June 12, 2024

Long Term Housing Stability Based On Strong Borrowers

When will the housing market improve?  That seems to be the question of the day so I offer some observations.

When you hear that financing is hard to get for a home mortgage, what you are really hearing is that unqualified buyers are not being approved.

If you can verify adequate income, are able to make a down payment of at least 3% and have decent credit (at least a 580 FICO score), getting a mortgage approval at a low rate is not difficult.  You will not be approved for a mortgage if you cannot verify your income, if you have terrible credit or if your income is insufficient to support your mortgage and other debt payments.  This is a healthy change for housing long term since ultimately, weak buyers are not capable of sustained home ownership.

Buyer psychology is an important part of the home buying process.  Just as in the stock market,  where higher price trends will entice more buyers, the same is true of housing.   Everyone talks about the wisdom of buying when prices are down, but the fear of future price depreciation deters present buying; everyone wants to wait until they can see a bottom.

Most responsible borrowers need to feel financially secure before purchasing a home.   With a very weak economy, job losses and lack of confidence in the future, most prudent people will think twice before taking on the large financial commitment of owning a home.  The disappearance of 100% financing also means that a buyer faces the loss of his capital investment if the mortgage payments cannot be maintained.

Is it cheaper to rent equivalent housing?  If it is cheaper to rent, does that imply that housing is overpriced?   Have prices been adequately discounted to adjust for past purchases made with easy financing by speculators and unqualified buyers?

A buyer contemplating a home purchase today must consider whether the various government schemes to keep delinquent homeowners in their homes is artificially propping up the market and extending the decline of housing prices.  If a homeowner is unable to pay his mortgage today and with incomes and jobs disappearing, how likely is it that a delinquent homeowner’s income will increase?  Are the loan modification programs and foreclosure holidays making a home buying decision more difficult?  If these programs fail, will the future flood of foreclosed homes on the market cause further large home price decreases?

Is the average buyer today prepared to pay the large maintenance and repairs associated with home ownership?  If buyers today see little chance of future price appreciation, are they prepared to invest a large part of their free time maintaining a home?

Given the large transaction costs of buying or selling a home is it worth purchasing a home unless you know with certainty that you will remain in the home for an extended period of time?  Transaction costs including sales commissions, financing and moving can easily equal 10% of an average home’s value.

Am I really ready to own a home?  In the past, when people foolishly believed that housing values could only go up, this question was rarely asked.  Before considering the purchase of a home, a buyer should discuss in depth with other homeowners the pros and cons of home ownership.  The question of whether to buy or rent has never been more difficult.  A very uncertain housing future and lack of confidence breeds indecision and purchase deferral.

Many of the current problems in the housing market arose due to the easy credit offered to buyers who should have stayed renters.  Buyers should not consider the purchase of a home unless their total mortgage and other debt payments are easily affordable.  Buyers should not use their last dollar of savings when purchasing a home.  Many unexpected expenses will routinely come up.  If you don’t have at least 6 months of income in savings, after your down payment, consider postponing the purchase until your finances improve.   After years of  house buying mania and then a bust, how many confident and strong buyers are out there?

Most mortgage companies and home builders involved with first time home buyers offer advice on determining the affordability of a buyers mortgage payment but do not address many of the other issues discussed here.  Major companies such as KB Homes, for example, discuss the affordability question, but I think more needs to be done in this area.

In the long run an educated buyer with financial stability will be the bedrock of a stable housing market.   Hopefully, future regulations arising from the current housing crisis will address the issue of educating home buyers and make this a mandatory part of the home purchase process.