Get the Buyer Incentives to Act Now

Sellers, who last year, were not willing to make any concessions, are much more likely to do so this year due to the softening of the market because of inflation and higher mortgage rates affecting affordability for buyers.

Concessions can take place in different forms.  A seller could offer to pay the buyer's closing costs or pay points for the buyer to get an FHA or VA loan.  Another option would be to pay for a 2/1 buydown that would lower the buyer's payments in the first two years of the mortgage.

Buydowns can be temporary or permanent and are achieved by pre-paying the interest at the time of closing.  Typically, the seller will do this as an inducement to the buyer.  While individual lenders set the price for permanent buydowns, a common rule-of-thumb would be two points, or two percent of the mortgage amount, to buydown the rate 0.5% for the life of the mortgage.

A more common type of buydown is a 2/1 where the payment is calculated at 2% lower than the note rate for the first year and 1% lower for the second year.  The third and following years, the payment would be calculated at the note rate.

$400,000 Purchase Price, 80% loan-to-value @6.27% for 30 years  Cost of buydown - $8,099
	1st year	2nd year	Remainder
Payment Rate	4.27%	5.27%	6.27%
P&I Payments	$1,775	$1,992	$2,221
Monthly Savings	$446	$229

 

In the example above, the seller would pre-pay the interest on the buyer's mortgage for the first two years to subsidize the difference in the note rate and the payment rate.

A 2/1 buydown is a fixed interest rate mortgage where the buyer must qualify at the note rate.  It is a standard, conforming loan and applies to FHA, VA, or conventional.  The benefit is that the buyer will have lower payments for the first two years which can help them settle into the home and not exhaust their resources initially.

Closing costs and pre-paid items are commonly included in seller-paid incentives for the buyer.  Many times, they are described in the listing and/or sales agreement as "Seller to pay up to $X,000 in closing costs or pre-paid items on behalf of the buyer."

The benefit to the buyer is that less money is needed to close the loan.  Lenders are agreeable to this type of provision if it is stated in the sales contract.

Car dealers have been providing incentives in the form of upgrades, below market interest rates, pre-paid regular service for a period, and other things to incentivize a buyer to purchase now.  It is also common practice for new home builders to do the same.

In the resale home market, while these things have been done in the past, there wasn't a need for sellers to incur the additional expenses with such a short supply of homes.  The market certainly changed in 2022 with fewer qualified buyers in the market due to the higher interest rates.  Now, sellers are starting to offer incentives but regardless, buyers can include the incentives in a sales contract for the seller to consider.

Your agent will be able to help you understand what things are common in your market to help with some of the concerns facing buyers today.

Compare Before Deciding on the Standard Deduction

The TCJA of 2019 dramatically increased the standard deduction so that many homeowners benefit from taking that rather than itemizing their deductions.  Taking the standard deduction may result in a larger deduction even if you have expenses that qualify for claiming itemized deductions.

Another thing that may reinforce that was interest rates for mortgages were low at the time and the interest paid plus the property taxes were less than the standard deduction.

In 2022, mortgage rates more than doubled, so anyone who purchased a home or refinanced at the higher rates might benefit from itemizing rather than taking the standard deduction.  The takeaway in this article is to compare both methods each year to see which way provides the larger deduction.

For 2022, the standard deduction for married couples filing jointly is $25,900, for single filers and married individuals filing separately is $12,950, and for heads of households is $19,400.  There are increased amount for seniors over 65.

Mortgage interest, points paid to purchase a home (paid by seller or buyer), and property taxes are deductible on Schedule A.  Other items allowed as deductions are charitable contributions, medical expenses in excess of 7.5% of taxpayers' adjusted gross income, and casualty and theft losses from a federally declared disaster.

In 2019, IRS reported that 89.5% of people took the standard deduction which is easier to file, doesn't require receipts, and may yield a higher deduction than itemizing. The only way to be sure is to compare both ways.

For more information, download Publication 529 or contact your tax professional.  Download my Homeowners Tax Guide for more information on homeowner taxes.

Negotiate a Buydown to Get into a Home Now

If you are a prospective homebuyer, things have changed in the past year.  Most notably, mortgage rates have more than doubled which has created an affordability gap that has taken approximately 15 million buyers out of the market.

Inventories are growing but it isn't because more people are deciding to sell their homes; it is because it is taking longer to sell properties because less people are qualified.  Current housing inventory is a little more than a quarter of what it was in 2008.

Buyers are wondering when the market will return to normal, as if mortgage rates at three and four percent should be commonplace.  The average mortgage rate between April 1971 and November 2022 is 7.76%.

Predictions for mortgage rates in the third quarter 2023 range from 4.5% for Fannie Mae, 5.0% for Mortgage Bankers Association, and 5.2% for Freddie Mac.

Traditionally, over the past 35 years, there is a 175-200 basis point difference between the 10-year Treasury and the 30-year mortgage rates.  However, recently, the spread has been 300 basis points.  Some experts explain this to indicate that the Fed's tactics for lowering inflation is working and the mortgage market will soon respond which is indicated by lower rates in the past few weeks.

"The gap between the 30-year fixed mortgage rate and the government borrowing rate is much higher today than it has been historically," NAR Chief Economist Lawrence Yun, said. "If we didn't have this large gap, mortgage rates wouldn't be 7%, they would be 5.8%."

There is opportunity for prospective buyers in today's market.  The slowing of housing sales, down 34% from December 2021, have changed the environment buyers were experiencing in 2020 and 2021.  Instead of having to pay a premium over the list price, many sellers are willing to negotiate on price.

Without multiple offers being the normal, buyers can expect to include contingencies for financing, appraisal, inspections, and possibly, the sale of a home currently under contract.

Some buyers who are confident that mortgage rates will come down soon have opted to purchase now with an adjustable-rate mortgage.  This can lower the rate by about one percent for the first period which can be five years.  When mortgage rates returned to acceptable, the borrower could refinance to a fixed-rate mortgage.

Another option to consider would be to do a buydown on the mortgage rate.  Assuming that in the "softer" market, the seller would accept an offer to buydown the interest rate for the first two years.  It would allow the buyer to purchase at today's prices, with much lower payments for the first two years.

Example

$500,000 Purchase Price, 80% loan-to-value @6.13% for 30 years | Cost of buydown - $8,934
	1st year	2nd year	Remainder
Payment Rate	4.13%	5.13%	6.13%
P&I Payments	$1,940	$2,179	$2,432
Monthly Savings	$492	$253

 

This type of mortgage is a standard, conforming, fixed-rate loan where the buyer must qualify at the note rate.  The payment for the first year is 2% less than the note rate and for the second year is 1% less than the note rate.  The difference must be paid in advance at closing and in the case of this example, the seller paid it based on contract negotiations.

During this period of lower payments, if the rate comes down, they could refinance the property.  Let's further assume that the rates come down at the end of the first year.  If the property is refinanced before the pre-paid interest is owed, the lender is required to reimburse the borrower which could be applied toward the cost of refinancing.

When the mortgage rates do return to an acceptable rate, there may be considerable pent-up demand from the mortgage-ready buyers who were priced out of the market.  This could lead to another seller's market where high competition results in prices above list price and sellers not willing to accept contingencies.

Temporary rate buydowns have been available for decades.  Their main purpose is to help a borrower get into a home with lower payments initially.  In some cases, they need it because they depleted their cash reserves on the down payment; in other situations, maybe, they are upwardly mobile and expect to be making more income soon.

The reason lenders across the country are talking about them now is because they provide a reasonable and viable alternative to buying a home at today's prices without having the higher payment initially for the current rates.  It especially makes sense if you believe that rates are coming down soon.

Your real estate agent can give you more information about this and explain how you can negotiate with the seller to pay the fee to get this type of loan.  Call us at (616) 402-3535.

If you're on the sidelines, at least get ready...

If you're on the sidelines to buy a home, there are things you can do to be ready when you do get back in the game.

Improve your credit score to qualify for the best mortgage rate available which are reserved for those with the highest scores.  Get a copy of your current credit reports from all three of the main credit bureaus: Equifax, TransUnion, and Experian.  You can get them at AnnualCreditReport.com without paying for them.

While you won't see a credit score on these reports, you will see a history of your available credit accounts.  According to the Federal Trad Commission, one in five people have at least one error on one of their credit reports which can lower your score or increase the cost or likelihood of receiving new credit.  Identify and correct these mistakes. 

Explain in writing the error in the report and include copies of documents that support your dispute.  Both the credit bureau and the business that supplied the information must correct the information that is in error.  There will not be a fee to correct it.  You can get specific info for the process on each credit reporting companies' website and from the FTC Consumer Advice.

There is a term call "credit utilization" which describes how much of your available credit on each revolving account is currently being used.  If the limit on one card were $10,000 and you had a $5,000 balance, the utilization ratio is 50%.  Amounts above 30% can negatively impact your credit score even if you do pay the balance each month.

Any delinquent items that may appear on your credit report need to be cleared up.  Regardless of whether there is a legitimate reason, it needs to be explained to the credit bureau.  Beginning in 2023, medical collections less than $500 will no longer be reported on consumer credit reports.

Continue to save for a down payment because mortgages less than 80% of loan-to-value require mortgage insurance which increases the monthly payment.  The exception to the rule is for VA loans which do not require it.  The cost of mortgage insurance could add 0.5% to 2% or more to the payment.

Lower your debt-to-income ratio by paying off installment loans for cars, boats, and other things.

While there are legitimate credit repair services available, you may be able to get excellent advice from a trusted mortgage professional.  You'll eventually want to be pre-approved before you start looking at homes.  Your real estate agent can make a recommendation to connect you with someone who will get you ready to get back into the game.

Negotiating Your Position

The seller wants the most for their home and the buyer wants to pay the least possible.  From the very beginning of the homebuying process, there are adversarial positions between the principals.  If you happen to be in a multi-offer situation, it just complicates things further.

Then, there are the emotions that tend to cloud the decision making on both sides of the transaction.  Sellers have lived in the home for years, possibly, with cherished family experiences and maybe, having put considerable effort and money into capital improvements.

On the buyer side, they may have lost out on several homes due to competing offers and now, this year, interest rates have doubled, and the discretionary funds required to pay for a home could be causing cuts in their budget in other areas.

A year ago, buyers were waiving contingencies for financing, appraisals, inspections, and other things just to be competitive.  Today, to make the home more affordable with the higher mortgage rates, buyers need the seller to make financial concessions but who is going to make their case to the seller for them?

The role of a third-party negotiator played by the real estate professionals has always been valuable to the success of the transaction but now, it may even be essential.  Sellers enjoyed an extraordinary market in their favor for the past two years with incredible appreciation and so many buyers chasing so few homes, the sellers were able to write their own ticket.

Inflation and mortgage rates have put the brakes on the market, eliminating over 15 million mortgage-ready buyers.  The buyers who are still in the market need to be cautious, so they don't overextend themselves and overpay for a home.

The agents can assist both the buyers and sellers in seeing things in an objective way that reflects the current market and not the way it was a year ago.  All parties must be reasonable and not expect too much.  They need to consider facts and not feelings.

Negotiating the sale or purchase of a home is a competition; for one person to get something, someone must give something up.  If a person doesn't feel comfortable with this, it is important to work with an agent who can bring their skills to the table on your behalf.  As your advocate, they can champion your position and put transactions together that would not have been possible if it were left to the principals alone.

Negotiation skills are acquired through training and experience.  When interviewing an agent, ask them what role negotiation plays in their marketing plan if you're a seller and purchase plan, if you are a buyer.  An agent who cannot defend their position in the transaction may not be the right person to defend yours.

Turn Back Time

As the expression goes, "if I could turn back time", maybe you would do some things differently.  If you're wanting to buy a home, the regret may come from not getting a mortgage when rates were half of what they are today.  There may not be a way to literally "turn back time" but you may still be able to get a mortgage with last years' rates.

Let's say a home was sold in the fall of 2021 for $350,000 with a 3% FHA loan.  Today, winter of 2023, the home is on the market for sale at $400,000.  There are buyers who have $40,000 for a down payment, who like the home, and want to purchase it.

At today's mortgage rate of 6.42%, the $360,000, 30-year mortgage payment would be $2,2565.54 for the principal and interest.  They have been looking for a year and in the past 12 months, the mortgage rates have doubled which will stretch their finances along with all the other inflationary pressures.

Their incredibly savvy agent has learned that the underlying mortgage is an FHA mortgage at 3.00% with a little less than 29 years remaining.  This loan could be assumed by an owner occupant at the current rate which would save the buyer a considerable amount of interest.

The problem is that the buyers do not have enough cash to buy the equity.  The unpaid balance is $328,902 which makes the equity about $71,000 which is more than the $40,000 they have available.

The agent believes that with the buyer using the $40,000, they should be able to get a second mortgage for the difference of $31,000.  While it may not be possible to get a 30-year term on the second, it may be possible to get a 30-year amortization on the payment and have the second loan due in ten years.

Sources for the second loan could be the borrower's local bank, a credit union, a relative or other investor not happy with what they're earning on cash in the current market.

This could save the buyer over $600 a month.  In addition to a lower payment, assumptions on FHA loans have lower closing costs, they're easier to qualify for, and the lower mortgage rates allow them to amortize faster than a higher rate mortgage.

 

Buyer Scenario #1 ... New Mortgage
Purchase Price	$400,000
10% Down Payment	$40,000
Mortgage at 6.42% for 30 years	$360,000
Principal & Interest Payment	$2,256.54
Future Value at 3% Appreciation in 7 years	$493,342
Future Unpaid Balance	$325,062
Future Equity	$168,280
Buyer Scenario #2 ... Assumption
Purchase Price	$400,000
10% Down Payment	$40,000
Assume Existing Mortgage at 3% for 28.8 Remaining Years	$328,871
Assume Principal & Interest Payment	$1,386.66
New Second Mortgage at 6.5% for 30 years	$31,098
Payment on Second Mortgage	$247.32
Total Monthly Payments	$1,633.94
Monthly Savings	$622.55
Future Value at 3% Appreciation in 7 years	$493,342
Unpaid Balance on 1st Mortgage in 7 years	$266,313
Unpaid Balance on 2nd Mortgage in 7 years	$35,379
Future Equity in 7 years	$191,649
Increased Equity Over New Mortgage	$23,369

 

In the early 1980s, both Fannie Mae and Freddie Mac added "due on sale" and escalation of interest rate clauses to the standard verbiage on notes and mortgages.  From a practical standpoint, this ended assumptions of most conventional mortgages. 

FHA and VA continued to be assumable by anyone, regardless of credit, until 12/1/86 and 3/1/88 respectively.  At that time, an owner-occupant could assume the existing interest rate but had to qualify to do so.  Mortgage rates went down over the next three decades with only some temporary increases until January 2022 when they began to increase dramatically.

If a buyer had to qualify to assume a mortgage, especially if it was higher than the current rates, there was no compelling reason to put more money down for an existing mortgage.  Now, in 2023, this environment has changed.

Many buyers who purchased using an FHA or VA mortgage in the past two to three years, benefitted from some of the lowest rates in over 50 years.   The equities in these properties are still within reason to either assume cash to equity or consider a second mortgage for part of the equity.

If you'd like to learn more about how to assume FHA, VA, or USDA mortgages at lower rates than currently available on new mortgages, contact your real estate professional.  Unfortunately, some agents are not aware of how assumptions work.  Give us a call and we can walk you through the process and even have a spreadsheet that will analyze the comparison for you.

Buy Now, Refinance Later

The dilemma facing would-be buyers today is to wait until things settle down or move ahead in this unsettling economic environment.  More specifically, the question should be, what are you waiting to settle down: mortgage rates, or prices or both?

Mortgage rates haven't been this high since 2002, so it could be considered plausible that the high rates are temporary.  That leads to the question of how long before they do start coming down.  If we look back further, the average 30-year fixed-rate mortgage, dating back to April 1971 is 7.81%, so the current rate is lower than the 50-year average.

The other variable is waiting for prices to come down.  That one is probably not as likely to happen.  We have seen some softening of prices for homes on the market which is due to a decline in sales based on affordability and the resulting increase in inventory. 

Sales reached a seasonally adjusted annual rate of 4.09 million in November which is down 35.4% from one year ago, conversely, inventory has increased to 3.3 months from 2.1 months one year ago according to the NAR Housing Snapshot of Existing Home Sales.

While listing prices may be coming down, sales prices are still rising from the same month a year ago.  The National Association of REALTORS reported the median sales price for November 2022 is up 3.5% from November 2021.

Homes are expected to continue to appreciate and not come down in value albeit at a much lower rate than was seen in 2021, and even currently in 2022.  Historically, homes have appreciated at 4% annually on a national basis. 

Nationally, the NAR reports 42% of homes are selling at or above list price while 58% of homes are selling for less than list price.

Lawrence Yun, Chief Economist for the National Association of REALTORS at their recent annual conference, forecast home price appreciation for 2022 at +10%, for 2023 at +1% and 2024 at +5%. 

Some experts are calling for a decrease in prices.  Ivy Zelman, of Zelman & Associates, expects national home prices to fall 4% in 2023 and 5% in 2024.  Goldman Sachs is expecting a 5-10% decrease in home prices from its peak. Fannie Mae is expecting a 1.5% drop in home prices for 2023.  Freddie Mac predicts a 0.2% decrease in values.

Some consumers are anticipating another wave of foreclosures like the Housing Crisis in the Great Recession of 2008.  While the number has increased, it is not expected to reach anywhere near those previous levels.

Homeowners facing difficulties with the labor market and affordability have a significant advantage over those during the housing crisis over a decade ago.  Homeowners currently have record amounts of equity which give them options to borrow against the equity or to sell the home for more than is owed.

Returning to the dilemma facing many would-be buyers, "Wait until things settle down or forge ahead now?"  Being able to afford a mortgage at today's rates certainly factors into the decision.  If inflation is brought under control and rates do return to "normal", or at least the new normal, a buyer would be able to refinance the home at the then, current rates.

Home price appreciation has been close or beaten inflation in each of the past five decades.

Decade	Home Prices	Consumer Prices
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
Source ... NAR & Bureau of Labor Statistics

 

First-time homebuyers represent 26% of sales in 2022 down from 50%, its high in 2009.  This is the lowest it has been since NAR started the Profile of Home Buyers and Sellers in 1981.  Desire to own a home is the prevalent reason 62% of first-time buyers cited.

Holding onto cash during high inflationary times is not good because the purchasing power of the cash dwindles because the same dollar is able to buy less.  Moving money into hard assets, like real estate, allows the person to benefit from the inflation on a large asset.  The leverage from using borrowed funds to finance the purchase creates leverage that additionally works in favor of the buyer.

Download our updated Buyers Guide and connect with your agent to discuss your options.

Does high inflation discourage you from buying a home?

Inflation devalues the purchasing power of money and the interest earned on savings is almost always less than inflation.  Tangible assets like your home consistently become more valuable over time.  In inflationary periods, a home is a good investment and a hedge against inflation.

Borrowing money at fixed rates during times of inflation can be very advantageous...like buying a home.  The rate stays the same over the term of the mortgage and so does the payment instead of going up at the rate of inflation.

In September 2022, rents rose by 7.2% according to NAR Chief Economist, Lawrence Yun and "rents are accelerating to higher figures with each passing month."  The annualized rate for this year is 10.6%.  Buying a home allows you to avoid rent increases while enjoying property appreciation.

The housing shortage that is fueling the price appreciation, as well as increases in rent, is something that has existed for over ten years, yet American home building has not kept pace with population growth.

When you are repaying the mortgage, you are using dollars that are worth less and less due to inflation.  Home Price Appreciation has been close or beaten inflation in each of the past five decades.

Decade	Home Prices Average Annual Increase	Consumer Prices Average Annual Increase
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
22	13.4%*	8.2%

*Revised predictions for 2022 home price appreciation are: Fannie Mae estimating 16%; Freddie Mac 12.8%; NAR 11.5%.  Average of three projections is 13.4%

 

The funds for the down payment and closing costs that are sitting idle in a bank, while an otherwise qualified buyer waits to see what happens in the market, are having their value eroded by inflation.  At the current rate of inflation, $48,000 would be worth $39,073 in three years.  In seven years, it would be worth $29,697.

A 90% mortgage at 6.3% for 30-years on a $400,000 home that appreciates at 4% a year will have an estimated equity of $202,000 in seven years due to appreciation and amortization.  That is a 22.8% annual rate of return on the down payment plus $8,000 closing costs.  That is a significant hedge against a current inflation of 7.1%.

The borrowed funds in the mortgage produce leverage for the homeowner to enjoy the benefits as the value of the home goes up while the unpaid balance goes down with each payment made due to amortization.

Every day, a renter, who is otherwise qualified to purchase a home, is faced with a decision to continue renting or buy a home.  Renters will ultimately be facing an increase in their rent, feeling an erosion of the purchasing power of their funds, and experiencing an opportunity cost by not benefitting from the appreciation and amortization benefits of buying a home.

Let's connect and talk about what opportunities are available now and options that could benefit you, even considering the volatile economic atmosphere we're all facing.

Did you know this about your credit?

Credit scores are used to assess risk and determine whether a borrower is approved or declined for a mortgage, credit card or some other type of credit.  The score is a numerical value ranging from a low of zero to a high of 850 or 900 depending on the credit bureau.

The higher the score, the more likely the lender will be repaid in a timely manner.

1. A higher credit score could help you get a lower interest rate
2. You can get a free credit report from all three major bureaus at www.AnnualCreditReport.com.
3. Your credit score doesn't have to be perfect to get a loan ... most lenders want buyers to have a minimum of 620 but FHA will consider as low as 500
4. Credit utilization, the percentage of credit used compared to what is available, should be kept below 30%; amounts higher could negatively affect your credit score.
5. There is a difference between a soft and a hard credit pull.  The former doesn't hurt your score, but the latter can lower it a few points.  Try to avoid multiple hard inquiries.
6. Credit cards, bank loans, car loans and home loans are considered "good credit" and a mixture of different types is helpful compared to only a car loan.
7. Opening new credit accounts after you apply for a mortgage can hurt or even prevent you from being approved on the mortgage.

There are five components to making up a credit score.  35% of the weighted average is determined by payment history like paying on time.  The next highest item is the amount owed and counts for 30% of your score.  This component deals with credit utilization which is expressed as a percentage of what you owe divided by what is available.

The length of time you have had credit established accounts for 15% of the score.  New credit and the types of credit accounts are weighted at 10% each.  Opening several accounts in a relatively close period will negatively affect your score.  While it isn't necessary to have all types of credit like credit cards, installment loans, finance company accounts and mortgage loans, the types of credit in the mix are evaluated.

If you need help increasing your score, a trusted lender that provides your pre-approval can also make suggestions that would improve your credit.  Contact your real estate professional to get a personal recommendation of a trusted mortgage lender.

Waiting for the Mortgage Rates to Come Down

Waiting for the mortgage rates to come down before you buy a home may not be a good decision.

If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be devoured by the appreciated price increase.

As of 12/8/22, the 30-year fixed-rate was at 6.33% which is close to the highest level since mid-2008.  If the rate drops to 4.7% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.

An increasingly, popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.00% rate for five years.  Then, refinance to a fixed rate when rates come down.

Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.

Mortgage rates have increased over 3% in the first three quarters of this year.  Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates could lower the monthly payment. 

The lower adjustable-rate could save a buyer $300 a month during the first period of five years.  At any point during that period, they could refinance at a better interest rate should it become available.  However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.

Mortgage rates have been low since the housing crisis that caused the Great Recession.  The government kept them low to build the economy.  Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster it which led to inflation which is what is causing the rates to increase currently.

When inflation is under control and back to acceptable levels, the rates should lower.

Home prices are a different situation.  The recent rise in mortgage rates has caused home prices to moderate because it affects affordability.  Inventories are still low and there is a pent-up demand for housing from purchasers unable to buy during the pandemic.

This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise.  The rate of appreciation could even increase when rates come down which would also affect affordability and demand.

Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.

Downsizing Options

Opportunities exist for a subset of homeowners, possibly in their 60's to 70's, who want to downsize to smaller homes for convenience, less maintenance, change of lifestyle, or to save money.  These homeowners are more likely to have large equities and will not feel the same constraints that are keeping younger owners in their homes due to the substantial increase in mortgage rates in the past year.

In some cases, there may be enough equity in their relinquished home to pay cash for the replacement.  In other situations, the loan-to-value may be so low that even with higher mortgage rates, it won't be as expensive as purchasing with a minimum down payment.

Some downsizers may be moving from a high-cost area to a lower-cost area where they can get more home for the dollar and may even be able to free up cash for investment or special projects.

It is more likely that older homeowners are living in a property above the median price.  If a seller has a $750,000 home with no mortgage and they're wanting to downsize to a $400,000 home, 7% mortgage rates are probably no concern at all because they're going to pay cash.  In a situation like that, even considering sales costs on the relinquished home and acquisition costs on the replacement home, there will be cash proceeds available.

If you're considering downsizing, or possibly, have parents in this situation, feel confident that you have different options than first-time buyers becoming a homeowner.  Your equity and the fact that you're buying a smaller home can help you achieve your objectives even in a volatile market.

Let's connect and explore the different options that are available.

Concessions Make Your Home More Marketable

Sellers offer concessions as an incentive to encourage buyers to purchase their home.  The concessions, paid for by the seller, benefit the buyer in ways that may be more appealing than possibly being able to purchase the home for a lower price.

In some situations, buyers have good income, credit, and even the down payment to purchase a home but not necessarily enough cash reserves to pay their closing costs.  Another possibility is that there could be a feature in the home that the buyer wants replaced but can't afford to do it themselves.  If the seller agrees to make that improvement, it could cause the buyer to act favorably.

Concessions could include paying the buyer's closing costs, buying down the interest rate, or any possible combination of physical improvements or upgrades to the property.

Sellers, occasionally, question why they should provide concessions to a buyer.  It should be obvious; it improves the marketability of the home.  With less than the normal number of homes on the market, it may appear that the seller has the advantage and may not need to offer concessions.

Today's market is different.  The decreasing number of sales and increased days on the market are resulting from a smaller than normal pool of buyers.  Interest rates have more than doubled in 2022 which has made houses less affordable.  Buyers who qualified last year but couldn't find a home to buy, may be able to find a home today but their debt-to-income ratio has increased significantly, causing them to qualify for smaller mortgages.

Most buyers, especially in lower priced range homes, can't afford to put more money down and human nature tends to discourage them from considering a smaller home.  For that reason, they are forced out of the market until rates come down.

To counteract this dilemma, sellers are willing to consider making concessions, something that builders have successfully used for years to sell their inventory without lowering their prices that will have a direct impact on comparable sales which affects appraisals.

Concessions can take on different forms.  A seller could offer to pay the buyer's closing costs or pay points for the buyer to get an FHA or VA loan.  Another option would be to pay for a 2/1 buydown that would lower the buyer's payments in the first two years of the mortgage.

Any number of improvements could be offered to the buyer like appliances, floor covering, countertops, roof, fence, etc.

Typically, these would be included in the listing agreement and promoted in the listing description through MLS and other public media.  When a sales contract is written, it needs to be included so that there is no misunderstanding between the parties and that the lender is completely aware of the concessions.

To avoid possible disputes, it is also recommended that a dollar limit is attached to the concession.  For instance, "Seller to pay up to 3% of the sales price in buyer's financing concessions" or "Seller to escrow up to $5,000 for appliances at buyer's discretion."

Concessions have not been used much in the past fifteen years, but changing times requires us to use different methods to be successful.  Sellers can offer concessions and buyers can ask sellers to make concessions in the purchase agreement.

If your agent is not familiar with concessions, it may be that they have never used them before.  They are commonplace and legal, within limits, if they are disclosed.  The benefit is that concessions can improve marketability of a home and put a transaction together between parties that would not be possible otherwise.

Building Your Home Buying Team

There are a lot of professionals involved in the home buying process.  And when these people can function as a team, the buyer is much more likely to end up where they want to be...in their new home.

The lender is an integral part of the team unless you are going to be paying cash.  Trust is very important when selecting this person because they are going to qualify you for the mortgage you need.  The interest rate and fees should be fair based on your credit, income, and the market. 

You'll want someone who can close at the rate and terms that were quoted.  In a rising market, you may want to consider locking in the rate so that it doesn't go up before you close.

The appraiser is hired indirectly by the lender to determine the value of the home as part of the loan approval process.  During the financial crisis of 2008, a process was created by the Dodd-Frank Wall Street Reform and the Consumer Protection Act to limit direct contact between borrowers, lenders, and appraisers.

This requirement protects appraisers from being influenced by a lender.  Sometimes, an Appraisal Management Companies, AMC, may assign an appraiser who may not be familiar with a particular area or type of property.  The real estate agent can act as a liaison to provide additional information about the property and area that the appraiser would not necessarily know about initially.

Once a contract has been fully agreed upon, one of the first steps is for the buyer to have a home inspection made by a professional.  While most states require these professionals to be licensed, 14 states do not require one to perform inspections.

In addition to being licensed, some inspectors belong to professional organizations that provide specialized education and suggest levels of performance.  Recommendations from friends who have recently purchased a home would be helpful.  Your agent may give you several names of inspectors and you can ask for the buyer's contact information who used them recently to verify their results.

Pest control is not usually included in the normal home inspection.  These are also licensed specialists who are concerned about termites, other insects, and vermin.  If you do not have experience with a pest control company, recommendations from friends and your agent can give you a place to start.

Property casualty insurance is required by the mortgage holder but even if you were paying cash for a home, it would be prudent to have insurance.  A homeowners' policy provides the broadest coverage with fire and other named perils including burglary for both the dwelling and the contents. Liability is packaged with the other coverage to protect you if someone is hurt while on your property.

Deciding based on policy price may not present a complete comparison.  Another consideration is how the company handles claims in both time and settlement.

The title insurance provider is usually named in the sales contract.  There are two different policies that are usually offered simultaneously but paid for separately.  The owner's title policy guarantees the buyer they are getting a clear and marketable title while the mortgagee's title policy guarantees the lender that they have an enforceable lien.

The Real Estate Settlement Procedures Act gives the buyer the right to determine the provider.

Surveys are commonly required when new mortgages are established to make sure there are not encroachments on the property lines.  Even in a cash purchase, a buyer may want to get a survey for the same reason.  In some cases, lenders might accept a seller's previously obtained survey.

The title company usually order's the survey based on instructions from the contract or lender.

A real estate attorney is required in some states to be involved in all transactions.  In other situations, a real estate attorney may be involved to draw the legal documents but in no way is representing the interests of a specific person.

A buyer or seller can consult an attorney and have them represent their interests in the transaction.  Once a buyer understands that an attorney is not required in a real estate transaction, they are free to decide if they want legal representation.

The listing agent is hired by the seller when they place their home on the market for sale.  In many cases, the listing agent has a fiduciary duty to put the seller's interest above their own.  These duties include loyalty, confidentiality, disclosure, obedience, reasonable care, diligence and accounting.

The buyer's agent will interface with the listing agent in the various negotiations that will take place beginning with showing the property, offer, acceptance, and all the other steps that will lead to the settlement of the sale.

Agency describes a legal relationship and can apply to seller's and buyer's agents and is created once an agreement is signed; a few states have provisions for oral agreements.  Members of the National Association of REALTORS subscribe to a code of ethics that describes their practice and behavior to clients and the public.

There are many professionals involved in the purchase of a home.  From a buyer's standpoint, it is helpful to have one person who is familiar with the process to be coordinating the efforts of the different parties to finish with a settlement and possession.

There are a lot of steps and even if a buyer has been through the process before, they may not have the experience to anticipate difficulties and solve issues that could derail the transaction.  The role of a third-party negotiator is a valuable role that the buyer's agent plays.  While the buyer is in control, the buyer's agent can provide the information and background necessary for sound decisions.

The purchase of a home is the largest investment most people make.  Like it takes a village to raise a child, it helps to have a team to buy a home.  Finding an agent to keep your best interests at heart is the first team member you need to select.  From there, your agent can help you find the other team members.

For more information, download the Buyers Guide and make an appointment, in-person or virtually, to find out how they can put together your Homebuying Team.  In that appointment, ask the agent to explain agency and its benefits to you in your upcoming transaction.

Securing Your Retirement

Social Security was established, on August 14, 1935, to take care of the country's elderly in their retirement years.  Today, about 65 million or 1/6 of Americans collect benefits and the average monthly retirement amount received in January 2022 was $1,614 per month or about $19,370 per year.

This annual Social Security benefits exceed the 2022 Federal poverty level of $13,590 for individuals and $18,310 for a family of two but from a practical level, it is nowhere near enough to be comfortable in your "Golden Years."

Every adult in the work force, can go to SSA.gov to find out what to expect to receive based on their planned retirement age.  Since it probably won't be the amount you need to retire comfortably, at least you'll know how short you'll be so that you can devise an investment plan.

There's a quick formula to estimate the investable assets needed by retirement to generate a certain income.  The target annual income is divided by a safe, conservative yield to determine the investable assets needed.

A person wanting $100,000 annual income generated from a 5% investment would need investable assets of $2,000,000.  If a person had $500,000 now, they would need to accumulate $1.5 million more by the time they retire.  A 50 year old wanting to retire at 65 would need to save about $100,000 a year for 15 years.

If trying to save an extra $100,000 a year seems impossible, consider the leveraged growth available in rental real estate.  The use of borrowed funds can contribute to the yield earned by the investment.  By reinvesting the positive cash flows from the rental to retire the mortgage, the home could be paid for by retirement, providing more cash flow when it is needed the most.

One of the bright spots in investments is rental real estate which is also open to self-directed retirement savings.  Single-family homes offer high loan-to-value mortgages at fixed interest for long terms on appreciating assets with tax advantages and reasonable control.  Price appreciation alone has outpaced inflation for the last fifty years.

Many Americans have participated in Individual Retirement Accounts, SEPs, 401(k)s or other types of retirement that would supplement the Social Security benefits.  Many of these are invested in mutual funds which have lost about 20% in value in 2022.  With inflation at a 40-year high, many retirees and future retirees are concerned about their income from these investments.

Retirees want a safe and secure investment whose income will not be eroded by inflation.  Single-family homes, in predominantly owner-occupied neighborhoods, meets those requirements.  Home prices have experienced double-digit appreciation in the past two years and around 5% for the last five decades.

Decade	Home Prices Average Annual Increase	Consumer Prices Average Annual Increase
70's	9.9%	7.2%
80's	5.5%	5.6%
90's	4.1%	3.0%
00's	2.3%	2.6%
10's	4.9%	1.8%
20 + 21	12%	3%
		Source: NAR & Bureau of Labor Statistics

 

Increased mortgage rates coupled with rising home prices have sidelined many would-be purchasers who want to be in a home.  Since they cannot buy at this time, the next best alternative is to rent a home.  This has added to the increased demand for single-family homes in good neighborhoods which has resulted in increased rents.  While this isn't good news for tenants, it is for investors.

Investing in rental real estate could be a way for you to increase your retirement income and grow your net worth while avoiding the volatility of the stock market.  Current homeowners already are aware of the value of homes as well as the maintenance they require.

To get more information about single-family homes for rentals, download my Rental Income Properties guide.  You can also schedule a time with me to get answers to any questions you may have and find out about what is available now.

Homeowners Need Resources

Managing an asset worth hundreds of thousands of dollars is a responsibility that requires attention to details such as timely payment of the mortgage, home repairs and maintenance, upkeep, and oversight on financial issues including taxes, insurance, and other things.

Depending on how long you've been a homeowner, you may have faced some of the decisions common to homeownership.  Occasionally, there could be something new that you haven't had to deal with in the past.  This is where having a resource you can rely on becomes valuable.

During the buying or selling process, it is natural to turn to your agent for information and advice but during those periods in between where do you go for counsel?  Sure, you can turn to the Internet but that may not be the best place to get advice for your situation.

I encourage you to think of me as your "source of real estate information"; someone you're comfortable with asking a question and confident that you'll get good advice.  I not only want to be there for you when you buy or sell, but all the years in between.

By helping you with the day-to-day decisions of homeownership, I believe we can develop relationships that will lead to future sales when you move again, as well as recommendations to your friends who need the services of a trusted real estate professional.

Whether you simply need the recommendation of service provider, a trustworthy mortgage professional, an estimate of your current market value, or advice on what kind of improvements are best to consider, I'm happy to share that information with you.

Just a few of the kind of questions I often receive:

• Can you recommend a good (plumber, painter, handyman, etc.)
• What is the current value of my home?
• How do I challenge a property tax assessment?
• When should a homeowner refinance?
• How often should we update our personal home inventory?

I want to be your "Go-To" person for everything to do with real estate.  If you have a real estate question, please call me at (616) 402-3535.  If I don't have the answer, I'll find it for you or at least, point you in the right direction.

Waiting for the Mortgage Rates to Come Down?

Waiting for the mortgage rates to come down before you buy a home may not be a good decision.

If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be devoured by the appreciated price increase.

As of 10/27/22, the 30-year fixed-rate was at 7.08% which is the highest level since April 2002.  If the rate drops to 5% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.

An increasingly popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.96% rate for five years.  Then, refinance to a fixed-rate when rates come down.

Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.

Mortgage rates have increased over 3% in the first three quarters of this year.  Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates are substantial and could lower the monthly payment. 

The lower adjustable-rate would save a buyer $323.90 a month during the first period of five years.  At any point during that period, they could refinance at better interest rate should it become available.  However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.

Mortgage rates have been low since the housing crisis that caused the Great Recession.  The government kept them low to build the economy.  Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster the economy which led to inflation which is what is causing the rates to increase currently.

When inflation is under control and back to acceptable levels, the rates should lower.

Home prices are a different situation.  The recent rise in mortgage rates has cause home prices to moderate because it affects affordability.  Inventories are still low and there a pent-up demand for housing from purchasers unable to buy during the pandemic.

This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise.  The rate of appreciation could even increase when rates come down which would also increase affordability and demand.

Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.  Reach out to me and we can discuss the options that are available.

Finding Funds for a Down Payment

A soft second loan, sometimes called a silent second, is subordinate to the first mortgage, whose payment is deferred or forgiven until a specific date or the resale of the property.  This would mean that buyers would not have to contend with regular payments thereby keeping their debt-to-income ratio lower and more affordable.

While normal lending institutions may not be open to such types of financing, family and friends may be.  In some cases, these relatives and friends may be inclined to make a gift to help buyers get into a home.  Instead of an outright gift, if the person makes the loan, they have options to be repaid at some point in the future or in other cases, they could forgive the debt but don't have to make that decision today.

There are more than 2,000 down payment assistance programs nationwide.  State, county, and city governments run many of them.  Other programs could be from churches, employers, non-profit organizations, regional Federal Home Loan Banks, federally recognized Native American tribes and their sovereign instrumentalities or public agencies.

Various local or state Housing Finance Agencies have used "soft second" mortgages for down payment and closing costs to eligible borrowers.  For example, the Indiana Housing and Community Development Authority offers down payment assistance in the amount of 3 to 4 percent of the purchase price of the home at zero percent interest with no monthly payments. The loan is fully forgiven after two years if the borrower remains in the home.

In a more mainstream application, let's say that a parent or other relative was willing to help a buyer with their down payment and possibly, closing costs to purchase a home now.  However, they will need the money for their retirement at some determinable point in the future, possibly, five to ten years.

The sales contract would disclose a "soft second" together with the terms which could include interest and due date such as ten years from execution of note or when they sell or refinance the property whichever comes first.   It would also specify that no payments would be made until the maturity.

The mortgagor of the "soft second" may also retain the right to forgive the loan.

The lender of the first mortgage must be aware of the intended soft second and it should be mentioned in the sales contract so it can be underwritten by the lender appropriately.  Failure to disclose a soft second to the lender is illegal and borrowers who fail to do so could be prosecuted.  Mortgage fraud is classified as a Class C felony under federal law.

Both liens would be recorded for public record for the safety of all parties concerned.

Since this procedure is not commonplace, the advice is to run this concept past your lender prior to writing the offer.  With full disclosure in the contract and the proper terms to satisfy underwriting, you should be able to structure a transaction to get a qualified buyer without a down payment into a home.

Some things to consider in the second mortgage note is a firm due date far enough down the road that it isn't going to trigger risk issues.  An example would be ten years or when the property is sold or refinanced, whichever comes first.  Specify an interest rate and arbitrary payments which would give the buyer the option to make payments if they wanted.  By doing this, the underwriter can calculate payments and amount owed at the term.

In today's economy, there are a lot of companies that have rich cash reserves, as well as plenty of individuals also.  Once buyers have identified a friend or relative to become the lender on the second mortgage, your agent will help you find a lender for the first mortgage who is willing to participate.

The buyer will become pre-approved and the process of finding the home can begin but not until the other steps have been finished.

"Do you feel lucky? Well, do ya?"

You may remember the famous line in the Dirty Harry movie when Clint Eastwood has just had a shootout with bank robbers and is standing in front of the lone surviving thief who is considering going for his gun. Harry with his gun pointed at the bad guy says to him ""Did he fire six shots or only five? Well, to tell you the truth, in all this excitement, I kinda lost track myself. But being this is a 44 Magnum, the most powerful handgun in the world and would blow your head clean off, you've gotta ask yourself one question: Do I feel lucky? Well, do ya?" 

Our economy has had a long recovery from the great recession, due in most part to the housing crisis of 2007-2009.  Then, the Pandemic hit in 2020 which tanked the worldwide economy but the surprise to homeowners happened to be housing.  2021 became a red-hot market with prices going up by 21% nationally. 

In 2022, mortgage rates have increased by four percentage points and haven't been this high since 2008.  Inflation, at the end of September, reached a 40-year high at 8.2%.  The Fed recently said they'll continue raising rates until they can get inflation near their target of 2% annual rate.

People who own homes have seen their values go up dramatically and so has their net worth. Due to the extremely low inventories and the maturing millennial market, there is a lot of pent-up demand for housing.

This leads us to the scene in the movie.  You may be considering buying a house now but at the same time, you're thinking "Have prices and mortgage rates hit the top of the market so they'll start coming down or will they continue to go up, making it cost more to get into a home?"

The facts are that the U.S. is the strongest economy in the world.  The housing bubble of 2007 was created by over-inflated property values and predatory lending practices.  Those conditions don't exist today.  There is a housing shortage in America due to not enough homes being built to keep up with demand and people staying in their homes longer.

Homeowners have record amounts equity in their homes and foreclosure rate hit a historic low at the end of 2021 even though it edged up a bit in spring of 2022 as reported by CoreLogic.

Homes are expected to continue to appreciate but not as fast as they did in 2021.  The revised predictions for 2022 appreciation vary from Fannie Mae at 16%, Freddie Mac at 12.8% to NAR at 11.5%.

NAR Senior Economist Nadia Evangelou recently said "Mortgage rates are a heartbeat away from the 7% threshold. According to Freddie Mac, the 30-year fixed mortgage rate rose to 6.92% from 6.66% the previous week. While inflation remains elevated, mortgage rates will continue to move up, making homeownership even further out of reach for many."

If the home you could buy this year for $500,000, will cost you $550,000 next year and the mortgage rate goes up from 6.5% to 7.5%, the payment will go from $2,844 to $3,461 based on a 90% mortgage for 30-years.

If interest rates are temporarily high based on the Fed's position to lower inflation, a home could be purchased at today's price and refinanced later when the rates come down.  5/1 adjustable rate mortgages allow a borrower to lock in a lower initial rate for five years which would allow a person to find the best time to refinance.

So, back to the movie scene... "you've gotta ask yourself one question: Do I feel lucky? Well, do ya?"