5 Not-So-Obvious Reasons Why “Early-Bird” Buyers Are Getting The Housing Worm

With each passing week, it becomes more obvious : the housing market has moved off its bottom. Home prices are rising, home supplies are dropping, and market optimism is up.

There are more reasons to “buy now”, though, besides just an improving market. Regulatory change, economic recovery and even monetary policy threaten the most favorable home-buying conditions in a lifetime.

Here are a few less-than-obvious reasons your buyer prospects should act now, or risk paying more on their next home purchase:

1. Purchasing power is up 20 percent since last year

Current home buyers are getting more bang for their housing buck.

The average 30-year fixed rate mortgage rate fell to 3.40% this week. This is an all-time low and puts rates 170 basis points below where they were 18 months ago. As a result of falling rates, today’s home buyers purchasing power have 20 percent more purchasing power than they did in 2011.

Here are the facts in action:

  • In February 2011, a $1,500 mortgage payment afforded a loan size of $278,000
  • In September 2012, a $1,500 mortgage payment affords a loan size of $338,200

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The dramatic rise in purchasing power is one of the main reasons why homeownership is 45% less expensive than renting on a national basis. Low rates can’t last forever, though, and as the economy continues its rebound, low mortgage rates will be among the first casualities.

This may be about as low as mortgage rates get and with each tick higher in the 30-year fixed rate mortgage, for example, home affordability shrinks. Better to act now while rates remain low.

2. Government programs are helping stabilize home values.

Also noteworthy is that, across many U.S. markets, home price growth appears sustainable. Some of that foundation and stabilization has been the result of improving local economies. The rest has been a government-assist.

New loan modification programs have reduced the number of foreclosures and short sales nationwide; and revamped loan products for underwater homeowners such as the HARP 2.0 refinance program and the FHA Streamline Refinance have helped today’s homeowners get access to the lowest mortgage rates ever.

As these owners get help staying in their homes, it’s leading to a decrease in number of foreclosures nationwide. This hastens the pace at which housing markets find balance, and begin to move higher.

We’re seeing this play out in previously-hard hit areas such as Phoenix, for example, where home prices have made double-digit growth in the last 12 months.

3. More buyers will chase fewer homes in 2013

Recent data suggests that the 2013 market will be a tough for U.S. buyers.

The National Association of Homebuilders reports builder optimism at 6-year high; REALTORS® increasingly relay stories of multiple-offer situations; buyers talk about  “all the good homes” selling too quickly.  It’s a trend and each item underscores that today’s pool of home buyers is growing faster than the available home supply in many U.S. markets.

Basic economics tells us that when demand outweighs supply, home prices rise and that’s exactly what we’ve seen. Median prices are up in many U.S. markets and appear poised to head higher in 2013 — especially with fewer homes starting the foreclosure process.

According to RealtyTrac, the number of homes heading to foreclosure is down more than 10 percent, year-over-year. Fewer homes in foreclosure helps to keep the national housing stock tight and means less homes on the market for buyers in the season to come.

Buyers looking to snag the best of this market’s inventory should consider acting now.

4. New “G-Fees” could raise mortgage rates again soon.

It’s not just home prices that should rise in 2013. Mortgage rates should, too.

While the Federal Reserve is using policies to suppress U.S. mortgage rates for some, separate government agencies including the Federal Home Finance Agency (FHFA) and the FHA have passed new policies which do the opposite.

As one example, in early-September, for all loans to be backed by Fannie Mae or Freddie Mac, the FHFA increased its mandatory guarantee fee by 10 basis points. ”G-fees” are how Fannie Mae and Freddie Mac charge lenders for mortgage-backed security-related services like pooling, servicing, and insuring against bad loans.

Each g-fee increase of 10 basis points adds roughly 0.125% to retail mortgage rates, or roughly $6 per month per $100,000 borrowed.

This recent increase was the FHFA’s second g-fee increase in a year, and the conservator for Fannie Mae and Freddie Mac has said a third g-fee hike is likely — perhaps a fourth and and a fifth, too.

With each g-fee increase, mortgage rates climb, and home affordability suffers.

5. Rising FHA mortgage insurance premiums raise loan costs

Rising loan costs affect more than just conventional borrowers — they hit FHA mortgage applicants, too.

In 2008, home buyers using FHA-backed home loans paid 0.50% in annual mortgage insurance premiums (MIP). Today, after four increases in four years, that premium as high as 1.50%. Plus, Congress is working on a bill which authorizes the FHA to make a new, 55-basis point increase.

By 2013, FHA-backed buyers could pay as much as 2.05% in annual MIP. Rising annual premiums mute the effect of falling mortgage rates.

FHA loans will likely be more costly in 2013 than they are today.

Those that want to make the most of the market need to act now

As we head into Q4 2012, the housing and mortgage markets look strong. Attitudes are changing and optimism is growing. The best opportunities for a “good deal” may be the ones your buyers get between now and the start of the Spring Season.

Written by  Dan Green

Dan Green is an active loan officer with Waterstone Mortgage. His mortgage blog, The Mortgage Reports, is widely-considered the #1 consumer mortgage blog nationwide. NMLS #227607.

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