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.

Request to Extend Affordable Mortgage Access

The Mortgage Bankers Association (MBA) has officially requested that the Federal Housing Finance Agency (FHFA) expand income eligibility for certain low down payment loan programs. FHFA regulates mortgage giants Fannie Mae and Freddie Mac. The MBA sent a letter to FHFA specifically requesting changes to the Home Ready and Home Possible loan programs.

Home Ready and Home Possible currently provide interest rate pricing discounts and mortgage insurance premium discounts for borrowers whose incomes are less than 80% of the Area Median Income (AMI) where the subject property is located. These discounts apply to home buyers whose credit scores are 680+ and who complete a free online home ownership course. Lender pricing typically adjusts interest rates higher for borrowers with lower credit scores and those who are financing condos using loan amounts greater than 75% of the condo’s value. For Home Ready and Home Possible borrowers, these credit score and condo pricing adjustments are eliminated. Making these programs even more powerful is the fact that the discounts apply to borrowers who can make only a 3% down payment.

Saving enough cash for a down payment is one of the greatest challenges that homebuyers can face. Providing these interest rate and mortgage insurance discounts for loans with only a 3% down payment is a powerful tool for homebuyers without alot of available cash.

In the letter to FHFA, MBA requested that the agency expand Home Ready / Home Possible eligibility to borrowers with incomes up to 100% of the subject property’s AMI. MBA also requested that the income threshold be eliminated completely in low-income census tracts. This change would encourage homebuyers to seek properties in low-income areas. MBA president and CEO Robert Broeksmit stated, “Raising the AMI limits to expand access to these programs would still be beneficial as there are key features of Home Ready and Home Possible loans, such as a 3% down payment, that make homeownership attainable for historically underserved borrowers.”

I think an increase is warranted. When you look at 80% of the average income in an area versus the average home price, it eliminates many borrowers from qualifying for these programs. For example, in DeKalb County, the Home Ready / Home Possible annual income limit is $76,560. Some first-time buyers may qualify to buy an average-priced home, if they have no additional debt, but it is tight. By allowing the amount to go to 100%, more borrowers would qualify to purchase the average home price in the market with some additional debt. This is important as most first-time home buyers are in the Millennial/Gen Z demographic. These generations have additional student loan debt that previous generations didn’t have. Raising the income threshold to 100% AGI isn’t about buying more home. It is allowing first-time home buyers to purchase the average home in their area while having some additional debt obligations. If these programs are intended to help first-time home buyers, then let’s help them.

For reasons covered in a recent Mortgage Blog post, now is a great time to buy a home. If you want to buy a home in Georgia, give me a call and we can quickly determine which discounts you can obtain, and then set you on a path to home ownership.

Lower Rates and Easier Approvals for Some Home Buyers

In recent weeks, mortgage giants Fannie Mae and Freddie Mac have announced changes that will give better interest rate pricing to specific borrowers. A quick primer on interest rate pricing….lenders price loans based on risk factors. The greater the risk, typically the higher the interest rate. Key risk factors that can impact mortgage interest rates are:

• Credit score – the lower the borrower’s credit score, the greater the default risk, and therefore the interest rate is adjusted higher to compensate for the risk.
• Down payment – the lower the down payment, the greater the risk and therefore the interest rate is adjusted higher.
• Condominium – lenders consider condos to be riskier properties due to potential issues with the HOA. So the interest rate for a condo loan with a less than 25% down payment is adjusted higher.

In the mortgage industry, we call these “Loan Level Price Adjustments” or LLPA’s. Given that background, here are the recent changes that will help some borrowers.

Removal of the LLPA’s for first-time home buyers whose income is 100% or less than the Area Median Income (AMI) for their home purchase location. First-time home buyers include anyone who has not owned a home in the last three years. The AMI differs by geographic area, but a quick check of a southeast Atlanta address shows an AMI of $95,700. One caveat is that if the borrower’s qualifying credit score is less than 680, the interest rate will be adjusted higher to compensate for the additional credit risk. I think this new program is great news for potential home buyers who qualify. The biggest benefits will accrue to qualified borrowers with credit scores between 680 and 700 who want to buy a condo with a low down payment.

Another recent change affects the Home Ready / Home Possible programs offered by Fannie and Freddie. In the past, these programs removed the LLPA’s for borrowers who qualified: (i) credit score of 680 or higher, (ii) income less than or equal to 80% of the AMI ($76,560 in the area mentioned above), and (iii) down payment of less than 20%. These programs offer improved interest rate pricing and discounted mortgage insurance premiums for qualified borrowers. For these programs, the borrower does not have to be a first-time buyer. The recent change was eliminating the down payment requirement. I’ve had past customers who wanted to put 20% down, but who qualified for better pricing with a 19.5% down payment. With the change, borrowers making a 20%+ down payment will still obtain the discounted pricing if they meet the other program requirements. Note that these programs require the borrower to complete a free online homeownership course.

One other recent change that may help some borrowers is that Fannie and Freddie will now allow the use of cryptocurrency assets to cover a borrower’s down payment and closing costs. Before now, cryptocurrency assets were not allowed. To use cryptocurrency, the borrower must move the assets to a bank account (checking or savings) prior to closing and must provide documentation showing that the borrower legitimately owned the crypto assets and documenting the transfer from the crypto account to the bank account.

For reasons covered in a recent Mortgage Blog post, now is a great time to buy a home. And if you qualify for the new discounts or you have crypto accounts, the situation just got better for you. If you want to buy a home in Georgia, give me a call and we can quickly determine which discounts you can obtain, and then set you on a path to home ownership.

It’s no longer just about the jobs report

Until recently, all attention about the direction of the economy focused soley on the jobs report. Analysts made predictions and then analyzed where they got things wrong. Then there is the quarterly growth data (GDP). Together with the jobs report, the markets reacted until the next set of numbers were released.

Now we have another focus, and it involves inflation.

Now analysts are obsessing over the inflation numbers. The Consumer (CPI) and Producer (PPI) price reports are “where it is at” with the regard to influencing the stock and bond markets today. We are even reacting to inflation reports from Europe, because the entire world seems to be in a similar situation.

For example, last week, it was announced that the CPI increased by 7.7% annually, with the core number increasing by 6.3% annually. The core excludes the volatile components of food and energy. Overall, these numbers were seen as better than expected and the stocks and bond markets reacted very positively. Though this is only one month of data, it is hoped that this report represents the beginnings of the improvement we have been waiting for (and the reason for my post last month about the Federal Reserve moving too fast/perhaps need to slow down on rate hikes)

Today, market movement is all about inflation and the wide range of data gives analysts and the Fed plenty to chew upon.

Mortgage Interest Rates Improve

The most exciting mortgage news from the week before Thanksgiving was the significant drop in mortgage interest rates. Official reports show rates improved almost one-half of one percent. I actually had a client whose rate improved by five-eighths (0.625) of one percent. That is a significant impact on home affordability and I hope that trend continues.

Many people wonder how mortgage interest rates can decrease when the Federal Reserve has been consistently raising the Federal Funds rate in recent months. As discussed in a recent Mortgage Blog post, mortgage rates are not directly linked to the Federal Funds rate. The Fed most directly influences mortgage rates using purchases of mortgage bonds. Now that the Fed is not buying mortgage bonds to lower interest rates (called quantitative easing), other economic factors naturally impact mortgage rates.

One of the most important economic influences on mortgage rates is inflation. When inflation trends higher, mortgage rates tend to increase as well. It’s no surprise that without Fed mortgage bond purchases keeping mortgage rates low, the recent high inflation numbers have caused mortgage rates to rise rapidly.

In mid-November, published data was positive – inflation is still high but the inflation rate cooled from prior months. Freddie Mac’s chief economist noted that mortgage rates decreased due to data “that suggests inflation may have peaked.”

This good news does not mean that the period of relatively high mortgage rates has ended nor does it indicate a trend of declining mortgage rates. That will all depend on future inflation report data. But the good news is that when mortgage rates hit the 7% level, they quickly moved lower. Hopefully that 7% level will remain the ultimate ceiling for mortgage rates.

Are you (or perhaps someone you know) looking to buy a home in Georgia? With the recent drop in mortgage rates and current sellers’ willingness to negotiate contract terms (such as price and closing cost contributions), right now could be the best time in almost two years to buy a home. Give me a call and we can get you fully underwritten with a TBD address so you can make an aggressive offer, giving you strength to negotiate contract terms in this more favorable market.

The Cause of Higher Mortgage Rates

A recent article in the Wall Street Journal gave an interesting explanation for 2022’s rapid rise in mortgage interest rates. Most people think mortgage rates have risen because the Federal Reserve has increased the Federal Funds rate several times this year. Not exactly. Here’s quick evidence of that. The first mortgage I closed in 2022 had an interest rate of 3.00%. On March 15, I locked the rate for a new loan at 4.375%. The first time the Fed raised the Federal Funds rate was on March 16.

What caused mortgage rates to rise? In short, it’s economics 101 – supply and demand. In this case, the product involved is mortgage-backed securities. The vast majority of mortgages originated are sold to Fannie Mae and Freddie Mac. Fannie and Freddie package the mortgages into mortgage-backed securities (MBS) and sell the MBS to investors – insurance companies, pension funds, mutual fund managers, etc. Economic factors generated by the pandemic and then its fading created supply and demand shocks that first caused mortgage rates to drop, and then recently caused rates to rise.

When the pandemic first hit, the Fed began buying large quantities of MBS to hold in its portfolio. The increased demand for MBS pushed the security prices up but that inversely pushes the interest rates down. This process is known as “Quantitative Easing.” Banks also bought large amounts of MBS. Americans began saving more during the pandemic. Bank deposits increased significantly while consumer and business borrowing decreased. Since banks had an excess of cash, they decided to buy MBS and put their excess cash to work. So during the pandemic, the Fed and major banks combined to purchase over $1.5 trillion of MBS.

This cannot go on forever, so the Fed began backing off their MBS purchasing in November 2021 and completely stopped in February 2022 – right before rates began rising rapidly. In fact, my colleague discussed this in a January 2022 mortgage blog post. In addition, the 10 largest bank holders of MBS have reduced their MBS holdings by $133 billion in the first 3 quarters of 2022, as bank deposits have leveled off and customer borrowing has increased, leaving less excess cash to buy MBS.

Ultimately, the demand for MBS has dropped significantly now. To motivate other buyers to purchase MBS, the market has forced interest rates much higher. The effect has been dramatic. In recent weeks, mortgage lenders have charged 7.00% or more for 30-year fixed mortgages that had a 3.00% rate to start 2022.

Next time someone tells you they are holding off on a home purchase to see if the Fed raises rates in the coming months, tell them it’s not that simple. Then connect them with me. Mortgage rates are higher, but I still have clients who have saved money with a home purchase compared to the very high current market rents.

Signs of a More Balanced Market

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.

Mortgage Rates Expected for 2023…

2022’s rapid increase in mortgage rates has been dramatic and impactful. Many potential home buyers have stopped searching because rising rates have driven home payments to uncomfortable levels. Interest rates have risen about 4% this year, starting at around 3% in January and rising to around 7% now (for a 30-year fixed rate mortgage.)

People often ask me where interest rates will go in the future. After my initial smart aleck answer, “If I could predict the future, I would be sitting on a tropical beach somewhere enjoying retirement.” I tell people it’s impossible to accurately predict where mortgage rates will go. There are too many variables that can impact rates unexpectedly. Statistical experts in analysis with access to troves of research data disagree on where the economy and rates will go, almost all of the time. And now is a great example with respect to mortgage rates.

Here’s a link to an article (dated October 24, 2022) reporting that the Mortgage Bankers Association (MBA) predicts that mortgage rates will drop to 5.4% by the end of 2023.

And here’s a link to an article (dated October 21, 2022) reporting that a financial advisory firm predicts that mortgage rates will rise above 10% in 2023.

Here’s another article (dated October 17, 2022) stating that mortgage rates could reach 11.6% by October of 2023.

And finally, for balance, here’s an article (dated August 29, 2022) stating that Fannie Mae predicts mortgage rates will fall to 4.5% in 2023.

The bottom line is that experts do not agree on their interest rate forecasts, and that makes it tough for home buyers to plan. Here’s the good news, for those who find a home they love and can afford the payment, experts say they are likely better served to buy now rather than wait. If interest rates go higher, someone who buys now has locked in a lower rate and will thus have a lower payment than if they had waited. And if interest rates drop, as some experts predict, people who buy now can refinance their mortgages to lock a lower rate, when that happens. With less competition for available homes now, buyers may be able to negotiate a deal that would have been impossible just a few months ago.

Interest rates frequently cycle up and down. If you or someone you know finds the home they love in Georgia and they want to buy now, connect them with me. Dunwoody Mortgage can get them a competitive interest rate now. If future rates are higher, they are protected. If future rates decrease, I’ll call them and let them know when refinancing will make good financial sense.

The Impact of Credit Scores…

A recent Zillow study shows the significant impact of lower credit scores on mortgage payments. The study showed that a home buyer with a 760+ credit score would pay about $288 less per month as compared to a buyer with a 620 – 639 credit score, when buying the same priced home. My professional experience confirms Zillow’s ultimate conclusion – that borrowers with the highest credit scores obtain the lowest interest rates and mortgage insurance premiums, which means they pay a lot less for the same mortgage.

You may then wonder, “What factors affect my credit score and what can I do to improve it?” Here are the five major criteria and their weights used to calculate a person’s credit score:

• Payment History (35%) – Lenders are most concerned about whether or not someone pay their bills on time. The best indicator of this is how that person has paid their bills in the past. Paying bills on time, every time, will give the best scores in this component. Derogatory items such as late payments, collections accounts, bankruptcies, etc. will lower this part of the score. Derogatory items have less impact the older they are.
• Debt Level (30%) – This is also called debt utilization. It is primarily used with credit card accounts. This component measures how much of a person’s available credit has actually been used. The best scores in this category are given to people who have used less than 25% of their available credit. So if you have a card with a $10,000 limit, you get the best score from this component by keeping the account balance at $2,500 or less.
• Length of Credit History (15%) – Longer credit histories are better than shorter histories, as such histories give a better picture of a person’s payment habits.
• Inquiries (10%) – An inquiry occurs when a lender (like me) runs a credit report. An inquiry indicates that a person is considering increasing their personal debt. Each inquiry lowers the credit score slightly. The more recent the inquiry, the more effect it has on the score.
• Mix of Credit (10%) – Having different kinds of credit accounts (credit cards, auto loans, student loans, mortgages, etc.) improves the score because it shows that a person has experience managing payments on different types of credit.

Interesting Facts About Credit Knowledge

Here are some additional professional observations. A person can make mistakes / decisions that lower the credit score quickly. It typically takes a long time to earn back a good score once it has dropped due to late payments, other derogatory items, or identity theft. Avoid late payments if at all possible.

Do you want to buy a home in Georgia but worry about the impacts of your credit score? Dunwoody Mortgage has a credit analyzer tool that can help some clients increase their scores within a short time. Some of my clients have improved their scores by over 40 points quickly. This improvement had a great positive impact by lowering their interest rates and monthly payments. Call me to start the process and we will determine if we can help you too.