The real estate market has been waiting on a spark to catch for the better part of seven years. However, there are increased signs that buyers may be ready to finally jump back in – even in hot markets like San Diego. It is no secret that the shortcomings of economy hit the housing sector incredibly hard. Over five million Americans lost their homes since the start of the collapse. This has led to an increase in renters and lenders tightening their guidelines. Fortunately, there have been signs that the market is ready to fully recover, but nothing has stuck as of yet. Over seven years removed from the collapse, buyers are ready to once again enter the market in full force.
After the market collapsed, getting approved for a mortgage was difficult. Lenders – already having billions of bad debt on their books – wanted only slam dunk loans that they could easily sell on the secondary market. Gone were the stated income and low down payment loans. Only loans with excellent credit, low debt-to-income and a substantial down payment were accepted. This forced many would-be buyers into the rental pool, where they stayed for many years. The rental market has reached the point where it is more expensive to rent than it is to buy. After years of renting and getting nothing in return, renters have started looking at buying again.
Increased buyer interest has led some lenders to soften their guidelines. The FHA, the leading loan provider in the U.S., recently reduced the amount of private mortgage insurance coverage they require. This has directly reduced mortgage payments and offers buyers more house for their dollar. Accordingly, there are other changes in guidelines that are geared at attracting buyers. The FHA has long been the source for low down payment mortgages, but other lenders are now offering alternatives. Buyers can get into a new house with as little as three percent of the purchase price. For as much money as a rental security deposit, they can reap the benefits of homeownership. With monthly payments on a mortgage lower than a rental, buyers have begun to take notice.
Buyers are more qualified to buy than in years past. The mortgage collapse lead to increased credit card use, which lowered credit scores. Today’s buyer have learned to adapt and have finally accepted their current wage scale. On average, credit scores are higher than they have been at any point in years past. With increased credit scores, buyers have more options. Low down payment loans that they may not have been eligible for in the past are available to them now. Instead of accepting whatever program they could get, they can shop around for the best deal. Having rented for multiple years or downsized their mortgage, borrowers stabilized their credit and ready to take advantage of the market.
Many buyers are as stable as they have been in their employment in years. The unemployment rate has continued to drop over the last few years, and shows no sign in increasing any time soon. Stable renters want something for their money. Instead of living paycheck to paycheck, they have reduced their liabilities and increased their savings. They are not as worried that they will have to pack up and move in a few months if they lose their job. They are increasingly confident that they can handle a mortgage payment for the next 30 years. This has been one of the big concerns for would be buyers, but those fears are slowly going away.
The biggest factor drawing buyers to the market are the interest rates. It wasn’t that long ago that a good rate on a 30 year fixed mortgage was somewhere around six percent. Rates have been at or near all time lows for the better part of the past five years. This gives buyers the ability to keep a low monthly payment in a house they can afford. Interest rates show no sign of increasing any time soon. New programs with low down payments and low interest rates are the perfect storm for buyers.
There is also one other big factor in the market: lack of inventory. Lower demand means lower home prices. The same home that was on the market just a few years ago is now 15-20% lower. With lower prices, buyers are in a better position to buy than they have been in years. Instead of getting into bidding wars, they can make their offer and wait to see if its accepted. If not, they can move on to another house that is in their price range. Low rates, low home prices and low down payments mean we may be on the verge of a buying boom.
A foreclosure stays on your credit report for seven years. Many buyers are approaching that time and can begin looking to buy. There are many factors indicating that buyers are ready to enter the market again. Like most booms, they happen all at once and take on a life of their own. Interest rates and low home prices will not stay this way forever. The next 18 months should be a very exciting time for the real estate market. If you are looking to buy, you may want to start looking now. The home buying market is poised to take off soon.