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Playing Monopoly Is Good Homework
March 6, 2023
If you’ve ever been in a Monopoly game after most of the properties have been purchased and developed, it can be a relief to land on Free Parking, knowing the dice must rotate to the next player giving you a respite from paying rent. Like the game, in real life, it would be nice to avoid paying rent and even better to have people paying you rent for property you own.
Winning in the game of Monopoly is all about investing. If you travel around the board, trying to buy the ultimate property and pass Go to get another $200, you’re missing the opportunity to purchase good properties along the way that could lead to upgrading into your dream home.
Starting early to buy your first home gives a buyer a chance to acquire a property with a minimum down payment, and inevitably, have a lower payment than paying rent for a similar home. As the home appreciates and the loan amortizes, the equity grows. Within a few years of average appreciation, the down payment can double or triple based on the leverage of using other people’s money.
They could use the equity to stair-step their way into a larger home and finally, their dream home. Or, if that homeowner’s goal is to acquire rental properties, they could convert that home to a rental and buy another home on a low-down payment, owner-occupied mortgage to allow that property’s equity to grow in the same way.
Multi-unit properties could be another option. Finance it with the same type of owner-occupied, low down payment mortgage to achieve leverage that isn’t available to non-owner-occupied investors; live in one unit and rent the others. FHA, VA, and conventional mortgages allow for owner occupants to purchase up to a four-unit building with minimum down payments.
It is very impressive to see the portfolios of properties that some young people have built by focusing on their goals, living within their means, and not getting distracted along the way. You can learn a lot from them but be careful about getting into a game of Monopoly with them; they know how to play the game.
Let’s connect and talk about some of the specifics.
Getting Comfortable with the New Normal Mortgage Rates
February 27, 2023
The biggest shock to homebuyers is the soaring mortgage rates of 2022 that doubled in one year resulting in approximately 15 million mortgage ready buyers displaced from the market due to affordability issues.
As of February 23, 2023, the 30-year fixed rate mortgage was at 6.5%. While that is twice as high as it was on January 6, 2022, it is still lower than the 7.75% average rate since April 2, 1971, according to the Freddie Mac Primary Mortgage Market Survey.
When rates increase at a rapid pace like this, it takes time for the public to adjust and begin to accept it as the new normal.
Prior to the housing bust that led to the Great Recession, the normal for mortgage rates was in the 6% range and existing home sales were over 6.5 million for three years. From 2007 to 2014, home sales were closer to 5 million with 2008-2011 at just above 4 million annually.
From January 17, 2008 to March 5, 2020, mortgage rates averaged 4.32%. In this 12-year period, buyers experienced some of the lowest mortgage rates ever and became to expect that rates would always be that low.
Then, during the hardest part of the pandemic, the government took unprecedented actions to influence rates even lower to where they averaged 3.06% between March 5, 2020 and March 17, 2022.
It appears that mortgage rates have peaked in this latest cycle. In December 2022, the rates came down for four straight weeks following two weeks of slightly higher rates. The question is what to anticipate for 2023.
The National Association of REALTORS is expecting mortgage rates to be below 6% in the last half of 2023 possibly, 5.5% to 5.7%. Zillow’s chief economist believes rates will drop to around 5.5% for 2023. The Mortgage Bankers Association expects that “30-year mortgage rates will end 2023 at 5.3%.” Fannie Mae forecasts rates will end 2023 at 5.7%.
Relying on the experts, rates are not going to return to the unusual levels during the pandemic or even in the past 12-14 years. The new normal may well indeed be at the mid-5% level and when the public gets use to it, sales will begin to rise again.
Some buyers may need to adjust their price points because higher payments are directly impacted by the higher rates. Even if they could have afforded more with the lower rates, that was a missed opportunity. When the Fed gets inflation under control and the market rebounds from the pent-up demand, another window could be lost.
David Stevens, CEO of Mountain Lake Consulting, and former Assistant Secretary of Housing recently said in a LinkedIn post talking about the housing market in 2023 “So be advised…this may be the one and only window for the next few years to get into a buyers’ market. And remember…as the Federal Reserve data shows…home prices only go up and always recover from recessions no matter how mild or severe. Long term homeowners should view this market…right now…as a unique buying opportunity.”
Get the Buyer Incentives to Act Now
February 13, 2023
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.
I can help you understand what things are common in your market to help with some of the concerns facing buyers today.