Why Now Is the Time to Buy a Home

 Owner-occupied, Residential Mortgage  Comments Off on Why Now Is the Time to Buy a Home
Mar 182011

Spring is just around the corner, traditionally the busiest home buying season. But mortgage applications for home purchases remain subdued. The reasons are many, including concerns about falling home prices, continued high unemployment, and restrictive credit standards. The economy certainly continues to face headwinds, but if you’re considering a home purchase, here are some reasons why now might be the best time to buy.

1. A recent study by Trulia (a real estate data network) concluded that buying is once again cheaper than renting in most Texas cities, including Austin, Houston, Dallas, and San Antonio.

2. Real estate markets are local. Recent talk about a “double-dip” in home prices are based on the entire US market. Texas statistics indicate that many areas of the state are approaching equilibrium between a buyer’s and seller’s market. In fact, the Austin area may see a housing shortage by 2012.

3. If you plan to use an FHA loan to purchase a home, the agency is planning to hike its mortgage insurance rates in mid-April by 0.25%. On a $150,000 mortgage, the increase is about $33/month.

4. Despite the fact that interest rates have risen since last fall, they still are amazingly low. Rates for a 30-year, fixed-rate mortgage are still below 5%. Before the financial collapse, we were excited about rates in the 6’s. Going forward, I’m afraid the factors favoring higher rates are going to dominate. I have outlined a few of these factors below.

– Japan is the second largest purchaser of US Treasury bonds (behind China). In light of the recent disaster, it seems likely that Japan’s appetite for US bonds will diminish. Given that the US cannot change the quantity of bonds it needs to sell, the market may insist on higher interest rates to absorb the supply that Japan would have purchased.

– The winding down of Fannie Mae and Freddie Mac will put upward pressure on rates. Fannie and Freddie purchase almost all mortgages not originated through government agencies (FHA, VA, USDA), and they currently have the explicit backing of the US government. Without that backing (or without Fannie and Freddie), estimates are that mortgage rates would be 0.5% higher.

– A new rule by the Federal Reserve regulating loan originator compensation is expected to raise rates at least 0.25%. The rule is complex and poorly designed and is scheduled to go into effect on 4/1. Originators no longer will be able to compete with each other on closing costs nor will they be able to cover unforeseen fee changes, such as when a rate lock has to be extended. The rule is likely to penalize quality mortgage customers because they will pay a higher rate to provide lenders with a buffer for these unforeseen circumstances. Longer term, many financial pundits predict the rule will lead to a further consolidation of the industry in the hands of the largest banks. Less competition typically means higher prices, or in this case higher rates.

– Another proposed rule may have an even more devastating effect. The financial regulatory bill passed last summer contained a provision that lenders must retain a 5% interest in any mortgage they sell unless it is a “qualified residential mortgage” (QRM). The bill left it to regulators to define QRM, and the proposed definition states that conventional mortgages with less than 20% down will not qualify. Estimates are that a non-QRM loans will have an interest rate 2% higher than QRMs. The senators who drafted the bill recently wrote the regulators to explain they didn’t intend for a large down payment requirement, but so far the regulators don’t seem to be listening.

For these reasons, now may be the best time to buy for the next decade. If you’re considering a home purchase, check out the calculators on our Web site.  (Go to www.LoneStarLending.com and click on the “Calculate Payment” button.)  You can estimate the maximum home price you can afford, among other calculations.  You also can compare various loan options without the threat of spam emails or solicitation calls.  (Click on the “Compare Options” button.)