1. The Cost of a Mortgage Increased 13% in 2013
It has been a rough ride for mortgage rates over the past 9 months. As you can see on this chart, 30-year fixed mortgage rates have increased from 3.25% to 4.5% during 2013.
A buyer who wcould afford $500k at the beginning of the year, can now only afford $435k using the same monthly payment today. So in just 9 months, the cost of paying a mortgage has climbed 13%, and a buyer has lost 13% in purchasing power.
2. Home Prices are Continuing to Rise Everywhere
Home Prices are on the rise everywhere, as limited inventory is driving prices up. It is the old law of supply and demand, with limited supply demand will rise, and this is why we are seeing bidding wars for properties going on in most local markets, and this in turn is driving prices up.
For example, see below the September year-over-year home price appreciation gains for the cities Case-Shiller tracks for its report on housing values!
The housing markets in San Diego, LA and San Francisco have all seen annual appreciation gains around 20% over the past 12 months!
3. Tougher Underwriting Rules are Coming in January 14th 2014
On January 14th the CFPB, (the Consumer Financial Protection Bureau), is due to enforce new tougher qualifying rules for mortgages. These new laws will be known as “Qualified Mortgage” (QM) and the “Ability to Repay” (ATR).
Q: What is a Qualified Mortgage (QM)?
A: A Qualified Mortgage is a home loan that meets certain standards set forth by the federal Government. Lenders that generate such loans are presumed to have also met the Ability-to-Repay rule mandated by the Dodd-Frank Act. The Qualified Mortgage rule, as defined by CFPB, is designed to create safer loans by prohibiting or limiting certain high-risk products and features.
One of these new rules will cap the debt to income ratios allowed on certain loans at 43%. Currently the FHA and VA allow buyers to go to a 55% Debt to income ratio, Conventional is currently allowed to go to 45% and sometimes 50%.
Once these new rules are in place on January 14th, I will send out more information.
4. As Mortgage Rates Increase in 2014, Your Purchasing Power Will Fall
A question that all buyers have is, where will rates be in a year and how will this affect my affordability? There have been several experts out in the past few weeks who are convinced the Fed will taper their bond purchases early next year, now that economic data is improving, and predict mortgage rates will be north of 5% by this time next year. (Goldman Sachs, Pimco)
With that in mind, here is a good chart to share with your buyers, that shows the “impact of rising rates on a buyers purchasing power or affordability”. It shows if rates just increase from 4.5% to 5.5%, a buyer will lose another 10.75% in purchasing power, which means, if they can afford to purchase $600k today, they will only be able to afford $540k in a year!
Add in another 8%-10% appreciation, and the cost of a home will be roughly 20% more expensive in a year than it is today!
5. Buy A Home When the Fed is Offering Money at a Discount.
A question many people ask is, “When is a good time to buy a home?”
I think a great time to buy a home is when the Fed is applying monetary stimulus into the economy, via their Quantitative Easing or “QE” program, which essentially is giving buyers the opportunity to borrow money at a discount. But now that recent economic data has been improving, The Fed will start to pull back on their monetary stimulus soon, which will automatically increase the cost to borrow money.
As you can see on this chart, the influence of Federal Reserve stimulus on mortgage rates is undoubted, and is the #1 reason why rates are so low in the first place. The average 30 year fixed rate prior to stimulus was roughly 6.5%, compared to today’s rates of roughly 4.5%.
This is a chart that all buyers and move-up-sellers who are contemplating when they should sell should review, so they know what effect the Fed is having on current interest rates and affordability. Without Fed stimulus, rates will probably revert back to normal, which will be roughly 6.5% on a 30 year fixed.
Tips for Buyers and Move-Up-Sellers in 2014
Bottom line, all evidence above suggests that rates and home prices are going to continue to increase over the next 12 months, which means the cost of purchasing a home is going to increase for buyers. And it looks like qualifying for a mortgage may get more difficult too.
But, on the positive side, buyers should know that the average 30 year fixed mortgage rate over the past 40 years has been 8.7%, and 6.5% over the past decade! So for any buyers who are still on the fence looking at buying a home, a 4.5% rate is still a terrific rate to get on a home loan.
Another good tip for buyers too, is to focus on the monthly payment and NOT the rate. Yes rates have gone up this year and it is very unfortunate, but is the monthly payment still affordable? If the payment is still affordable, do not focus on the interest rate.
Overall, it is still a great time to buy a home, but waiting another 6 months or a year to buy a home, will probably just end up costing you even more money.
If you have any questions about any of this information above, please feel free to contact me directly at 858-442-2686. I look forward to chatting soon!