Borrowers rejoice. If ever you will have a glorious moment in the financial sun this is it. What we have today is a borrower’s market, a time with both low interest rates and easy access to home loans.
Borrowers should be giddy. Whether you need to finance or refinance you have to have been happy with 2014 — and 2015 looks like more of the same.
Let’s start with interest rates. If you’re a borrower lower is better. According to Freddie Mac, interest rates for fixed-rate, 30-year mortgages in 2014 started at 4.53 percent and ended at 3.87 percent. By historic standards, 4.53 percent is ridiculously low and 3.87 percent is even more ridiculous.
At least so far things have been even better in 2015: At the end of January the interest rate for that same 30-year loan was down to 3.66 percent.
Low rates are great but can you really get such loans?
There’s been a lot of mooing and outrage regarding alleged “tight” lending standards during the past year but the facts are different. “Credit requirements held steady year over year,” said EllieMae. “In December 2014, 31 percent of closed loans had an average FICO score of under 700, the same as December 2013.”
In fact, the percentage of closed loans went from 54.3 percent to 60.2 percent during the same period.
Discounted Real Estate
Cheaper loans and more successful applications are trends every borrower likes to see. But even better, borrowers can now use mortgage borrowing to buy discounted real estate.
According to the National Association of Realtors, in December “the national median existing-home price was $208,500, the highest since 2007 ($219,000) and a 5.8 percent increase from 2013 ($197,100).”
Savvy readers will notice two things about this statement.
First, real estate prices on average have still not returned to 2007 levels.
Second, why should we look at real estate values only on the basis of cash costs?
Real wealth is not measured in cash, it’s measured in buying power. The usual example goes like this: Imagine that a loaf of bread cost $1.00 five years ago and today it costs $1.50. You can say that the price of bread went “up” on a cash basis or you can say that the buying power of a dollar went down: After all, for $1.50 you’re not getting more slices of bread you’re just paying “more” for the same loaf you could have bought five years ago.
Now apply the same idea to real estate. If a typical existing home cost $219,000 in 2007 and the same home now costs $208,500 then it would seem that real estate today is priced $10,500 cheaper. On a cash basis that’s true, but in terms of buying power we need to look deeper.
According to the Bureau of Labor Statistics, an inflation calculator shows that it now takes $1.14 to purchase goods and services which would have cost $1 in 2007. A home that cost $219,000 in 2007 should cost $250,047 in terms of today’s buying power.
Translation: Real estate on average remains a substantial bargain, a typical home at $208,500 in today’s dollars remains vastly cheaper in terms of buying power than a house purchased in 2007.
Help For Borrowers
There are a ton of assistance programs available to borrowers. Figures developed by RealtyTrac show that “out of more than 78 million U.S. single family homes and condos, more than 68 million (87 percent)” qualify for down payment assistance.
What kind of assistance? Things such as tax credits, down payment help, grants and interest-rate reductions are available to qualified borrowers. In fact, DownPaymentResources.com lists more than 2,100 assistance programs by state and county.
A Borrower’s Market
For 2015 many believe you can pretty much count on more of the same, low interest rates and bargain real estate prices.
There’s been much talk that the Federal Reserve will raise interest rates later this year but that was largely the same rumor and speculation heard in 2014 and nothing happened. Even if the Fed attempted to raise rates how much could they go up? Will mortgage levels “soar” to 4 percent? For context, consider that mortgage rates during the past four decades averaged 8.6 percent.
It’s not clear what specific impact a Fed rate hike would have. For instance, mortgage rates rose when speculation began last May that the Fed would stop its “quantitative easing” program, the monthly purchase of mortgage-backed securities and other debts. Now that the Fed has ended the program, mortgage rates have not only failed to rise, they have actually fallen.
“It’s amazing,” says the Mortgage Daily News, “or at least interesting to consider that asset purchases have now been fully phased and that a rate hike is a much more immediate threat, yet rates are back to where they were before markets really began adjusting for all that ‘stuff.’ That’s the power of global economic turmoil and a troubling lack of inflation for core economies.”
The reason mortgages rates remain low is not because of any federal directive but because of an even more powerful force, the law of supply and demand. The U.S. lending system is stuffed with cash, some $2 trillion in excess funds so how can rates rise when the supply of capital greatly outstrips demand?
No less important, it’s likely that even more capital will enter the system because economic prospects overseas remain woeful and weak. What leading economy is doing better than the U.S.? The European Central Bank (ECB) is lending money at negative interest rates while the Nikkei 225 finished January at 17,674.39. That’s down from the high seen in 1989 when the Japanese stock index reached 38,915.
As to home prices, one would hope that they rise faster than the rate of inflation during the coming year, the same hope owners should have every year. The good news is that for 2015 there are three objective changes in the marketplace which are likely to pressure home values higher.
First, Fannie Mae and Freddie Mac are trying to lure more first-buyers into the marketplace with conforming loans that require as little as 3 percent down.
Second, the FHA has reduced its annual mortgage insurance premium by .5 percent for most new borrowers. HUD estimates that an additional 250,000 first-time buyers will enter the marketplace because of this reduction, another piece of good news if it comes true.
Third, RealtyTrac estimates that 7.3 million boomerang buyers — individuals who have previously lost a home to a foreclosure or short sales — could potentially re-enter the real estate market during the next eight years.
The impact of boomerang buyers on the housing market could be significant. In 2014 existing home sales amounted to 4.93 million transactions according to NAR. If half the boomerang buyers come back that’s 3,650,000 additional purchasers, or an average of 456,250 annually over eight years and that’s a big deal.
Meanwhile, the lending industry beckons with cheap rates to finance and refinance deflated real estate. It’s a borrower’s market, so enjoy.
87 Percent of U.S. Homes Qualify for Down Payment Help According to RealtyTrac and Down Payment Resource Analysis
7.3 Million Boomerang Buyers Poised to Recover Homeownership in Next 8 Years
RealtyTrac Ranks Best U.S. Markets for Buying Residential Rental Properties in First Quarter of 2015