Here is what was at the top of the headlines for the mortgage industry this past week:
1. Cost of Owning a Home is Spiking in 2014
The sharp rise in home prices in 2013 caused two conflicting results: The return of positive home equity for hundreds of thousands of borrowers and considerably weaker affordability for an equally large pool of potential homebuyers.
While positive equity allows more borrowers to move, weaker affordability keeps them in place. So which will be the greater driver of housing this spring?
“There’s going to be a reality check in the spring in terms of realizing that what we saw in 2013 is not a real market,” said Daren Blomquist of RealtyTrac, a real estate sales and data website. “It’s a nice bounce-back market, but ultimately you need the biggest pool of potential homebuyers out there to be able to afford those homes.”
In an analysis of housing affordability, RealtyTrac found that the estimated monthly house payment for a median-priced, three-bedroom home purchased at the end of 2013 was a whopping 21 percent higher than it was at the end of 2012 in more than 300 U.S. counties. That includes mortgage, insurance, taxes, maintenance and the subtracted income tax benefit.
The rise is the result of higher home prices and higher mortgage rates. RealtyTrac used a 30-year fixed-rate mortgage with an interest rate of 4.46 percent and a 20 percent down payment. That is versus a 3.35 percent interest rate the previous year.
2. Higher Education or a House–Can Americans Have Both?
Despite these statistics, Redfin Open Book Lender, John Wheaton, said home buying is still attainable for many student debt holders. According to Wheaton, “Many young people with student loans delay buying a home because they don’t think they can qualify for a mortgage. Yet, many of them actually can. Underwriters generally treat student debt in a more positive light than credit card or auto loan debt.”
For example, a person with $45,000 in student loans (about $500 per month for a 10-year term), a FICO score of 741 and an income of about $75,000 per year could likely qualify for a property starting at around $375,000 with a 5 percent down payment, Wheaton said.
For others, buying now would mean sacrificing on the home they really want. According to Redfin agent Alex Haried, “For my home-buying clients, student debt hasn’t prevented them from buying a home, it has prevented them from buying the home they want. Instead of buying a $350,000 home, they would rather rent for a few more years as they pay down their student debt and then buy a $500,000 home.”
With tuition costs soaring, potential homebuyers in the future may have even bigger debt hurdles to overcome. From 2008 to 2013, annual tuition for a public four-year university rose 20 percent to $18,391, according to the College Board. For graduate students, tuition growth is even steeper; the cost for a Master’s in Business Administration grew 33 percent between 2008 and 2012. For a top-tier MBA program such as the one at Duke University, students dole out $110,600 in tuition.
3. Keep your investment safe–Don’t Treat Your Home Like a Cash Cow
Almost everyone once thought of their house as their largest and safest investment—until the bubble burst.
For generations, prudent “savers” would put sizable chunks of their incomes into their homes. To begin with, you would buy a house slightly above your price range, thinking, “My salary will increase about 2 percent to 3 percent each year, and soon it will be just right.”
Ten years down the road, you redo your kitchen and expand your bathroom with the notion of adding value and growing your nest egg. Then, crash! Seemingly out of nowhere, your largest investment takes a major thrashing.
We all knew the stock market could turn south, although many of us didn’t want to believe it. But your house? Never. So what now?
The U.S. government has increased its spending on and promotion of home ownership. Interest rates are lower than ever before, and home prices in some areas remain depressed. Buying a home appears very attractive. It may be, but it is time the investment misconception is thwarted.