Interest Rates and the Current Housing Market

Over the last few weeks the Subprime mortgage market has been devastated if not killed off. We have seen multiple companies go out of business. Large players such as Novastar, New Century and even First Magnus have gone into bankruptcy. Even Countrywide the nation’s largest mortgage lender is teetering on financial disaster. We are now seeing the impact of these high risk loans play out in the real estate market as well as on Wall Street. The panic over the liquidity in the mortgage markets has definitely spilled over into the real estate market in a big way. If you look at the run the real estate market had in 2004 & 2005, the market force in the market was the availability of multiple loan programs and low interest rates. Low interest rates made it cheaper to buy a home than to rent. In this time many people were buying homes on first lien home equity lines. If you look at the prevailing rates for these home equity lines, they were around 4.25%. If you compare the same rate for that mortgage today you would be at 8.25%. Not only was money cheap but you could even buy a home with no money down and no proof of income, employment or assets. No documentation loans made it easy for anyone with high credit scores to obtain a mortgage. Many of these buyers had no business buying a home. They could buy because they could. The rules for lending have changed. That type of borrower will no longer be able to obtain this type of financing. You must now demonstrate your ability to repay your mortgage.

What does all of this mean to the current real estate market? Since the Subprime meltdown, mortgage companies have pulled back on the types and loan to values of mortgages they are offering. It is no longer enough just to show up at the closing table with your good credit score. You must demonstrate your ability to repay the loan. The no documentation or liars loans, as they are often referred to have disappeared. The 100% financing loans have also begun their recession. Borrowers will now have to have some skin in the game. Many of these high risk loans had borrowers bring no money down to the transaction. If things get bad, there is nothing to loose. Walking away from the situation is easy. It is true that you will end up with a foerclosure on your credit report, but the impact is still less than a bankruptcy. If you have put a down payment down on a property, a borrower would be more inclined to try to work it out and try to keep the property rather than to just walk away.

If I am selling my home what does this mean to me? What it means is that the pool of buyers has shrunk considerably. The tighter the lending guidelines get, the fewer buyers there will be to potentially buy your home. You might expect to see the value of your home drop as well. It is just simple economics. As demand goes down and the supply goes up, your home becomes worth less. If you don’t need to move don’t. If you do, you may want to consider renting. Real Estate cycles don’t last forever and it is likely market conditions will change in a few years.

If I am a buyer what does this mean to me? If you are in a position to buy, you may not have a better time to purchase a new home. With low interest rates, lower property values and anxious sellers abound, you may not find a better time to buy for years to come. There are still many programs that will allow you to buy with no money down. You may want to talk to your real estate agent about negotiating a seller to pay for your closing costs. Many Fannie Mae loan programs will allow a seller to pay for up to 6% of your closing costs. This would be enough to pay all of your costs and even buy your interest rate down to a more attractive rate. Sometimes the best time to buy is when nobody else is. The deals of a lifetime could possibly be right under your nose. At some point you need to give up the fact that this in not 10 years ago, it is now and these are the market conditions. You may kick yourself in another 10 years and say why didn’t I act then. Following the flock may not get you want and it may not be prudent. Trust you gut and make your move. Life is risky, but owning property over the long term is usually a winning proposition.

For more information on Fannie Mae 100% financing please visit www.getprequalified.com. While you are there you can check your credit and find other valuable financial services to assist you in the home buying process.

Dave Mason
Mortgage Broker