With rates high and housing values falling this is not a fun market but there are two questions which should be addressed. 1)Are there people who can benefit from this and 2) what should folks who were contemplating refinancing their ARM do?
Purchasing
It is easy to look at the housing market and panic. National average housing values are likely to continue to fall at least for the next year. Realtors and mortgage folks are not having their best year ever but there is a reality that is being overlooked. For folks who do not own, the opportunity to buy in a buyer's market is starting to occur. We have gone through a period of several years where sellers have controlled the market. I have had cases where buyers were offering 10% more than asking and found that they were the 14th highest offer. That market helped drive prices up and also made negotiation of thing such as splitting closing costs impossible. That era is over. Some sellers do not yet fully realize this and are holding out for last year's prices. They are not going to get them. This makes for even more homes on the market.
If you are buying currently you should be asking the seller to as least share the closing cost or perhaps to buy the rate down. Some of this has to do with the way jumbo mortgage have been priced lately. A year ago a 1 point cost would get you a rate 0.25% less than no point. Now that 1 point will get you closer to a 0.5% lower rate. This way you can, in effect, have the seller pay to get what jumbo rates might be if we were not faced with this liquidity mess.
This is and will become even more so a buyer's market. Here is what you should do as a potential buyer:
- find out what you can afford as a payment on a fixed rate loan. Stay away from anything that qualifies you to buy something which you cannot afford at something less that the going fixed rate.
- pay attention to the local housing market. We can talk about national or statewide values but housing is everywhere local. If values are falling where you want to buy then you can wait. Do not try to think that you can find the bottom but just get some sense that values are not plummeting.
- note that one strange effect is that with there being a lot of foreclosures there are more renters and rents are going up and buying income property is becoming more attractive in terms of debt service ratio.
- express only joy that lending is getting stricter. You will not be overbid by someone with overstated income. You are less likely to be victimized by unscrupulous lenders who had only their short-term profit in mind. Many of them will be out of business.
- this is all about supply and demand. Supply (homes for sale) will increase as foreclosures increase and demand has decreased since lending standards have returned to something close to sanity. Foreclosures tend to do serious harm to values. This will not only drive prices down but totally screw people who are trying to refinance when the appraiser finds that the value has been savaged by the sale of a foreclosure down the block. These are sales which take place under extreme duress and they really hurt valuations.
Refinancing
This is something which is not getting enough attention but with values falling some folks who can refinance today will not be able to refinance next year because their value will fall and their LTV will be over the guideline. Even though rates may be higher than they should be some folks who have ARMs adjusting next year should refinance soon because they may not be able to refinance next year. While the situation is hardly ideal the fact is that some people are about to face their last opportunity to refinance for the next, perhaps, five years. When I first got into the mortgage business in 1992 it was after a significant slide in values. The company that I worked for did a lot of media advertising and we got a lot of phone calls. My recollection is that almost a third of the people who called had properties which they could not refinance because values had declined.
Dick Lepre
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