Trying To Time The Real Estate Market? Don’t.

Trying To Time The Real Estate Market?

Don’t. You may think that you’re going to get a home while it’s at the ‘bottom’. Here’s the thing though, are you considering what your overall cost of ownership would be? More importantly, do you know what is going on in the mortgage market today that will impact you 60 days, 120 days or 12 months from now? If you don’t, step back and listen. You may think you get the real estate market, but I’d be willing to bet you don’t know what’s happening in the mortgage market.

So What’s Up?

It’s a great question. The mortgage market has seen a lot of changes in the past year. Now that we’re pretty much down to conventional loans (Fannie Mae and Freddie Mac) and FHA loans, they’re calling the shots. As you may have heard, the conventional lenders aren’t being extremely profitable right now (understatement of the YEAR). Since they’re seeing rougher times, they’re naturally passing that cost onto consumers. The good news is you still have time to beat the clock! Remember, home ownership is not all about the price of the home. It’s your overall cost of ownership and your home financing should be taken into consideration!

How High Will Rates Go?

I want to be extremely clear – mortgage rates are NOT moving higher because of inflation fears right now. They are moving higher because Fannie Mae and Freddie Mac are re-assessing risk. They’ve seen way too many deals go south and they’ve lost their shorts (and so have their stock holders). Fannie Mae recently announced (last Monday) that they will be increasing their ‘adverse market fee’ from .25% to .50%. For consumers, that roughly means about .125%-.25% higher interest rate. That is about $16 per $100,000 your borrowing. Over 30 years, that’s over $5,700! Do I have your attention yet?

It Gets Better

Yes, Fannie Mae and Freddie Mac often follow each other. So, count on Freddie Mac instituting the same increased fees in the next couple of months. Furthermore, Fannie and Freddie have been implementing credt score (FICO) based increases to interest rates. You could literally have a 1% higher rate than some consumers just because of your credit score. This credit score based system is likely to stay and likely to get even worse. That’s right, it will get worse before it gets better.

Still Don’t Believe Waiting is a Suckers Choice?

I’m going to put together a comparison. This is simply for demonstration purposes only, but it should drive my point home that your overall cost of ownership should be what you’re focusing on.

Assumptions:
Let’s assume that homes could drop another 5% and that would be the skeptics “bottom”. Let’s also assume in this scenario, there will be 20% down (only to make this the best case scenario for skeptics). Let’s also assume that in the future the new ‘adverse market fee’ from Fannie Mae has kicked in with a small credit score adjustment (this really is more than fair).

Today:
You decide you want to buy a home for $200,000.
You are financing $160,000 (80% of purchase price).
You can obtain financing at 6.25% for 30 Years, Fixed.

Your monthly payment (principal and interest) would be: $985

Billionaire Investor, Waiting For Bottom:
You have waited for the home to be bought for $190,000.
You’re financing $152,000 (80% of purchase price).
You can now obtain financing at 6.75% for 30 Year, Fixed.

Your monthly payment (principal and interest) would be: $985

They cost EXACTLY the same!

The Big(ger) Picture

The one thing that isn’t being addressed here is the availability of these programs. If you’re putting 20% down, you’ll always be able to get a loan (assuming you have a job, and some money in the bank). However, What If:

You’re short on cash?
You’re a first time home buyer?
You’ve got less than perfect credit?
Don’t have a credit score at all?
Need to use a roomate’s rent for income?
Want that home that’s currently on the market?
Your landlord kicks you out?
A dog had a square….?

My point is these things begin to matter. If you want to bulletproof your approval, you need to get started today. While there is still a loan you can get. I’ve had multiple potential homeowners come to me (in the past few months) and I’ve had to turn them down (when they were well qualified) and they could have qualified without a problem just 6 short months ago. That hurts.

There Is No One Size Fits All Answer, But There is a Way to Find Out!

If the answer was the same for everyone, there would be no need for professionals in this business (oh wait, that recently changed huh?)… Truth is, things have changed. Some Iowans are sitting on the sidelines waiting for the ‘bottom’ of the market, but have no idea how their financing impacts their plan.

If you or someone you know is looking to purchase…. or sitting on the bench, tell them to check this out. I think the comparison is about as ‘best case scenario’ you could use. Trust me, things could get much more different.

As always, if you’ve got questions and need answers, I’m here to help.

Photo Kudos!