2008 all over again?

Coins, moneyLet’s not forget what happened during the housing crash. Many homeowners ended up in a negative equity position. In other words, they owed more on their houses than the houses were worth. I well remember sellers bringing money to the closing so the mortgage could be paid off.

Here we go again with loans that guarantee the borrower will have no equity from the start via zero-down mortgages.

United Wholesale Mortgage (UWM), one of America’s largest mortgage lenders, is offering zero-down mortgages, opening up home ownership to more people but revitalizing a controversial practice that carries as many risks as advantages for cash-strapped home buyers.

Here’s how it works: For first-time homebuyers making 80% of their area’s median income or less…

  • Buyers take out a mortgage for 97% of the value of the house they buy.
  • The remaining 3%, up to $15,000, is a second interest-free mortgage.

The second mortgage has to be paid back in one payment when the first mortgage is paid off or the house is sold or refinanced.

Under the program homebuyers start without any equity, so if the value of their home decreases, they would instantly owe more than the house is worth.

If a buyer has to sell quickly, they’ll still have to pay back the entire second mortgage or risk default/foreclosure.

Buyers may get stuck with a higher mortgage rate, even if the Federal Reserve starts to cut interest rates because to refinance, borrowers need to have enough cash to pay back the second mortgage.

Please think before you borrow and borrow responsibly.

Mortgage Interest Rates Matter

Will mortgage interest rates go down this year? Some experts are suggesting that rates will go down in September. Even with the higher rates home prices are rising and the number of home sales in 2024 will likely be up from 2023. Go figure!

Please borrow responsibly.  When you borrow it is a win for your employer because you will need to work hard to pay back your loan.

When rates go down the demand for houses will rise, which will drive prices higher still.

Keep an eye on rents. Rent growth was around 2.2% in the Twin Cities last year and less than half a percent for luxury properties. (Axios)

Chart of mortgage interest rates
Mortgage interest rates

Higher mortgage rates results in fewer home sales

According to the National Association of Realtors:

“Single-family home sales declined to a seasonally adjusted annual rate of 3.8 million in March, down 4.3% from 3.97 million in February and 2.8% from the prior year. The median existing single-family home price was $397,200 in March, up 4.7% from March 2023.

At a seasonally adjusted annual rate of 390,000 units in March, existing condominium and co-op sales decreased 4.9% from last month and 11.4% from one year ago (440,000 units). The median existing condo price was $357,400 in March, up 5.8% from the previous year ($337,900).”

This year waiting until spring to sell a house may not have been the wisest choice. So much for hind site. When rates go down prices will go up due to the pent up demand from home buyers who did not want to pay the higher mortgage interest rates.

The best time to sell in 2024 may have already passed. Keep an eye on the interest rates.

Mortgage interest rate – a historic perspective

There just isn’t anyway to sugar coat this. Mortgage interest rates are high. They will go down and when they do you may not be able to refinance and get a lower rate on your loan and if you do refinance the interest portion of your payment starts all over again. Borrowers pay the most interest on the first payment.

That means more interest and less equity. Anyone who reads this blog knows that I am in favor of homeownership. I am not in favor of debt or paying interest. Less debt means more freedom and more choices. Rates will come down again.

In the U.S. Mortgage debt is increasing and so is credit care debt. We owe, we owe, it’s off to work we go . . . .

 

 

Mortgage interest rate 10 year graph
Freddie Mac Mortgage Interest Rate averages

The lock in effect

Lock & keys
Lock

Those low mortgage rates and the recent mortgage interest rate increases have caused people with low interest rate mortgages to stay put. Who wants to trade in their 2 to 4% rate for 7% or 8%?

Higher interest rates are also making housing more expensive which is contributing to inflation which is why interest rates are being raised.

Rates are likely to go down this year. This is an educated guess but once rates are around 6% people will be more interested in moving again which will increase demand and drive up home prices.

Higher home prices will contribute to measures of inflation which will prompt the Federal Reserve to increase interest rates.

If rates are too high swipe left

brick and brownstone turret
Turret with brick, brownstone, and granite.

Mortgage interest rates are too high and so are home prices, which rose due to high demand and low rates.  Some real estate professionals are advising their clients to buy a house even though rates are 7%ish.

“Marry the house, and date the rate”.  This catchy phrase has become popular advice and a catchy phrase since the Spring of 2022 when mortgage rates increased to 20-year highs.

The phrase “Marry the house, and date the rate” means you’re committing to a long-term relationship with the house you love.  But you can dump the interest rate when you refinance.

Not so fast. Rates will remain high for a few years and it will take a few years just to build some equity at today’s prices. In fact, you can’t really date a rate. Well maybe you can but you don’t get to just decide when to date another rate.

When a borrower refinances to a new rate they start all over making mostly interest payments. People who have been laid off generally can not refinance. There are fees and closing costs too. In most cases, a borrower would need to own the house for at least three years and rates would have to go down by 2%. Good luck with that.

When my husband and I bought our first house rates were over 8.5%. At the same time houses were less expensive back then and our monthly payments were just a little more than rent.

We can not assume that home values will always rise and that rates will go down soon.  Housing prices can go down or stay flat and rates can go up.  In fact, sometimes renting makes more sense than buying. A home buyer could date an apartment and eventually marry the right house at the right price.

Typically the real estate agents promoting this phrase “Marry the house, and date the rate” either don’t know any better or are a bit sketchy.

Instead of dating the rate, swipe left.