In any given market, inventories fluctuate based on supply and demand considering area and price range. The National Association of REALTORS considers a balanced market to be a six-month supply of homes.
If it takes longer than six months to sell, it is thought to be a buyer’s market and less than six months, a seller’s market. Most buyers and sellers probably feel a balanced inventory is more like three months’ supply of homes.
The inventory of existing homes has been reduced to approximately 1.5 million houses which is 10.3% lower than a year ago. According to the Federal Reserve Bank of St. Louis there are 5.7 months’ supply of new homes currently on the market in the U.S.
Inventory has a direct impact on price. When demand is constant, but inventory is reduced, price tends to increase because the same number of people are trying to buy a smaller than normal number of homes.
As easy as it is to recognize the signs of spring, one should be able to spot the direction prices will be moving. When prices and mortgage rates are increasing, buyers are affected by not being able to afford the same price or size of homes.
One of the silver linings to filing your income tax return is finding out that you are going to receive a refund. If you happen to be one of these fortunate taxpayers, your next decision is what to do with it. With the average tax refund around $3,000, it could be the difference that makes a home a reality sooner rather than later.
Many would-be buyers think it takes 10% or more down payment to purchase a home, but actually, it can be much less. There are VA and USDA mortgages that have no down payment for qualified buyers. FHA has a 3.5% down payment program and FNMA has 3% down payment mortgages for qualified creditors.
Closing costs for originating new mortgages can easily range from two to three percent of the purchase price but most lenders will allow the seller to pay part or all of them based on the agreement in the sales contract.
While the average tax refund might not cover the down payment on the median price home, it certainly helps. Your refund could make it as simple as 1-2-3 to get into a home.
Call me at (281) 704-3749 or Jill to get started.
Buyers who have been concerned about what might happen to the tax laws affecting home ownership should feel more comfortable about moving forward with their decision to purchase. The 2017 Tax Cut and Jobs Act passed by Congress and signed by the President continues to treat real estate as a favored investment.
Whether it is for a home to live in as your principal residence or to use as rental property, the tax laws are in place but other dynamics to be concerned with are not; mortgage rates are expected to rise as well as prices.
Reasons to buy now:
For a summary of specific real estate provisions in the 2017 Tax Cut and Jobs Act, click here.
In 1968, mortgage rates were 8.5%. The next year, rates went down to 7%. Homeowners could buy a 15-20% larger home for the same payments if they could find someone to assume their mortgage.
FHA and VA mortgages were very popular in certain price ranges and they allowed anyone to assume the mortgage regardless of the credit. If you could find a person to take over your note, you were free to qualify for another mortgage.
In October 1981, mortgage rates reached 18.63%. A $250,000 mortgage had a monthly principal and interest payment of $3,896.46. As astronomical as that rate sounds, people were still buying homes and were good investments.
Four years later, they were still over 12%. The monthly payment was $2,571.53. Believe it or not, people were excited to be paying only 2/3 what they had to pay a few years earlier.
Fast forward to late 1991 when the rates went below 9% and that same payment was to $2,015.16. At the turn of the 21st century, rates were 8.15% and that made the payment $1,860.62. Not much change in rates during that decade.
If we look around the housing bubble, late 2008, the rates were 6.04% and the payment was $1,505.31. By 2009, mortgage rates had fallen below 5%. The lowest mortgage rate was 3.31% on November 2012 with a payment of $1,096.27.
Rates fluctuated for the next few years until now, and most of the experts are expecting them to be above 5% by the end of 2018. Rates have increased each week for the last six weeks to 4.38% with payments of $1,240.12.
The average mortgage rate for the past 47 years is a little over 8%. The real estate and mortgage markets are cyclical. Rates have been historically low for a long period but will probably continue to rise. Most buyers don’t pay cash and mortgages enable them to purchase now. Based on history, even 8% would be an excellent rate. Until it reaches that point again, everything lower is a bargain.
Some buyers think that finding the right home is the critical part of the buying process and that is how they determine which agent to use. While it is important, there may be a broader skill set to consider when selecting your real estate professional.
The most recent NAR Profile of Home Buyers and Sellers indicate that 52% of buyers do want help in finding the right home to purchase. There was a time when the public did not have access to all the homes on the market, but the Internet has changed that.
Helping to negotiate the price and terms of sale were identified by almost 25% of the buyers. No one wants to pay more than is necessary and the terms of the sale can be as important as the price.
The next largest area of assistance that buyers value has to do with financing and the paperwork. Even if a buyer has been through the process before, it very likely could have been several years and things have probably changed.
Since the cost of housing is dependent on the price paid for the home and the financing, a real estate professional skilled in these specialized areas can be very valuable in finding the “right” home. An agent’s experience and connections to allied professionals and service providers is equally important.
Ask the agent representing you to specifically list the tools and talent they have available to address these areas.
The new tax law doubles the standard deduction and it is estimated that over 90% of taxpayers will elect to use it. However, even without considering tax benefits, homeownership has convincing advantages.
Besides the personal and social reasons for owning a home, one of the most compelling is that it is cheaper. Principal reduction and appreciation are powerful dynamics that reduce the effective cost of housing.
Amortized loans apply a specific amount of each payment to the principal amount owed to retire the loan over the term. Some people consider it a forced savings account; when the payment is made, the unpaid balance is reduced.
The price of homes going up over time is appreciation. While there are lots of variables and it is not guaranteed, it is easy to research the history of an area and make predictions based on supply and demand.
Interest rates are still low and can be locked-in for 30 years. Without considering the tax benefits at all, the appreciation and the amortization dramatically affect the “real” cost of owning a home.
Consider a $250,000 that appreciates at 2% a year for the next seven years instead of paying $2,000 a month in rent. In the example, the payment is less than the rent being paid even including the property tax and insurance.
When you factor in the monthly principal reduction and appreciation and consider additional owner expenses like maintenance and possible homeowners association, the net cost of housing is considerably lower than the rent. In this example, reduced cost in the first year alone is more than the down payment required on a FHA loan.
Based on the assumptions stated, the down payment of $8,750 could grow to $73,546 in equity in seven years. Can you name another investment with this kind of potential that also provides you a place to live, enjoy, raise your family and share with your friends?
Use this Rent vs. Own to make projections using your own numbers and price range. We’re available to answer any questions you have and to find out what it will take to own your own home.
Mortgage loans for more than 80% loan-to-value typically require private mortgage insurance. Mortgage insurance reimburses the lender if a borrower defaults on a loan. PMI is expensive, and homeowners should be aware of how to remove it when certain conditions have been met.
A borrower can request in writing for the lender to cancel the PMI when the mortgage balance has reached 80% of the home’s original appraised value. However, they are required to eliminate it when the balance reaches 78%. It is a good idea to monitor this, especially if additional principal contributions are being made to pay off the loan early.
Other methods to eliminate PMI sooner than through normal amortization include the following:
Mortgage insurance is not required on VA loans regardless of the loan-to-value. FHA mortgages made after June 3, 2013 are required to have Mortgage Insurance Premium for the life of the loan. For FHA loans made prior to that date, the MIP should automatically cancel when the loan-to-value ratio reaches 78% and has been in effect for a minimum of five years.
To obtain additional information specific to cancelling your mortgage insurance, contact info can usually be found on the annual statement provided by your mortgage servicer.
It can be shocking to hear how many people spend more time planning their vacation or next mobile phone purchase than planning for retirement. It is hard to imagine that they are expecting Social Security will take them through their golden years. A person who has paid in the maximum each year to social security can assume to receive about $30,000 a year.
Every adult in the work force, should go to SSA.gov to find out what they can expect based on their planned retirement age. Since it probably won’t be the amount you need to retire comfortably, at least you’ll know how much you’ll be short so that you can devise an investment plan.
There’s an easy rule of thumb used to estimate the investable assets needed by the time they retire to generate a certain income. The target annual income is divided by a safe, conservative yield to determine the investable assets needed.
A person who wants $80,000 annual income generated from a 4% investment would need investable assets of $2,000,000. If a person had $500,000 now, they would need to accumulate $1.5 million more by the time they retire. They would need to save about $100,000 a year to be ready for retirement in 15 years.
If saving that amount does seem possible, an IDEAL alternative could be to invest in rental homes. The familiarity of rental homes like owning a personal residence can reduce some of the risk. Rentals also enjoy other characteristics like income from the operation, depreciation in the form of tax shelter, equity buildup from the amortization of the loan, appreciation and leverage from the borrowed funds controlling a larger asset.
Some investors explain the strategy by buying good rentals with mortgages and having the tenant to retire the debt for you. Single family homes offer the investor an opportunity to meet their retirement and financial goals with an investment that is easily understood and controlled.
A Retirement Projection calculator can give you an idea of how many rental homes you’ll need to supplement your social security and other investments.
The benefit of insurance is to transfer the risk of loss to a company in exchange for a premium. The deductible is an amount the insured pays out of pocket before the insurance starts covering the cost of the loss. The challenge is to balance the risk an insured can accept with the premium being charged.
To manage insurance premiums, policy holders often consider adjusting their deductibles. Lower deductibles result in less money out of pocket if a loss occurs in return for higher premiums. Higher deductibles will lower premiums but require that the insured bear a larger amount of the first part of the loss.
Insurance companies offer deductibles as a specific dollar amount or as a percentage of the total amount of insurance policy. The amount is usually shown on the declaration page of homeowner and auto policies.
A small fire in a $300,000 home that resulted in $5,000 of damage might not be covered because it is less than the 2% deductible which would be $6,000. If the homeowner can afford the cost of repairs in exchange for lower premiums, it might be worth it. On the other hand, if that loss would be difficult for the homeowner, a change in the deductible for higher premiums could be considered.
Raising deductibles can save money in the present when paying the premium but could cause problems later if a claim occurs. Homeowners should review deductibles with their property insurance agent to be familiar with the amounts and make any changes that would be appropriate.
The new tax law that was signed into effect at the end of 2017 will affect all taxpayers. Homeowners should familiarize themselves with the areas that could affect them which may require some planning to maximize the benefits.
Some of the things that will affect most homeowners are the following:
The capital gains exclusion applying to principal residences remains unchanged. Single taxpayers are entitled to $250,000 and married taxpayers filing jointly up to $500,000 of capital gain for homes that they owned and occupied as principal residences for two out of the previous five years.
Not addressed in the new tax law, the Mortgage Forgiveness Relief Act of 2007 expired on 12/31/16. This temporary law limited exclusion of income for discharged home mortgage debt for principal homeowners who went through foreclosure, short sale or other mortgage forgiveness. Debt forgiven is considered income and even though the taxpayer may not be obligated for the debt, they would have to recognize the forgiven debt as income.
These changes could affect a taxpayers’ position and should be discussed with their tax advisor.