The Real Story …
News and commentary about the real estate market and related topics.
Dave Parrish, ABR ®, CRSA, CSP, GRI, ePRO ®, REALTOR ®, RealtySouth
The opinions expressed here are my own and don’t necessarily represent those of HomeServices South.
Carrots and sticks…
For a while now, in an attempt to get the economy going again, the government has been offering carrots to motivate buyers to by homes: Tax Credits, historically low-interest rates (resulting from the Fed purchasing/supporting Mortgage Backed Securities) in addition to various other subsidies and incentives.
Come April 30th most of that comes to an end, except for qualifying active duty military that have an extra 12 months to use the Tax Credit. Given the belief that these programs will not be extended (indeed congress promised not to do so at the last extension), we are about to enter a new period of buyer motivation… that of the Stick!
Now there’s no doubt there was and is a need for change in the real estate, home lending / mortgage and appraisal industries. There have been a number of attempts at making course corrections: rule changes, penalties, new standards of practice. I’ll take a minute here to review some of the more notable efforts that have begun to impact the market and that will continue doing so for the balance of 2010 and perhaps beyond.
Last year Non-Family/Employer Down Payment Assistance programs were banned and the minimum down payment for FHA loans… now the major source of financing for the below $300,000 market was raised from 3% to 3.5%. There are rumors of the down payment requirement will be raised again within the next 12-18 months to a minimum of 5%. Add to that the adoption of the HVCC (Home Valuation Code of Conduct) which places additional reporting disclosure requirements for RESPA compliance and making appraisals a more arms length process resulting in lenders requiring purchasers to pay for appraisals upfront. This change which took full effect in January and has made the whole process a bit more cumbersome. However, it does offer greater protections to purchasers form buying properties with inflated values based on tainted appraisals. At the same time many Sellers have had to face the reality of surprisingly low market valuations.
All-in-all these are good things and needed changes and for the most part helpful to buyers; although, many of us in the industry bemoan the added paper work and opportunities for obstacles to getting transactions to the closing table.
More recent changes have included:
1) the Fed’s withdrawal from the purchase of Mortgage Backed Securities effective 3/31/2010, which will most certainly result in rising mortgage rates form the recent historically low rates and a corresponding decrease in consumer buying power. Note that from current mortgage levels of 5% a 1% increase in rates to 6% would result in a 20% reduction of the purchaser’s buying power. Or to put it another way, if a prospective buyer today is considering a $200,000 home he would have to lower his target to a $160,000 home.
2) The raising of the Mortgage Insurance Premium (MIP) rate of FHA loans from 1.75% to 2.25% (effective 4/6/2010), which will increase the cost to purchase for most homebuyers.
Changes already approved and coming include: the reduction of the allowed Seller Assistance to Purchasers for closing costs from 6% to 3% of the home’s purchase price (scheduled to take place at a yet to be announce date this summer), which will eliminate many buyers from the market since a large portion of Buyer’s simply do not have the cash to cover both the minimum down payment and the closing costs and pre-paid items. This will not only impact purchasers; but, by reducing the number of purchasers is likely to drive home prices down even further.
Add to that the fact that the USDA Rural Housing Program which has been a place for the cash strapped purchasers to find housing solutions (USDA Loans allow up to 102% of the home’s purchase price to be financed) is now projected to be out of funds before the end of May. We are of course hoping that congress will expand funding to this program… but that is in no way a sure thing.
All-in-all the short term outlook is as follows: Buyers and Sellers need to be aware of the changing environment and act to take advantage of the currently favorable market conditions which still exists even in the absence of the current Tax Credit program. It looks as though we are returning to the day when purchasers must plan and save for a home purchase. For the next six-to-nine months informed buyers will be making decisions based on a fear of losing these favorable conditions rather than on getting a check in the mail. Sellers will need to be aware of these changing market conditions and take advantage of the situations and circumstance that promote a favorable market for buyers to take action or be prepared to stay put. You know when you think about it… that probably is more of a normal market.
