing market recovered from its initial Covid-19 shock in 2020, it has truly been a seller-dominated market. The demand for available homes was so great that to win a contract, home buyers had to avoid requesting seller contributions to closing costs, set the financing and appraisal contingencies to zero days or other very short windows, contract to cover some portion of an appraisal shortfall, and often offer a price higher than the home’s list price. The largest appraisal shortfall I saw a buyer willing to cover was $30,000, and I dealt with one home that sold for $110,000 more than its list price.
Higher mortgage rates have changed the housing market in recent months and lowered competition. I am now seeing this trend as I review my clients’ contracts. Some of my clients are winning contracts with offers at or slightly lower than the list price. I have recently seen sellers contributing $5,000 – $10,000 toward closing costs. And all of my recent contracts have included finance and appraisal contingencies of 12 – 21 days.
Since sellers are accepting buyer contingencies again, now seems like a great time to explain these contingencies. Both the finance and the appraisal contingencies protect the buyer’s earnest money for a set number of days. The buyer typically wants a longer contingency period to have more earnest money protection. The seller wants the contingencies as short as possible. Here’s how they work.
The finance contingency is a binding contract term giving the buyer a specific number of days to obtain financing approval. If the buyer’s loan application is denied and the buyer delivers a lender’s loan denial letter (documenting the loan type, interest rate, and down payment percentage specified in the contract finance exhibit) within that time period, the buyer is contractually entitled to an earnest money refund. If the buyer submits a loan denial letter after the contingency period has expired, the buyer forfeits the earnest money – the contract permits the seller to keep it.
The appraisal contingency is a binding contract term giving the buyer a specific number of days to obtain an appraisal on the subject property. If the appraisal report specifying a value less than the contract price is delivered within the contingency time period, the buyer is contractually entitled to an earnest money refund if the parties cannot negotiate a compromise agreement. If a low appraisal is delivered after the contingency expires, the seller can keep the earnest money if the buyer terminates the contract.
At Dunwoody Mortgage, we meet contingency deadlines! If I tell you to put “X” number of days for the contingency in the offer, we will get the job done on time to meet the contingency. Dunwoody Mortgage prioritizes delivering loan approvals and appraisals within the contingency period helping clients manage their financial risk and the associated stress.
New single family home sales fell for the fourth straight month in April, signaling the end of the recent housing boom.
The US has moved from a housing boom into a “housing correction”, according to Mark Zandi, chief economist at Moody’s Analytics. In an interview with Fortune magazine, the economist said all the evidence shows the housing market has “peaked”.
Zandi’s comments were in response to data which shows the US housing market is cooling down.
US census figures said sales of new single‐family houses in April 2022 fell for the fourth month in a row and were 16.6% below the March rate.
A new report by real estate brokerage Redfin revealed that almost one in five sellers were now dropping their prices – the fastest rate since October 2019.
What is causing this? The shift is mostly attributed to the relatively high-rate environment. Another component is inventory has also been increasing steadily since February, according to Federal Reserve data (although inventory levels are still low!). The economist, who is also a regular contributor to The Washington Post, used the term “housing correction” to mean that the housing boom would end and give way to a period “where home prices will fall in some regional markets.”
Using the word “regional” is important in the quote. Some areas of the country may not see a big fall in prices. For example, the metro Atlanta area may escape a significant price correction due to lower than ideal inventory levels and people are still moving into the metro Atlanta area. This new phase of the market will not be nationwide like the correction of 2008. We won’t see housing prices dropping 50% (or more) across the entire country.
Lastly, he went on to predict that year-over-year home price growth would flatline over the coming 12 months, which would mark the worst period for the sector since 2012. He also predicted in some overvalued markets home prices could decline by between 5%-10%.
We are in a new phase of the housing market, so what should a buyer do? It depends on how long one plans to own a home. If a buyer is looking at a short term purchase of just a few years, this could be a risky time to buy. On the other hand, if you’ve been looking for a year, need a larger home for an expanding family, and plan on staying in the home for 5-10 (or more) years, you would see home values recover and exceed your initial purchase price over that time frame.
Lastly, I haven’t touched on the “supply and demand” aspect of the market. There are still more buyers who want to own a home than there are homes to purchase. The supply and demand component should provide a floor for home values.
It is definitely an interesting time. If you are buying a home in the state of Georgia and want to go over pros and cons of buying, contact me today. I can help get you going on a TBD underwrite to allow your offer to stand out from the crowd. Even with all of this data showing the housing market is slowing, homes are still getting multiple offers! Meaning, there is still quite a lot of demand and not enough supply of homes out there to purchase.
As the Mortgage Blog has stated many times recently, buying a home in metro Atlanta is now a very competitive endeavor. Home buyers seek every possible advantage to win. A recent Redfin report documented the effectiveness of certain strategies. Here’s a quick summary:
All cash offers increase the buyers’ odds of winning by 290%.
Waiving the financing contingency increases the buyers odds by 66%.
Using a price escalation clause has no significant impact.
Waiving the inspection contingency has no significant impact.
I must say that the last two surprised me. But let’s focus on the effective strategies. The impact of making a cash offer is obviously huge, but one key in this market is that now cash offers must match or exceed the list price, or the offer may not win.
What if you have the cash but would prefer to finance some of the purchase? You have two options. I’m currently working with a client who made an all cash offer. After winning the contract, he applied for a relatively small mortgage. He could pay all cash, but he’s using the mortgage to keep some money invested in the stock market. With this strategy, we can close on time and it doesn’t concern the seller. But the buyer has no financing contingency or appraisal contingency protections. If the appraisal is low or underwriting denies the loan, the buyer must still close using his cash or will most likely lose his earnest money.
Another strategy for a cash rich buyer is to close the purchase with cash and then immediately do a home loan after closing. We call this a “delayed financing loan.” This gives the buyer the advantages of a cash offer and the ability to finance the home later and recoup some of the assets used for the purchase. Note that all of the assets used for the purchase must be from the buyer’s own accounts. The buyer cannot borrow money from a relative or anywhere else. If any of the funds for the cash purchase (even only $1,000) are from an account not owned by the buyer, then this quick finance option is not available. If not all the funds came from the buyer, then the buyer must wait 6 months after closing the purchase to do a refinance loan. And note that interest rate pricing on the delayed financing loan differs from the first approach described above.
Waiving the financing contingency is an effective tool for buyers who don’t have the cash to purchase without a mortgage. But it can be a risky strategy if the buyer has not addressed financing first. At Dunwoody Mortgage, we can underwrite loans with a “to be determined” property. Once approved, the buyer can confidently waive the financing contingency and offer a relatively short closing date. This is a great way to strengthen your offer versus your competition. Not every mortgage lender can offer TBD underwriting.
Are you buying a home in Georgia and want to win the bidding war? Call me about one of these options today. I’ll work with you to help you win the contract and close on your new home as soon as possible. (And for good measure, here are a few more creative Realtor ideas for winning the contract. I can help you with #4!)
Considering buying a condo now? Your timing is good then. In recent months, mortgage market makers Fannie Mae and Freddie Mac have loosened the lending requirements for condo purchases. You can buy a condo with a credit score as low as 620 and a down payment of 5% or more.
Understand that the underwriting process is still different for a condo purchase, but the standards are being relaxed now. As with single family home purchasers, underwriters will review the credit score, available assets, income, and debt of condo purchasers.
In addition, underwriters review the financial stability of the complex in which the condo is being purchased. Condo complexes assess HOA (home owners association) dues to fund expenses such as maintenance for buildings and common areas, utilities, insurance, reserves for replacing large items like roofs and parking lots, etc. When the economic crisis hit, owners at many condo complexes became delinquent on their dues payments, causing financial difficulties for the complexes themselves. In reaction to this, lenders imposed tighter restrictions on condo underwriting. Now lenders are relaxing these standards.
When underwriting the condo complex, the lender will require documentation from the complex management as follows:
A completed condo questionnaire reporting details about the complex.
Current year HOA budget.
Master insurance policy.
Below are some key condo criteria that the underwriters consider. The underwriters will likely deny your condo loan if the complex fails to meet any one of these items:
At least 10% of the annual HOA budget set aside for reserves.
No more than 10% of the units owned by a single individual or corporation.
No more than 20% of the units used for commercial space.
No more than 15% of the homeowners more than 60 days past due on their monthly HOA dues.
Bottom line, if you want to buy a condo in a well-managed complex that meets the above criteria, it has a good possibility of being approved; but it will require some extra work as compared to buying a single family home. I have financed multiple condos in the last few months and we have not experienced any issues with underwriting. If you are looking to buy a condo in Georgia, I can help you get started!
The Federal Reserve announced Wednesday afternoon that the “tapering” process will begin in January 2014. Apparently there will not be a QE4-ever after all!
The Federal Reserve has purchased bonds for several years now, and as much as $85 billion worth of US Bonds each month since September 2012. The process was called Quantitative Easing or QE as it is commonly known. QE was a two step process the Feds used to help stimulate the economy.
Step 1 – by 2008, the Federal Reserve dropped the Federal Funding Rate to near zero. This was to encourage short term borrowing to stimulate the economy. The lowering of the Federal Funding Rate is a common tool used by the Federal Reserve during a recession.
Step 2 – due to the severity of the financial crisis, the Federal Reserve began purchasing US Treasury and Mortgage Backed Security Bonds to lower long term lending to help stimulate the housing market along with the auto industry. This strategy was the QE, which turned into QE2, and QE3. The QE’s were partly responsible for the historically low interest rates the country has grown accustomed to seeing. Without QE, interest rates would have never got as low as they did over the past few years.
Instead of having a hard end to the QE program, the Federal Reserve will taper-out of QE. In January, the bond purchasing will reduce from $85 billion per month to $75 billion. The amount purchased each month moving forward will be reviewed at each Federal Reserve meeting and QE will eventually come to an end in a year or two.
By slowing reducing the amount of bonds being purchased, the Federal Reserve hopes the interest rate market has a slow and steady climb on interest rates instead of a volatile and rapidly rising rate market. In theory, historically low interest rates should still be available in the coming year, but rates won’t be as low as they were in 2012 and early 2013.
If you are looking to refinance or purchase a home, how should you respond to this?
I’ve spoken with several clients this year who decided to wait for interest rates to get lower. With the rapid rise in rates starting in early May, some people felt interest rates would eventually fall. With the announcement of tapering, we won’t see interest rates get as low as they have been in the past few years.
The goal now should be to look to get into your new home OR start that refinance process today while rates are still low. To get started, contact me. If the property is in the state of Georgia, I can help you through the loan process.
While the nation was focused on the Presidential election, many may have missed a story about interest rates. On Tuesday, November 6th, the bond markets had a horrible day of trading, and it pushed interest rates higher by 0.250% of a point in most cases.
Is this the end of low rates? Nope… 24 hours later, the exact opposite is occurring. Interest rates are back down to near historic lows having made up the ground lost on Tuesday. Stocks on the other hand are taking a beating down 250+ points as of this post.
Some people think interest rates are based on the time of year. Others may think if mortgage applications are down, then banks lower interest rates to get them back up again. The truth is that interest rates are based on mortgage backed security bonds and their values. As bond values go up, the interest rates go down. So what happened on Tuesday?
With Election Day upon us, bond investors began to worry about a possible status quo change. What happens if Romney wins? What happens if the Republicans take control of the Senate? Would current policies change and impact the markets? What does this positive jobs report mean? Out of potential fear, there was a big selloff on bonds. When bond values drop, interest rates rise.
As you know by now, nothing has changed in D.C. Obama won, the Democrats still control the Senate, and Republicans control the House. With this uncertainty behind us, all eyes are turning toward the “fiscal cliff” coming our way and bad news in Europe. Investors are now panicking for other reasons, stocks are getting hammered, and some of the money coming out of stocks is going into bonds. Bond prices are moving up, and mortgage rates back down to near historic lows.
What does all of this mean for you?
Interest rates can be fickle as the bond market can quickly change depending on recent news and investor emotion. If you are hoping and waiting for a particular rate, you can’t get much better than near historic lows. If you’ve been holding off on a refinance waiting for a rate, or hoping rates get better before buying a home, the timing is good to move forward now. Rates are unpredictable, and better to be cautious and grab what you know is true now than hope for something in the future and miss out. If the home is in the state of Georgia, I can help you get started.
We keep hearing and reading about Greece influencing the world economy. Any why not? Greece had a profound impact on the history of the world with its contributions to theater, math, science, architecture, art, democracy, literature, and war.
For example, who can forget Homer’s Odyssey? This story was the basis of the cult movie hit O Brother Where Art Thou?… What about superior weapons (bronze shields) and the military strategy (the phalanx) that allowed the Greeks to conquer most of the known world.
A rare photo documenting how average male Greeks looked in ancient times. 🙂
Yes, Greek influence can be seen in our modern day governments and culture. We are also experiencing some economic turmoil from Greece as well. The question I keep getting asked is how does Greece impact interest rates?
As strange as it may sound, the turmoil taking place in Greece is impacting not only our economy, but stocks and interest rates as well. Here is a quick summary of how this takes place.
While Greece may be staving off defaulting on their sovereign debt, the threat of a default is causing the world markets to panic. This is hurting stocks around the world, slowing trade, and hurting the Euro.
When stocks suffer, investors typically pull money out of stocks (better return but more risk) and put them into all types of bonds (lower return but safer investment). As certain bond prices rise, interest rates go down.
With the Euro in threat of collapse (extreme but possible), the US Dollar has become the safe-haven currency of the world. Even though the US economy is struggling, the Dollar is a safer bet right now than the Euro. As foreign investors and governments buy our bonds, their values rise, and interest rates go down.
As you can see, the turmoil in Greece is impacting much more than just one country and one currency. Their financial difficulties helped push rates down to new historic lows (set in early October), and interest rates are not that far off from those levels. That means interest rates are really, really low.
If you haven’t talked to anyone about refinancing a mortgage OR still sitting on the fence waiting for rates to get better before you buy a home, don’t sit around forever. Rates can change. Last November, rates were about where they are today. By mid December 2010, rates were in the low 5’s.
The moral of the story? Take a few minutes to talk to someone in the mortgage industry that can offer advice and steps on how to proceed to either buying or refinancing a home. That way you’ll know if it is a good time or not to consider moving forward. If the property is in the state of Georgia, I’d be glad to help you sort through the options. All it takes is a call or email to get going.
While the true impact probably can’t be calculated or even recognized for years to come, we can at least review the events of the past two weeks. Have these events lived up to some of the potential results mentioned in a recent post?
Yes, some of them do. In fact, the events and news coming out of the financial markets over the past two weeks fall in one of two categories:
Renewed fears of a double dip: It started the first business day after the downgrade when investors decided to “sell first and ask questions later.” Since then, Asian, European, and US markets have seen their stock values plummet as the world markets fear the impact of a potential second global recession. The losses were stemmed by some upbeat job news (for a change) in the US, but entering this week, the markets are still volatile.
Interest rates are back down to historic lows: When stocks drop as they have, the typical response is for rates to also drop. Why? As money comes out of stocks, it moves into bonds and increases their value. As mortgage backed security bonds increase in value, interest rates decrease. That trend continued over the past couple of weeks, and interest rates for a 30 year fixed conventional mortgage are back to levels we saw in the fall of 2010-in the upper 3’s.
It has been quite a ride so far, and the ride isn’t over. Is this a taste of things to come OR just the initial knee jerk reaction? Honestly, who knows. The markets are so nervous and volatile, nothing would probably surprise me at this point.
With these events taking place in the US and global markets, how does it impact those looking to buy a home or refinance a mortgage. Easy answer… at least take time to explore the opportunity.
If you are thinking about refinancing mortgage, I need only 5 minutes of your time to run numbers based on the info you know off of the top of your head. In 5 minutes, you’ll know if a refinance is worth exploring.
Looking to buy a home? With interest rates at historic lows combined with home values at their lowest points in decades, there has not been a better time to buy a home. In as little as 10 minutes, we can go through the prequalification process so you can have an idea of how much home you can and should buy.
Either way, what are you waiting on? If the property is in Georgia, I will be glad to walk with you through the mortgage process. All you need to do is contact me to get started!
First, I must give credit where credit is due. That title is in a CNN Money article from a quote by Paul Zemsky, who is the head of asset allocation with ING Investment Management. Zemsky’s full quote was “investors are having one reaction to the downgrade: sell first and ask questions later.”
Over the course of the day, I received several calls and emails from clients concerned about interest rates rising. In actuality, it has been a good day for interest rates as they have improved over the course of the day. Why would interest rates improve when stocks plunge?
That reaction is typical- as stocks surge, rates rise… as stocks plunge, rates get lower. Why? As money leave stocks, it usually heads for the safe haven of bonds. Then mortgage backed security bond prices improve, and interest rates improve.
Now I know what you may be thinking, “why would investors put money into US Bonds after the downgrade by the S&P?” It is a great question, and there are a couple of logical reasons for this:
During times of financial strife, money often leaves riskier (but higher rate of return) investments such as stocks. That money is moved into the safer (but lower of return) investments like bonds. Viewed at that angle, today’s events followed a logical pattern. If you don’t believe me, ask this guy for a second opinion.
The Euro is not a safe bet right now either. With the continued strife and more plans to rescue and/or bolster countries who are struggling, investors don’t have a great choice with the Euro right now. If investors don’t like the Dollar since the downgrade, are they in a hurry to invest in a currency that might become insolvent?
The Dollar is still being viewed as a safe haven currency. Even though the Dollar is not a part of the “AAA Club” anymore, it is still a safer bet (for now) than the Euro or any other currency in the world. With the size of the GDP, most investors feel at some point things will turn around.
Bringing this all back to the mortgage world, if you are out looking for a home or thinking about refinancing, what should you do?
If thinking about refinancing and have been waiting, now is the time to jump. Interest rates have improved into the low 4’s after being in the mid 4’s most of the year.
If you are looking to buy a home, you could consider using the Lock n’ Shop feature we offer. Lock in a rate now for 60 days. That gives you 30 days to make an offer, and then 30 days to close.
Buying a short sale property? This one is trickier because you never know how long it will take to get an approval letter from the bank that owns the propety you wish to buy. The Lock n’ Shop wouldn’t exactly fit that scenario. Even so, I wouldn’t panic. Even if interests rates rise, it will probably be only an increase back to the pre-downgrade levels, which were in the mid 4’s.
Remember, investors may be selling now, but they will ask questions at some point in time. When they do begin to think about and question their actions, the markets will more than likely correct themselves and move back to where they were prior to the recent panic attack. That is a typical and logical response. So… logically, you should take advantage of the lower rates while they are available!
There are plenty of opinions out there. Some that feel the downgrade will cause investors to reconsider long-standing fundamental market assumptions. Others imply the S&P is possibly overstepping their bounds and made an illogical decision. A great article by The Economist insinuates investors have an interesting dilemma on their hands-purchase a currency that may default (downgrade), or the one that could disintegrate.
While there will surely be a wide range of impacts due to the downgrade, The Mortgage Blog attempts to keep its focus in the mortgage industry. What might we expect? Honestly no one knows.
Could their be another slow down in the housing industry? That depends on the economy. For now, some believe the threat of a double dip has been pushed off thanks to an encouraging jobs report for the month of July. However, should that outlook change and businesses get conservative in hiring/spending, who knows what would happen. A wild card like the downgrade could be the catalyst that continues the downward trend of stocks and sour the country’s economic outlook. When that happened in 2008, the resulting impact on the housing market was quite severe.
Could interest rates rise? Mortgage rates significantly rose on Friday after rallying for the first part of the week. With the downgrade taking place, one might assume bond prices would decrease as the Dollar’s credit rating has been reduced. When bond prices decrease, interest rates increase.
Could interest rates improve? One could argue that point of view too. If the downgrade has a negative impact on stocks, money typically flows from stocks into bonds. That helps increase bond prices, and causes interest rates to improve. Of course, this could also be a situation where both bonds and stocks suffer from the events of Friday afternoon.
For now, the markets are down… shut down for the weekend. We won’t know anything for sure until they come back online this Monday morning. Guess we will have to wait and see what happens. It could be a bumpy ride. In the immortal words of Samuel L Jackson in Jurassic Park…
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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