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Owning a home has great financial benefits, yet many continue renting! Today, let’s look at the financial reasons why owning a home of your own has been a part of the American Dream for as long as America has existed.
Zillow recently reported that:
“With Rents continuing to climb and interest rates staying low, many renters find themselves gazing over the homeownership fence and wondering if the grass really is greener. Leaving aside, for the moment, the difficulties of saving for a down payment, let’s focus on the monthly expenses of owning a home: it turns out that renters currently paying the median rent in many markets could afford to buy a higher-quality property than the typical (read: median-valued) home without increasing their monthly expenses.”
1. The latest Rent Vs. Buy Report from Trulia pointed out the top 5 financial benefits of homeownership:
2. Studies have shown that a homeowner’s net worth is 45x greater than that of a renter.
3. Just a few months ago, we explained that a family buying an average priced home at the beginning of 2017 could build more than $42,000 in family wealth over the next five years.
4. Some argue that renting eliminates the cost of taxes and home repairs, but every potential renter must realize that all the expenses the landlord incurs are already baked into the rent payment –along with a profit margin!!
Owning a home has always been, and will always be, better from a financial standpoint than renting.
The real estate market is moving more and more into a complete recovery. Home values are up. Home sales are up. Distressed sales (foreclosures and short sales) have fallen dramatically. It seems that 2017 will be the year that the housing market races forward again.
However, there is one thing that may cause the industry to tap the brakes: a lack of housing inventory. While buyer demand looks like it will remain strong throughout the summer, supply is not keeping up.
Here are the thoughts of a few industry experts on the subject:
"Sellers are in the driver's seat this spring as the intense competition for the few homes for sale is forcing many buyers to be aggressive in their offers. Buyers are showing resiliency given the challenging conditions. However, at some point — and the sooner the better — price growth must ease to a healthier rate. Otherwise sales could slow if affordability conditions worsen."
“The lack of inventory is very real and could have a severe impact on home sales in the months to come. Traditionally, a balanced market would have an MRI (Months Remaining Inventory) between six and 10 months.
This month, only eight metros we track have MRIs over 10, compared to 27 last year and 48 two years ago—illustrating that this lack of inventory is not being driven by traditionally ‘hot’ markets, but is rather a broad-based, national phenomenon.”
“Nationally, housing inventory dropped to its lowest level on record in 2017 Q1. The number of homes on the market dropped for the eighth consecutive quarter, falling 5.1% over the past year.”
“Tight housing inventory has been an important feature of the housing market at least since 2016. For-sale housing inventory, especially of starter homes, is currently at its lowest level in over ten years. If inventory continues to remain tight, home sales will likely decline from their 2016 levels. …all eyes are on housing inventory and whether or not it will meet the high demand.”
If you are thinking of selling, now may be the time. Demand for your house will be strongest at a time when there is very little competition. That could lead to a quick sale for a really good price.
Buying a home can be intimidating if you are not familiar with the terms used during the process. To start you on your path with confidence, we have compiled a list of some of the most common terms used when buying a home.
Freddie Mac has compiled a more exhaustive glossary of terms in their “My Home” section of their website.
Annual Percentage Rate (APR) – This is a broader measure of your cost for borrowing money. The APR includes the interest rate, points, broker fees and certain other credit charges a borrower is required to pay. Because these costs are rolled in, the APR is usually higher than your interest rate.
Appraisal – A professional analysis used to estimate the value of the property. This includes examples of sales of similar properties. This is a necessary step in getting your financing secured as it validates the home’s worth to you and your lender.
Closing Costs – The costs to complete the real estate transaction. These costs are in addition to the price of the home and are paid at closing. They include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed and other costs. Ask your lender for a complete list of closing cost items.
Credit Score – A number ranging from 300-850, that is based on an analysis of your credit history. Your credit score plays a significant role when securing a mortgage as it helps lenders determine the likelihood that you’ll repay future debts. The higher your score, the better, but many buyers believe they need at least a 780 score to qualify when, in actuality, over 55% of approved loans had a score below 750.
Discount Points – A point equals 1% of your loan (1 point on a $200,000 loan = $2,000). You can pay points to buy down your mortgage interest rate. It’s essentially an upfront interest payment to lock in a lower rate for your mortgage.
Down Payment – This is a portion of the cost of your home that you pay upfront to secure the purchase of the property. Down payments are typically 3 to 20% of the purchase price of the home. There are zero-down programs available through VA loans for Veterans, as well as USDA loans for rural areas of the country. Eighty percent of first-time buyers put less than 20% down last month.
Escrow – The holding of money or documents by a neutral third party before closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.
Fixed-Rate Mortgages – A mortgage with an interest rate that does not change for the entire term of the loan. Fixed-rate mortgages are typically 15 or 30 years.
Home Inspection – A professional inspection of a home to determine the condition of the property. The inspection should include an evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation and pest infestation.
Mortgage Rate – The interest rate you pay to borrow money to buy your house. The lower the rate, the better. Interest rates for a 30-year fixed rate mortgage have hovered between 4 and 4.25% for most of 2017.
Pre-Approval Letter – A letter from a mortgage lender indicating that you qualify for a mortgage of a specific amount. It also shows a home seller that you're a serious buyer. Having a pre-approval letter in hand while shopping for homes can help you move faster, and with greater confidence, in competitive markets.
Primary Mortgage Insurance (PMI) – If you make a down payment lower than 20% on your conventional loan, your lender will require PMI, typically at a rate of .51%. PMI serves as an added insurance policy that protects the lender if you are unable to pay your mortgage and can be cancelled from your payment once you reach 20% equity in your home. For more information on how PMI can impact your monthly housing cost, click here.
Real Estate Professional – An individual who provides services in buying and selling homes. Real estate professionals are there to help you through the confusing paperwork, to help you find your dream home, to negotiate any of the details that come up, and to help make sure that you know exactly what’s going on in the housing market. Real estate professionals can refer you to local lenders or mortgage brokers along with other specialists that you will need throughout the home-buying process.
A recent report released by Down Payment Resource shows that 65% of first-time homebuyers purchased their homes with a down payment of 6% or less in the month of January.
The trend continued through all buyers with a mortgage, as 62% made a down payment of less than 20%, which is consistent with findings from December.
An article by DS News points to the new wave of millennial homebuyers:
“It seems that the long-awaited influx of millennial home buyers is beginning. Ellie Mae reported that mortgages to millennial borrowers for new home purchases continued their ascent in January, accounting for 84 percent of closed loans.”
Among millennials who purchased homes in January, FHA loans remained popular, making up 35% of all loans closed. Ellie Mae’s Executive Vice President of Corporate Strategy Joe Tyrrell gave some insight into why:
“It is not surprising to see Millennial borrowers leverage FHA loans because they typically offer lower down payments and lower average FICO score requirements than conventional loans. Across the board, we're continuing to see strong interest in homeownership from this younger generation.”
If you are one of the many millennials who is debating a home purchase this year, let's get together to help you understand your options and set you on the path to preapproval.
Mortgage interest rates have risen over the last few months and projections are that they will continue their upswing throughout 2017. What impact will this have on the housing market? Here is what the experts are saying:
Laurie Goodman, Co-director of the Urban Institute’s Housing Finance Policy Center:
“In 1984, 1994, 2000, and 2013, every time we have rate increases, we have increases in nominal home prices. We expect this to be more pronounced, as there is a big demand-and-supply gap at the present time.”
Scott Anderson, Chief Economist for Bank of the West:
“The tightening labor market, rising wage growth, high levels of consumer confidence and a millennial generation with a pent-up demand for housing should allow the housing market to weather the storm of gradually rising interest rates.”
Ivy Zelman in her latest “Z” Report:
“Although we strongly believe that the housing supply-demand imbalance for single-family homes will continue to drive above-average home price appreciation, just as falling mortgage rates aided pricing power on the margin in recent months, we expect the opposite effect to become evident in the coming months. As such, we project year-end home price inflation of 4.8% for 2017 and 4.1% for 2018.”
Bob Walters, President & COO of retail mortgage lender Quicken Loans:
“A modest increase in mortgage rates won’t have much of an effect on home purchases. A buyer may need to slightly re-evaluate which homes they can afford, but it’s not likely to make an impact on qualifying, in most cases.”
First American Chief Economist Mark Fleming:
"Our survey data shows that mortgage rates would have to be significantly higher to have any meaningful impact. The house buying power that borrowers have, even with rates below five percent, still remains historically strong."
Self-made millionaire David Bach was quoted in a CNBC article explaining that "the single biggest mistake millennials are making" is not purchasing a home because buying real estate is "an escalator to wealth.”
Bach went on to explain:
"If millennials don't buy a home, their chances of actually having any wealth in this country are little to none. The average homeowner to this day is 38 times wealthier than a renter."
In his bestselling book, “The Automatic Millionaire,” Bach does the math:
"As a renter, you can easily spend half a million dollars or more on rent over the years ($1,500 a month for 30 years comes to $540,000), and in the end wind up just where you started — owning nothing. Or you can buy a house and spend the same amount paying down a mortgage, and in the end wind up owning your own home free and clear!"
Bach is a self-made millionaire who has written nine consecutive New York Times bestsellers. His book, “The Automatic Millionaire,” spent 31 weeks on the New York Times bestseller list. He is one of the only business authors in history to have four books simultaneously on the New York Times, Wall Street Journal, BusinessWeek and USA Today bestseller lists.
He has been a contributor to NBC’s Today Show appearing more than 100 times, has been a regular on ABC, CBS, Fox, CNBC, CNN, Yahoo, The View, and PBS, and has been profiled in many major publications, including The New York Times, BusinessWeek, USA Today, People, Reader’s Digest, Time, Financial Times, The Washington Post, The Wall Street Journal, Working Woman, Glamour, Family Circle, Redbook, Huffington Post, Business Insider, Investors’ Business Daily, and Forbes.
Whenever a well-respected millionaire gives investment advice, people usually clamor to hear it. This millionaire gave simple advice – if you don’t yet live in your own home, go buy one.
Mortgage interest rates, as reported by Freddie Mac, have increased over the last several weeks. Freddie Mac, along with Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors, is calling for mortgage rates to continue to rise over the next four quarters.
This has caused some purchasers to lament the fact they may no longer be able to get a rate below 4%. However, we must realize that current rates are still at historic lows.
Here is a chart showing the average mortgage interest rate over the last several decades.
Though you may have missed getting the lowest mortgage rate ever offered, you can still get a better interest rate than your older brother or sister did ten years ago, a lower rate than your parents did twenty years ago, and a better rate than your grandparents did forty years ago.
The inventory of existing homes for sale in today’s market was recently reported to be at a 3.6-month supply according to the National Association of Realtors latest Existing Home Sales Report. Inventory is now 7.1% lower than this time last year, marking the 20th consecutive month of year-over-year drops.
Historically, inventory must reach a 6-month supply for a normal market where home prices appreciate with inflation. Anything less than a 6-month supply is a sellers’ market, where the demand for houses outpaces supply and prices go up.
As you can see from the chart below, the United States has been in a sellers’ market since August 2012, but last month’s numbers reached a new low.
Recently Trulia revealed that not only is there a shortage of homes on the market in general, but the homes that are available for sale are not meeting the needs of the buyers that are searching.
Homes are generally bucketed into three groups by price range: starter, trade-up, and premium.
Trulia’s market mismatch score measures the search interest of buyers against the category of homes that are available on the market. For example: “if 60% of buyers are searching for starter homes but only 40% of listings are starter homes, [the] market mismatch score for starter homes would be 20.”
The results of their latest analysis are detailed in the chart below.
Nationally, buyers are searching for starter and trade-up homes and are coming up short with the listings available, leading to a highly competitive seller’s market in these categories. Ninety-two of the top 100 metros have a shortage in trade-up inventory.
Premium homebuyers have the best chance of less competition and a surplus of listings in their price range with an 11-point surplus, leading to more of a buyer’s market.
“It leaves Americans who are in the market for a home increasingly chasing too fewer options in lower price ranges, and sellers of premium homes more likely to be left waiting longer for a buyer.”
Lawrence Yun, NAR’s Chief Economist doesn’t see an end to this coming any time soon:
“Competition is likely to heat up even more heading into the spring for house hunters looking for homes in the lower- and mid-market price range.”
Real estate is local. If you are thinking about buying OR selling this spring, sit with a local real estate professional who can share with you the exact market conditions in your area.