Welcome to my new Blog and thanks for being a part of it! I plan on updating this Blog on at least a weekly basis. I will discuss of course the Real Estate Market. I'll mix in some lending comments and also what the economy may be up to at that particular moment.
Well, as some of you might be curious about, we're going to talk about the new lending guidelines and why these guidelines have recently changed. As I am sure that everyone has heard, 100% financing is now a thing of the past. Well, almost. It's a thing of the past unless you have DVA eligibility. If you don't know what DVA is, please ask - but my hunch is that if you don't know what it is, you don't have it. Some of you may be thinking that you could care less about 100% financing because you have enough money to put down on a home of your choice. As you will no doubtedly see, even if you have 100% cash to purchase your home, YOU CARE THAT IT'S GONE!!!
Up until recently, there were a plethora of 100% financing options. These ranged from 80/20 loans to loans with mortgage insurance to loans with down payment assistance. The 80/20's went away when the housing market took a turn for the worst. The lender in the second lien position (the 20% lender) was taking a hit because the homes were not selling enough to cover that amount. Well, we don't care that they went away because there was still 100% financing through FHA using one of the down payment assistance programs such as Nehemiah. This is a government backed loan that limits the lender's risk for defaults. As consumers, we cared that 100% was there. As a lender, they care about insured mortgages. Hence, everyone was still happy.
Now, about 2 months ago, legislation was passed and signed into law that made 100% FHA loans (the only available at the time) that were using down payment assistance illegal. The legislation contended that people that use down payment assistance were more likely to default, even though there is no concrete evidence for it. Now the down payment that you need to come up with is 3%, soon to change to 3.5%.
I'm starting to get to the point why everyone cares that down payment assistance is gone. People need a place to live. Nobody can argue with that. Life changes drive Real Estate. Whether it be a college grad that needs his or her first home, a growing family that needs a bigger home, or even a separation of a family into two different home. Whatever the case may be, most people move up OR down in their home value 125-150% As an example, the owner of the $200,000 home that wants to upgrade is probably going to spend between $250,000 and $300,000 on the new home.
Here's a stat for you that I've kept to myself up until now. 40% of buyers in our local market use down payment assistance for homes valued (and purchased) under $300,000. 40%!!! Now, let's say you have the $800,000 home for sale that you would like to sell before you upgrade or downgrade. I'd venture to say that you don't want to payments, even if you can afford it. Let's also assume for arguments sake that everyone in my example here is going to upgrade.
- Your $800,000 home is for sale. You want something new, regardless of what it is.
- The buyer for your home is selling $600,000.
- The buyer for #2's home is selling $450,000.
- The buyer for #3's home is selling $350,000.
- The buyer for #4's home is selling $250,000.
THERE ARE NOW 40% LESS BUYERS FOR #5 BECAUSE DPA IS GONE!! As you can see, everyone is affected up the line for home selling.
What can we do now? Well, the short answer is we can sit and wait. The Economy has tightened it's grasp on the credit market which may have some negative effects on the housing market. As if the housing market needs anything more negative to happen to it, right? Housing has consistently been a positive factor for the economy in the past many years. Even though it is easy to see that people have over-mortgaged, most of them used that money to buy things - to consume things. Restaurants flourished, home stores had profits soar, even down to the little mom and pop stores in the malls. All had great years because of the consumption. It's obvious that I am no expert on the economy. However, I am an expert in the Real Estate Market. No credit (lack of demand), depressed prices, and increasing inventory spell one thing. Trouble! I believe Macroeconomics 101 taught me this valuable lesson.
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