As with any other business, investing in real estate is heavily associated with revolving trends. However, it is those that embrace trends that realize greater success. Investors familiar with the latest trends will have an advantage over their competitors. Therefore, the following outlines 5 summer housing trends that investors need to be aware of:
1.) Mortgage Rates Are Surprisingly Low
Mortgage rates are directly correlated to the market in which they reside. Accordingly, the rapid appreciation rate that has taken hold over a large portion of the U.S. housing market should have increased mortgage rates. However, as you may already be aware, rates have remained relatively stagnant – at least in comparison to predictions. Many experts familiar with the market believed mortgage rates would escalate this year, which is not the case. In fact, rates continue to hover just about historically low numbers and are unlikely to spike at all this summer.
While theorists can conjure up reasons as to why rates have yet to increase as predicted, it is most likely due to the speed in which the economy is recovering. More specifically, the rebound has not gained as much traction as many had hoped it would at this point.
“Rates are falling as a direct relationship to the fact that the economy is not healing as fast as everybody thought it would,” says Anthony Hsieh, the CEO of LoanDepot.
According to the latest forecast issued by the Mortgage Bankers Association, the third quarter of 2014 should witness rates of approximately 4.9 percent, with the end of the year ushering in a rate of 5 percent. Of particular interest to buyers, and investors for that matter, is the rate in which rates are going up. At this point in the year, mortgage rates were already expected to be higher than they are. Expectations have already been tempered. Moreover, it is very likely that rates will remain stable through the end of summer, says Peter Grabel, senior mortgage loan originator for Luxury Mortgage Corp. in Stamford, Connecticut.
“I don’t feel there’s any reason for rates to change a lot,” he says. Perhaps even more importantly, if investors have been offered a loan that they like, there may not be a better time to capitalize on it. “They are not much off all-time lows. There’s only room for them to go in one direction, and that’s up.”
Therefore, if you are an investor looking to procure a loan for your next investment, there may be no benefit in waiting. While there is a good chance rates will remain stable, there is a lesser chance that they will actually drop. Take advantage of the low rates that present themselves now.
2.) Easement Of Lending Practices
It is not hard to assume that negligent lending practices contributed to the most recent recession. In fact, it is well known that poor lending practices landed many unsuspecting homeowners in a world of trouble. Too many owners were simply not qualified to take out a loan the size of the one they were approved for. For better, or for worse, the gross negligence demonstrated by many lending institutions led to stricter guidelines. However, the wake of the recession made it increasingly difficult to receive loan approval, as lenders were scared to repeat their previous transgressions.
Fortunately, after years of tightening, standards are beginning to show signs of easement. The state of the economy has given lenders more confidence.
“We are seeing underwriters have a little more flexibility with some common-sense issues,” Grabel says. “That’s not a suggestion we are going back to the old days.”
Investors may have already noticed that standards are loosening on larger loans, otherwise known as jumbo loans. This is largely due to the fact that they are not typically sold to Fannie Mae or Freddie Mac. These government institutions have their own guidelines and lenders must follow them if they want to sell the loans after they are issued.
It is important to note that the easement of lending practices will allow borrowers with lower credit scores to participate in the housing market. As per Mel Watt, the new head of the Federal Housing Finance Agency, new guidelines will allow lending to borrowers with slightly lower credit scores. Select lending institutions are even permitting lower credit scores on FHA loans. The recent move may allow borrowers to secure a loan with a credit score below the typical 640.
3.) Creative, Non-QM Mortgages
The recent easement of lending practices has promoted the implementation of new mortgage regulations. Essentially, if receiving a loan were to become easier, addendums would need to be made.
Earlier this year, when new mortgage regulations were introduced, many lenders said they would not lend outside the guidelines set forth by the Consumer Financial Protection Bureau’s qualified mortgage rule (QM). The new regulations were put in place to protect banks from defaulting loans. However, the regulations served as a double-edged sword. While loans were safer to make, they were equally challenging to give out. The new regulations made it harder for borrowers to receive approval. But now that lenders are slowly becoming familiar with the rules, some are once again offering creative loans that don’t meet QM requirements. This is particularly beneficial to investors, as lenders will be able to accommodate specific needs.
“There are some places offering non-QM loans, “ says John Walsh, president of Total Mortgage Services in Milford, Connecticut. “I think you will see more investors enter that space because there is an opportunity there.”
It is helpful for investors, and similar borrowers, to have access to lenders that go outside the QM lending guidelines. Sometimes that may be all that is needed to secure a loan for a subject property you have your eye on.
4.) Discounted FHA Loans
Loans insured by the Federal housing Administration, or those more commonly referred to as FHA loans, have long been a staple of those who couldn’t secure a large down payment. However, the cost of mortgage insurance on FHA loans increased significantly in recent years. This cost alone has served as an insurmountable obstacle to many prospective buyers. That is not to say that all hope is lost.
In an attempt to assist those receiving an FHA loan, the government has acknowledged a willingness to ease some of the burden if the borrower in question is willing to undergo housing counseling. The idea behind this is to increase awareness and mitigate the risk placed on lenders. The program, otherwise known as HAWK, reduces the upfront fee the FHA charges borrowers to 1.25 percent of the loan amount, from 1.75 percent. In addition, HAWK also reduces the annual mortgage insurance premium from 1.35 percent to 1.25 percent. That is, of course, if the borrower agrees to receive counseling.
“It’s a pretty descent discount you would get,” Walsh says. “If you get a $200,000 loan, you are going to save $1,000 upfront and 10 basis points yearly.”
Those who qualify to receive this discount are advised to take full advantage of it when it is finally made available.
5.) Price Appreciation Cools Down
For the moment, home appreciation rates appear to be cooling off. That is particularly encouraging news for those looking to acquire a property in the near future.
While home prices are sill demonstrating a propensity for growth, they are doing so at a slower pace. According to the National Association of Realtors (NAR), the median price for a previously owned home in the United States was $191, 600, up 8.6 percent from the first quarter of this year, compared with the same time last year.
The rate in which homes were appreciating, prior to the slowdown, could be attributed to inventory levels. A distinct lack of inventory drove up demand and served as a catalyst for bidding wars. It was rare to find a home that multiple offers were not made on. Essentially, competition drove up the asking price on many homes across the United States. With inventory levels returning to “normal,” there is less competition fueling the buying frenzy.