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Following last year’s real estate market was like riding a roller coaster. The market started off strong in 2018 and then softened before finishing with a mild flurry. However, one thing that did not waiver was America’s belief that owning a home makes sense from a financial standpoint.

An end-of-the-year survey by the Federal Reserve Bank’s Center for Micro economic Data revealed that:

“The majority of households continue to view housing as a good financial investment.”

And that percentage has increased over the last three years.

Bottom Line

Though there is some uncertainty as to how the real estate market will perform over the next twelve months, one thing remains very certain: America’s belief in home ownership.

As we kick off the new year, many families have made resolutions to enter the housing market in 2019. Whether you are thinking of finally ditching your landlord and buying your first home or selling your starter house to move into your forever home, there are two pieces of the real estate puzzle you need to watch carefully: interest rates & inventory.

Interest Rates

Mortgage interest rates had been on the rise for much of 2018, but they made a welcome reversal at the end of the year. According to Freddie Mac’s latest Primary Mortgage Market Survey, rates climbed to 4.94% in November before falling to 4.62% for a 30-year fixed rate mortgage last week. Despite the recent drop, interest rates are projected to reach 5% in 2019.

The interest rate you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power.

Purchasing power, simply put, is the amount of home you can afford to buy for the budget you have available to spend. As rates increase, the price of the house you can afford to buy will decrease if you plan to stay within a certain monthly housing budget.

The chart below shows the impact that rising interest rates would have if you planned to purchase a $400,000 home while keeping your principal and interest payments between $2,020-$2,050 a month.

With each quarter of a percent increase in interest rate, the value of the home you can afford decreases by 2.5% (in this example, $10,000).

Inventory

A ‘normal’ real estate market requires there to be a 6-month supply of homes for sale in order for prices to increase only with inflation. According to the National Association of Realtors (NAR), listing inventory is currently at a 3.9-month supply (still well below the 6-months needed), which has put upward pressure on home prices. Home prices have increased year-over-year for the last 81 straight months.

The inventory of homes for sale in the real estate market had been on a steady decline and experienced year-over-year drops for 36 straight months (from July 2015 to May 2018), but we are starting to see a shift in inventory over the last six months.

The chart below shows the change in housing supply over the last 12 months compared to the previous 12 months. As you can see, since June, inventory levels have started to increase as compared to the same time last year.

This is a trend to watch as we move further into the new year. If we continue to see an increase in homes for sale, we could start moving further away from a seller’s market and closer to a normal market.

Bottom Line

If you are planning to enter the housing market, either as a buyer or a seller, let’s get together to discuss the changes in mortgage interest rates and inventory and what they could mean for you.

One of the most common loans you can get to buy a home is a 30-year fixed rate mortgage. If the thought of paying for your home over the course of 30-years seems daunting, here are some easy ways to shorten that term which will actually end up saving you money over the life of your loan.

Any additional payments to the principal amount (the original sum of money borrowed in a loan), helps to cut down the amount of interest that you will pay over the life of your loan and can also help to shave years off the loan as well.

When you make ‘extra’ payments toward your loan, the key is to let your lender/bank know that you want the extra funds to go toward your principal balance as they will not automatically do this for you.

You don’t have to double your mortgage payment to make a big difference either!

If you have a 30-year mortgage on a median-priced home ($250,000) with a 5% interest rate, you’ll be responsible for a $1,342.05 monthly principal and interest payment. Over the course of the loan, if you pay your exact monthly payment, you will have paid $233,133.89 in interest alone!

Paying a Little Extra Can Pay Off Big

1. Pay an additional 1/12^th of your mortgage payment every month

Benefit: In the example above, adding $111.84 to your monthly mortgage payment might not seem like a lot, but each year you will have paid one extra month’s worth of payments which will shorten the term of your loan by 4 years and 8 months, all while saving you $42,000 in interest!

2. Pay an additional $50 per month towards your mortgage

Benefit: Fifty dollars might not seem like enough to make a difference on the term of your loan, but that small amount will save you over $21,000 in interest and will take over 2 years off the end of your loan. Twenty-eight years from now, you’ll be happy to pay off your loan that much sooner!

3. Make one-time lump sum payments when you can

Benefit: If you find yourself with a little extra money after a yearly bonus, a tax return, or from investment dividends, paying that money towards the principal can cut your costs. This option, however, is less predictable than the extra monthly payments.

If you have higher interest debts, like credit cards, consider using any extra funds you have to pay those debts down before applying that money towards your mortgage. Also, if you do not plan on staying in your home for more than 10 years, paying extra toward your mortgage might not make sense.

Bottom Line

If you’re wondering what strategies would work best for you to shorten the term of your loan, let’s get together to answer your questions.

Real estate is shifting to a more normal market; the days of national home appreciation topping 6% annually are over and inventories are increasing which is causing bidding wars to almost disappear. Some see these as signs that the market will soon come tumbling down as it did in 2008.

As it becomes easier for buyers to obtain mortgages, many are suggesting that this is definite proof that banks are repeating the same mistakes they made a decade ago. Today, we want to assure everyone that we are not heading to another housing “bubble & bust.”

Each month, the Mortgage Bankers’ Association (MBA) releases a measurement which indicates the availability of mortgage credit known as the Mortgage Credit Availability Index (MCAI). According to the MBA:

“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is calculated using several factors related to borrower eligibility (credit score, loan type, loan-to-value ratio, etc.).” *

The higher the measurement, the easier it is to get a mortgage. During the buildup to the last housing bubble, the measurement sat at around 400. In 2005 and 2006, the measurement more than doubled to over 800 and was still at almost 600 in 2007. When the market crashed in 2008, the index fell to just over 100.

Over the last decade, as credit began to ease, the index increased to where it is today at 186.7 – still less than half of what it was prior to the buildup of last decade and less than one-quarter of where it was during the bubble.

Here is a graph depicting this information (remember, the higher the index, the easier it was to get a mortgage):

Bottom Line

Though mortgage standards have loosened somewhat during the last few years, we are nowhere near the standards that helped create the housing crisis ten years ago.

Every year around this time, we take time to reflect and plan for next year. If you are renting your current home but have dreams of home ownership, your plan for the new year may include buying, and you wouldn’t be alone!

According to the 2018 Bank of America Homebuyer Insights Report, 74% of renters plan on buying in the next 5 years, with 38% planning to buy in the next 2 years!

When those same renters were asked why they disliked renting, 52% said that rising rental costs were their top reason, and 42% of renters believe that their rent will rise every year. The full results of the survey can be seen below:

It’s no wonder that rising rental costs came in as the top answer! The median asking rent price has risen steadily over the last 30 years, as you can see below!

There is a long-standing rule that a household should not spend more than 28% of its income on housing expenses. With nearly half of renters (48%) surveyed already spending more than that, and with their rents likely to rise again… why are they renting?

When asked why they haven’t purchased a home yet, not having enough saved for a down payment (44%) came in as the top response. The report went on to reveal that nearly half of all respondents believe that “a 20% down payment is required to buy a home.”

If the majority of those who believe they haven’t saved a large enough down payment believe that they need 20% down to buy, that means a large number of renters may be able to buy now!

Bottom Line

If you are one of the many renters who is fed up with rising rents but may be confused about what is required to buy in today’s market, let’s get together to help you on your path to home ownership.