Have you noticed what’s going on in the housing market these past few months? Despite the onset of spring and historically low interest rates, the most recent numbers are not pretty. The most recent report on mortgage applications fell to its lowest level since 2004. And the numbers on mortgage loans originated tells an even bleaker story as they recently hit a 14 year low.
Of course, memories of the recent winter puts a chill in our bones and we know that there was a natural slowdown as potential buyers stayed by the fire rather than venturing out to look at new houses. And we know that mortgage interest rates, while still relatively low in the 4.50 percent range, are nevertheless above the low 3.60 percent last May. I think we need to dig a little deeper …
Have you noticed that price appreciation is again evident in housing? Look at the numbers from various metro markets around the United States and you will see average gains in sales prices of homes in the 5-10 percent range (higher in some markets) for the past few years. On the local front, the Iowa City area realtors report that the average sales price for the first quarter of 2014 was some 15 percent higher than for the same quarter in 2013.
Looking at this a different way, the median sales price for the 2014 first quarter was 17.3 percent higher than in 2013. Is this good or bad? For those who own homes appreciating in value, it is well documented that home appreciation has a positive wealth affect that boosts confidence and spending.
However, for potential home buyers, rising prices mean lower affordability and these persons can be forced to put home ownership plans on hold. Another way to put this into perspective for a new homebuyer is to compare the payment on a $150,000 mortgage at 3.6 percent a year ago (P&I $681.97) with borrowing $165,000 to buy the same home in 2014 – assuming a 10 percent increase in value – at 4.5 percent (P&I $836.03). That is an increase of $150 per month for the same home.
For those who are not yet homeowners, it could still be a very good time to buy a home. As I’ve said, interest rates are at historically affordable levels and financing is abundant for those with good credit.
Not only that, but there are many programs that incent first-time homebuyers to own their first home. For those who have not gone through a home purchase, it is important to find someone you can trust to walk you through the nuances of the process because it can be confusing, intimidating and unnerving. If you do not know where to turn, one of our MidWestOne mortgage lenders would be happy to give you an informative and unbiased assessment of your credit capacity. Talking to a trusted advisor is an important step that many homebuyers do not take before making their first purchase.
Finally, a word of caution from this conservative banker. Even after a severe recession that was real-estate induced, we still see many home loans being made with loan to values of above 90 percent. To be sure, there are persons who can handle such a transaction.
For other potential high LTV buyers, however, the yellow light should be flashing. Think back to 2010 when persons in Arizona, Florida, California, and other “sand states” saw the values of their homes plummet by as much as 40 to 50 percent. Many of those homes had high loan to values when the homes were purchased and, as we all know, the end result was not pretty.
To be clear, I am not predicting this event! I am adamant about understanding the risk as you climb the loan to value ladder. Although Iowa values remained relatively stable during this recent housing “crisis”, you should ask yourself what you would do if your home was suddenly worth 25 percent less than your purchase price. Again, there is no right or wrong answer that fits every situation. What is important is that a homebuyer buys a home that is affordable and that the homebuyer understands the risks inherent with home ownership.
For the prudent buyer, home ownership has been a good investment for many years. That will likely continue to be the case. But be sure you seek out appropriate counsel before jumping into this big decision. You will be glad you did. Happy house hunting!