things to consider if you are buying a home SPRING 2012

Transcription

1 things to consider if you are buying a home SPRING 2012 EDITION

2 TABLE OF CONTENTS should you rent or should you buy? the cost is more important than the price if warren buffett says to buy, buy!! what is suze orman talking about? what value does your loan officer add? is it Time for young families to buy a home?

3 Should you rent or should you buy? People are delaying the decision to buy a home because they are not sure where prices are headed. If they buy and prices continue to soften, they feel that they will not have purchased at the optimal moment. They reason that, if they sit and wait, they can t be hurt. This thinking assumes that a non-decision comes without consequence. If a family continues to rent, they are looking at a housing expense which will rise with the market. Rental costs increase by 3% a year historically. But today s rental market favors the landlord to a greater degree. HousingWire recently quoted Paul Dales, senior economist with Capital Economics: As a consequence of Americans being less willing and less able to buy a home, the number of households in rented accommodation is set to rise by at least 850,000 a year over the next few years. The price of anything is determined by supply and demand. As demand increases, the price of an item will increase unless there is an equal increase in supply. The article mentioned above said: Dales said in his research that rental vacancy rates will fall again in the future, pushing prices up. The median rent is already up to $712 per month well above the average monthly mortgage cost of $647, Dales reported. He estimates vacancies in the home-rental market will push average rental rates up as much as 5% by early

4 Below is a graph of how rental prices have increased recently and where they are projected to go over the next few years based on a report from Marcus & Millichap. How many markets will be impacted? A new rent index offered by Zillow: showed year-over-year gains for 69.2 percent of metropolitan areas covered. Rents are increasing and will continue to do so for the foreseeable future. In many parts of the country, buying a home might make more sense as you can lock in your housing expense for the next thirty years. 2

5 the cost is more important than the price Buyers are often advised to look at the COST of purchasing a house more than the PRICE of the home. Obviously, price is part of the cost equation. The other piece, assuming you are not an all cash buyer, is the mortgage rate. The mortgage rate to finance a purchase can have a dramatic impact on the overall cost. Recently, there are more people talking about the possibility that mortgage rates could begin to increase. HSH.com studies trends in mortgage rates. They explain: A better economic climate almost always brings higher rates, and a lessening of the troubles in Europe from massive central bank assistance adds to the movement of money from safe havens to more risky assets, driving rates upward. Dan Green of The Daily Market Reports recently stated: The Fed sees growth coming faster than originally expected. There s suddenly less chance that the Federal Reserve will intervene to help keep mortgage rates low. Absent Fed intervention, mortgage rates are apt to rise and Wall Street is now betting that the Fed has bowed out. With no stimulus, mortgage rates rise. 3

6 Lawrence Yun, Chief Economist for the National Association of Realtors, recently wrote: Mortgage rates will be starting to rise. From the 3.9 to 4.0 percent average rate in the past five months on a 30-year fixed mortgage, the new rates will soon be in the range of 4.3 to 4.6 percent. Understand the potential impact on the cost of purchasing a home if rates do rise. Here is a simple table that shows, even if the PRICE of a home softens, the COST of a home could increase. Many purchasers think they should wait until they are sure that prices have hit bottom. Deciding whether or not to wait should be determined by where the COST of a home is headed. 4

7 if warren buffett says to buy, buy!! Warren Buffett is seen by many as the greatest investor of our time. When he speaks, people listen. Like anyone else in his position of influence, he is criticized by some for using his bullhorn to promote his own business agendas at times. That makes it very interesting when we occasionally learn of how he privately advises those closest to him. Such a situation occurred recently. Debbie Bosanek, Warren Buffett s secretary of 37 years, recently purchased a second home in Surprise, Arizona. In an article in the Omaha World Herald, Mrs. Bosanek discussed her reasons for purchasing a second home and the personal advice she received from Mr. Buffett. I just thought it was time to buy a home. Warren tells me that it will be the best opportunity in my lifetime. Mortgage rates are low and prices have dropped dramatically... I share Warren s view about the future of America, and we believe that our country will do just fine. I m happy to make this investment. The greatest investor of the last century privately has told the people closest to him that buying a home right now will be the best opportunity in [their] lifetime. 5

8 Weeks later, Buffett appeared live on CNBC s Squawk Box. During the interview, he was asked about the current real estate market and whether he felt now was the time to buy. His response was rather emphatic and has been used as a headline in hundreds of articles since the interview: If I had a way of buying a couple hundred thousand single-family homes I would load up on them. Throughout the interview, he addressed the market from a few angles. Here is what he said: Why invest in real estate now? It s a way, in effect, to short the dollar because you can take a 30-year mortgage and if it turns out your interest rate s too high, next week you refinance lower. And if it turns out it s too low, the other guy s stuck with it for 30 years. So it s a very attractive asset class now. Is buying your own home better than investing in stocks right now? If I knew where I was going to want to live the next five or 10 years I would buy a home and I d finance it with a 30-year mortgage It s a terrific deal. Should we buy multiple houses? If I was an investor that was a handy type and I could buy a couple of them at distressed prices and find renters, I think it s a leveraged way of owning a very cheap asset now and I think that s probably as an attractive an investment as you can make now. Over the last couple of months, there have been more and more financial analysts coming to the same conclusion: It s time to buy real estate. 6

9 What is suze orman talking about? Suze Orman deserves our respect. She has dedicated her life to educating consumers on financial matters and has built a sensational personal brand along the way. We don t always agree with her advice but can always see the logic in her position. However, she said something recently that was absolutely wrong. Ms. Orman appeared on HBO s Real Time with Bill Maher and addressed the housing market in this country. Her comment: We now have an America that doesn t even think that they want to own a home anymore; they re under water in their homes, and they are praying that somebody will just take it off of their hands so that they can rent. Her statement shocked us. We realize that there are many individual cases that are nothing less than tragic. We understand that there are some families trapped in a house they cannot sell. To say that Americans no longer believe in homeownership, however, is just not true. If you visit Orman s own website and search the words home ownership, it sends you to FannieMae s website for information. 7

10 What makes this ironic is that, on FannieMae s website, you can find the National Housing Survey which is done quarterly. This survey asks Americans how they feel about housing. Here are a couple of findings from the most recent survey: 96% of all homeowners (and even 93% of all homeowners that are currently underwater) believe that homeownership has been a positive experience. 84% of Americans and 70% of renters believe homeownership is a better alternative than renting. 63% of renters have aspirations to someday be a homeowner. 64% of Americans think buying a home is a safe investment. (A safer investment than stocks or government bonds) When asked which investment is currently showing the most potential, more Americans picked buying a home than ANY OTHER INVESTMENT (stocks, bonds, mutual funds, etc.) Broken down 67% of homeowners, 55% of renters and even 75% of those home owners underwater believe it is a good time to buy a home. Suze Orman may believe that families in this country now prefer renting over owning. Surveys say the exact opposite. Americans still very much believe in owning their own home. 8

11 what value does your loan officer add? For the longest time, loan officers have talked about why people should do business with them; and 95% of the time their presentations boil down to three things price, product, and service. On the pricing front, they talk about low interest rates and/or closing costs; on the product side, they position themselves as experts in a particular loan program (like a 203K or reverse mortgage); and on the service side, they discuss turnaround time or how available they are. In today s marketplace, virtually every lender (and therefore, every loan officer) has very similar pricing, pretty much all the same products, and service is difficult to prove until you give them a loan to work on. The changing lending landscape (tougher underwriting guidelines, loan officer licensing, stricter appraisals, and such) has eliminated virtually 70% of loan officers in America. The remaining people have been vetted and represent a very high quality group of professionals. (Not that there aren t always a few bad apples, but there truly are very few.) 9

12 So, when borrowers shop for loans on the old price/product/service model, how does a consumer differentiate between loan officers? Ask for Referrals If you have a friend, co-worker, or family member who had a good lending experience, ask who they used. Talk to people who deal with multiple lenders (real estate agents, attorneys, accountants, etc.) and leverage their comparative experience into making good choices. Loan officers who earn referrals typically go beyond price/product/service. Seek out a Mortgage Advisor Even today, with limited loan programs, there are many factors to consider when choosing the right mortgage. Your future income, the length of time you expect to be in the home and your risk tolerance should be discussed before ruling out adjustable rate mortgages, for example. Look for Transparency Demand a lender who freely and competently discusses rates and likely rate movements. Don t buy into the idea that rates are conjured up in a mysterious way. Rates are derived by activities in the bond market and your loan officer should be able to explain, in layman s terms, the factors that affect rates and upcoming events and economic reports, as well as, the most likely impact they will have. Accessibility of Information Are you looking for printed materials and/or videos to guide you through the process? How about online workshops or home buying seminars? Seek Out a Resource You may need other professionals when buying a home (from insurance people, to home improvement people, to legal help). A good loan officer has a network of high quality referral partners to help you. Many of the criteria for choosing a loan officer are less tangible than the old price/product/ service model, but frankly, they may prove more valuable over time. 10

13 is it time for young families to buy a home? Almost six million adults between the ages of 25 to 34 are currently living with their parents. That number reflects an almost 50% increase since These young adults are now being advised to jump into homeownership. Who are the people selling them on the American Dream? Their parents! It seems that parents of some adult children are strongly suggesting that their children take advantage of the low cost of homeownership available today. Some moms and dads are helping financially and are even co-signing for the mortgage. Middle age parents who have owned a home understand its true value. A home has always been a good long term financial investment. However, homeownership also has many other benefits. In Fannie Mae s most recent National Housing Survey, they asked the question directly: Is this a major reason to buy a home? The study broke up the answers into financial and non-financial reasons. The top four reasons and six of the top ten reasons were NON-FINANCIAL. The top four are below: 1. It means having a good place to raise children and provide a good education. 2. You have a physical structure where you and your family feel safe. 3. It allows you to have more space for your family. 4. It gives you control over what you do with your living space (renovations & updates). 11

14 Should this surprise us? Aren t these the same reasons our parents bought their home? Aren t these the same reasons we purchased our home? These are the same reasons parents have suggested their children buy a home. They want the same things for their grandchildren that they believed to be important for their children. And today, the cost of homeownership is at all time lows: J.P. Morgan The numbers on housing have an important message for American families today, and particularly younger families setting out on life s great adventure: Five years ago, at the peak of the home-buying euphoria, it was emphatically a time to rent. Today, when home ownership is depreciated more than ever before, the numbers tell us it is a time to buy. MSNBC.com [S]omeone who plans on staying put for seven years would come out ahead by about $9,000 if they bought a median-priced home rather than being a tenant in a medianpriced rental. HUD Homes today are more affordable for average families than they have been since Median-income families today have nearly double the funds needed to purchase the average home. Now that the economy is beginning to show signs of stabilizing, people are getting back to the core values that families have always embraced. Homeownership is definitely high on that list. And today, from a financial standpoint, it may be the opportunity of a lifetime. 12