Posts Tagged ‘Homebuyers’

Pre-qualification vs Pre-approval

Many of you have probably heard the terms pre-qualification and pre-approval.  You may have wondered what these terms mean and how do they differ?

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If it’s spring, it must be the housebuying season, right?

I know that the calendar says it is spring.  I also know that Easter and Passover are coming weekend. Though, like many others, I just don’t know where the spring weather is!  For those of us in the residential housing game, which each year feels more and more like a Game of Thrones, the spring weather is very important. For sellers and buyers alike, there is a big psychological boost when warm weather finally arrives.  Like the Israelites roaming the desert, the homebuyers are looking for a sign from above that it is time to enter the Promised Land (of homeownership)!

Photo via mypreferredlender.net

I am hoping that we finally get some warm weather next week.  And, while knowing that “hope” is not an effective business strategy, I am still predicting a very strong housing market.   Though the “so called” experts only expect housing prices to rise about 3% over last year’s prices, I think that the increase will be significantly larger. I am expecting the increase to be more like 5%-8% possibly higher.  As for the number of previously owned home sales which decreased to 4.93M nationwide in 2014 from 5.09M in 2013, I see a reversal of this for 2015.  I believe that nationwide we will be slightly above the 5.09M number.

First of all, interest rates have continued to remain low despite the dire predictions for this year. Since rates have actually decreased, not increased since January 1st, home affordability has improved since 2014. With the higher employment numbers so far this year, more people are in a position to buy a home now than they were last year.

In addition, the banks are finally easing up on their credit requirements. In January, the Federal Housing Administration (i.e. FHA) dropped their mortgage insurance rates from 1.35% to .85%. Here is a link to a 2 minute video about this reduction and it’s effect — Changes to FHA Mortgage Insurance Premiums January 2015.  With FHA loans allowing credit scores down to 580, low downpayments (including gifts and up to a 6% seller’s concession); and debt-to-income ratios as high as 55% of gross income (with income from non-occupying co-borrowers included), these loans will enable a lot of people to buy homes.

Other new first time home buyer programs were implemented by Fannie/Freddie which now allow for a 3% downpayment with credit scores as low as 620.  This will allow home buyers with less than $10k down to buy a $300,000 house or apartment!   For more information and for each of their specific program requirements (since they vary slightly), you can view this short You Tube video. — Fannie Mae and Freddie Mac 3% Downpayment for Conforming Loans.

There is also pent up demand for housing. The leading edge of the Millennials, who are now in their early 30s, are being “forced” by demographics, income and family size to purchase homes.  Though they prefer to stay flexible by renting and live in/near cities, like those of us who came before them, there comes a time when practicality and affordability (i.e. realization that you are no longer so young), trumps desire.  For many of the older Millenials, that time is now!

On the other end of the demographics are the folks who are retired or semi-retired and looking to unload the family home that they no longer need. For these people, who held out for higher prices after the housing collapse, housing prices, though not back to 2006 levels, have returned enough for them to consider selling.  The irony is that it is the clash of these two very similar generations, the formerly largest and most selfish generation of Baby Boomers with the (unbelievably) even larger and more selfish Millennials, will together bring back the housing market beginning this year. Their “partnership” will also allow the improvement to continue for the next several years, and probably accelerate as well.

So, there you have it. IMHO, there will be a very strong purchase market this year. But, if this does not occur, I will be back in the fall to tell you why. Since, like the rest of the “so called” experts, if I am wrong, it won’t be my fault. Rather it will be caused by something happening that was unexpected (at least to me)!

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Happy Easter and Happy Passover to those who celebrate each.

Dan

“Don’t Buy a Home As an Investment” A Faulty Logic and Fuzzy Math

While I was reading the Sunday paper I came across this article from The Wall Street Journal and got intrigued by the title. Don’t Buy a Home as an Investment: After Costs, It Typically Doesn’t Yield Much. Think of It as a Place to Live.

I always enjoy the Wall Street Journal’s columns and generally agree with them. However, in this column listed above, the author came to his conclusion first and then tried to justify it. He neglected to include several important factors and then he discounted his extraordinary return on his Manhattan apartment for no apparent reason. Read more here: Don’t Buy a Home as an Investment

Investing

The investment return for real estate is not always as high as it looks. But, the beauty of this investment is the leverage that you get from mortgage financing. Photo courtesy of consultist.eu

Dear Mr. Clements:

As for your NJ house, while including some operating expenses, you failed to properly account for the cost of renting a similarly situated home for your 12 years of home ownership. You indicated that you were not counting the $106k in interest for this purpose. But, $106k/144 mos. would only give you a house rental of $736 per month (which is not even remotely possible).  In addition, you did not apply the same 25% “tax  benefit” to this that you did to the real estate taxes, which would lower it further. The adjusted real estate tax of $90k/144 or $625 per month should have been ADDED to the cost of housing as opposed to the cost of ownership and not been taking into account as to your investment return. Even adding $736 for interest and $625 for taxes would only give you $1,361 per month for rent which would not have covered a house rental in NJ which would have been $2,000-$3,000 per month.  If not left out of the analysis as it should have been, then $1,000 or so should have been added when looking at the value of living in a house, not subtracted.As for the actual investment in your house, it was NOT $165k unless you bought it for all cash, which I doubt.  You should only be including the original down payment you made (plus closing costs) and any principal payback that were paid in your 12 years of ownership.  So your investment would be reduced by the existing principal amount of your mortgage debt at closing (because this was not your money used for the investment, it was the bank’s).  So, though the payoff amount on your mortgage was not included (i.e. deducted from your investment) in your analysis, it should have been.  Only when taking these other factors into account can you determine your actual investment return.

As for your Manhattan apartment, it was a “home run” in any way you look at it. We can disagree as to the amount of the investment return, but not as to the overall picture of a huge gain in two years.  Again, was this apartment purchased for 100% cash?  You neglect to include this very important fact which affects your investment return (I.e. you did not invest the full purchase price of $570k plus $7k of closing costs, only a certain percent of this).  Therefore, your net sales price of $750k (i.e. $800k minus $50k in closing costs) gets compared to your investment (whatever amount that might have been). Once we know that number, we can determine the investment return.

All that said, I will agree that the investment return for real estate is not always as high as it looks. But, the beauty of this investment is the leverage that you get from mortgage financing (which is my business).  To fail to properly include this information on your analysis of your two home purchases is, if inadvertently omitted, at a minimum, a disservice to your readers. If it was done intentionally, then it is just another example of improper journalism where the facts were manipulated to support the conclusion.  I am hoping that it was the former. If so, please provide a follow up so that your readers can get a more complete picture of the situation.

Dan.