Big Updates in the Lending World

Ever since the mortgage meltdown of 2008, it seems like it has been impossible for buyers to qualify for new loans. Following the 2008 crisis and well in to 2011 it looked like every lender required 20 percent down, excellent credit, and outstanding income in order to qualify for a new loan. Most buyers felt they would never be able to meet these requirements. However, the most recent three years have started to bring some flexibility back to the mortgage market. More specifically, we’ve seen some outstanding developments over the last six months that are really exciting for buyers: - FHA reduced their annual mortgage insurance fee by 0.5 percent. This equates to a savings of $80 per month on a $200,000 home. - The minimum down payment for conventional loans has been reduced to only 3 percent. This means you can purchase a $200,000 home with as little as a $6,000 investment. - New down payment assistance programs provide either a grant or a repayable second lien for the majority of the down payment, requiring the borrower to contribute as little as $1,000. - Investment property loans are available with as little as 15 percent down, allowing many smaller property investors to get back into the market. If you’re considering buying a property and haven’t been prequalified yet it’s worth your time to speak with a loan professional and see what they can do for you.

Bubble or No Bubble?

As we near the end of the summer selling season our housing market continues to march forward. Every month since February has brought a record high average home price in the metro Denver area, with average prices approaching an astounding $425,000. Amazingly, half of all Denver's new homes for sale sell in six days or less, which is the fastest in the country. The latest Case-Schiller report says we have the highest 12 month price increase of any of the Top 10 Cities it tracks (Denver 10 percent price increase, San Francisco 9.7 percent and Dallas 8.4 percent). The strength in the market has been so pronounced that logical, informed people are beginning to ask whether we’re setting ourselves up for another bubble. Good question. While no one can ever predict the future with certainty, I see no evidence that we’re heading for a dramatic downturn in the real estate market any time soon. Here’s why: 1. Even with the increase in metro Denver home prices the Housing Affordability Index is still well above the rate it was during the last upturn in the market between 2002 - 2006. The HAI is the median price of a home compared to the median income, taking into account the prevailing mortgage rate. So, given that homes are still relatively affordable given median (and, by the way, increasing) wages and low interest rates, we haven’t entered bubble territory. 2. The number of transactions relative to the population of metro Denver is just about at the 25-year average. At the peak of the bubble in 2006 the number of deals was about 20 percent percent above the historical average. When we see the number of closed transactions well above our historical average that’s an indication to me of an overheated market, as it was in 2006. We’re nowhere close to that. 3. As we led up to the last bubble in 2006, many of the deals were closed with low or no documentation ("liar loans” or “no doc loans"). Today, mortgage underwriting standards are the toughest they’ve been in decades. This prevents unqualified buyers from purchasing property, which mitigates the chance of the market overheating (fewer buyers means fewer purchases means less chance of the market frothing into bubble territory like it did in the past). 4. Because of reasonable home affordability it’s still cheaper to buy than rent in our market, especially at the lower end. This would not be true in a bubble. For housing price affordability to return to the average level that we saw in the years between 2002 and 2006 either home prices would have to increase an additional 24 percent or interest rates would need to reach 6 percent. Neither is going to happen any time soon. 5. The imbalance between buyers and sellers we’ve seen recently in our housing market is due to a lack of inventory, not illogical/unrealistic/unsustainable demand from buyers. "Much of the price increases we are seeing are the result of rising demand among investors and homebuyers for a still-limited supply of homes for sale," said Anand Nallathambi, president and CEO of CoreLogic. This imbalance is a logical correction from the past downturn years when we had too FEW buyers in the market. This is how markets are supposed to work, moving in cycles and always regressing to the mean over time. 6. Rising mortgage rates will help to temper the possibility of a bubble as well. "History shows that a rapid rise in interest rates tends to have little correlation with home prices. Rather, rising rates are more likely to contribute to a decrease in home purchase volume," wrote Mark Palim in a Fannie Mae commentary. So the positive side of a rise in mortgage rates is that it will reduce the number of buyers and therefore reduce the chance the market will rise out of control and end up collapsing in a bubble. Here are a few metrics I watch closely to look for signs of a weakening housing market: 1. Housing inventory. When the inventory of homes for sale rises, supply will begin to balance with demand and slow the price increases. We’re still at record-low inventory so I don’t expect to return to a balanced market for several more years. 2. Number of homes sales. If we see a spike in homes sales (most likely due to increased inventory of homes coming on the market) we can expect a slowdown in the housing market to follow just as we saw after our home sales spiked in 2006. At this time, we are right at the 30-year average of homes sales/year/capita which tells me the market is not overheated. 3. The economy. Metro Denver has a booming economy which is contributing to our strong housing market. If the economy begins to falter that will affect housing. I see no sign of that happening anytime soon. 4. Interest rates. Low interest rates have contributed to relatively high home affordability, continuing to help the housing market. If interest rates spike that will decrease affordability. But if you’ve been reading this newsletter for years you know that no one can predict interest rates and trying to do so is simply a waste of time. Some day if interest rates move upward we may see an effect on the housing market but there’s no reason to believe that’s going to happen any time soon. For these and many other reasons I believe our market will continue to be strong for the foreseeable future, but of course it can't grow indefinitely. Since the inventory of homes for sale is still extremely low I think the demand will still exceed the supply for the next 24-36 months and prices will continue to rise for at least the next few years. No bubble on the horizon yet. Stay tuned!

Five Essential Things You Need To Know About Our Home Buying Market

This year has kicked with an array of experts trumpeting the Denver housing market's strength and resilience. Inventory is at record lows, home prices continue to rise, and foreclosure activity has ebbed to lows not seen since before the 2007 downturn. Spring and summer is the time for selling houses. The months of April, May, June, and July typically account for more than 40 percent of all housing transactions annually, thanks in large part to good weather. 1. Inventory shortages: "The story of the day is on the inventory front," stresses Lawrence Yun, chief economist of the National Association of Realtors (NAR). It's a sentiment echoed by many. The number of available homes in metro Denver has plunged to a record low, thanks to both an abnormally small supply of existing homes for sale and a dearth of new construction not keeping pace with the current demand. 2. Increased Competition: In addition to a dwindling supply of available homes, the number of buyers has surged. And not just traditional buyers - investors have comprised a sizeable chunk of the buyer pool since the downturn and continue to do so. Real estate investors are responsible for about 25 percent of the existing home sales each month. You, the prospective buyer, need to be prepared to move fast if you find a property you'd like to buy. "Buyers need to be patient because many will be outbid by others and might have to bid on multiple homes," cautions Jed Kolko, chief economist of Trulia. Yes, indeed. 3. Cash is Still King: Given the steep competition, all-cash buyers who can close a deal relatively quickly offer great incentive to sellers. "Cash will still be king if there are multiple bids because from a seller's view, they want a deal with fewer hiccups, "says Yun. My sellers are surprised to hear that about 30 percent of home sales each month are all-cash purchases. 4. The Good News: Lending Tree chief executive Doug Leboda says in light of the recently unveiled new home-lending standards, lenders are slowly starting to make it slightly easier to get approved. Talk to a couple of lenders, they’ll tell you things have improved over the past few years on the loan front. 5. More Good News: We are seeing a definite correction in the appraisal business. A few years ago appraisers were consistently under-valuing properties, reacting to the over-conservative nature of their shell-shocked underwriter patrons. Today we are seeing the vast majority of appraisals coming in at value, killing far fewer deals than in the past.

The Denver real estate market midyear report!

Welcome to the real estate market midyear report! Here’s what we’re seeing. 1. Average Home Price: The average price of a home in metro Denver leapt another 12 percent in the past 12 months. I believe 2015 will continue to play out very strong and here’s why: The number one driver of home price change is the amount of inventory on the market. Our market inventory continues to drop, down another 17 percent from this time last year for single-family homes (down 19 percent for condos and townhomes!). Until inventory comes back on the market there will continue to be tremendous upward pressure on prices as demand outstrips supply. Where will the new supply of home inventory come from? It won’t be bank-owned properties and shortsales. The metro Denver economy is strong and unemployment is low so there will be very few distressed properties on the market for the foreseeable future. The additional supply will eventually come from home owners who finally realize what a great market it is to sell and decide to put their home up for sale. When this will happen is anyone’s guess. We’ve seen very little evidence of home owners making this realization so far, as evidenced by the continued lack of inventory on the market. Sooner or later though inventory will begin to appear. That’s your sign of a changing market. But this might take several more years which is why prices will continue to rise strongly. 2. Number of Homes Sold: Because there is so little inventory in our market the number of homes sold is actually going DOWN year over year, not up. There were 9 percent fewer homes sold in June, ’15 than June ’14 simply because there is no inventory to sell. It’s the very definition of a seller’s market. 3. The Condo/Townhome Market: Incredibly enough the condo market is doing even better than single-family homes! Prices are up 16 percent in the past year and inventory is down 19 percent creating a blistering hot market for attached homes. Just like for the single-family home market I don’t see any evidence this will change any time soon. Until more condo inventory comes on the market prices will continue to rise. Expect strong price increases for the next several years. 4. The Investor Market: Denver is still a great place to invest in real estate. The fix and flip market is strong for those who can find underpriced homes to buy and repair. They’re out there but it takes tools, patience, and work to find them. Once you get one fixed up, selling is the easy part because of the lack of competing inventory. The buy and hold market will continue to be extremely profitable for long-term investors. Interest rates and vacancy rates are still near record lows and rents continue to rise – a record 10.8 percent per year the past three years. It’s not difficult to buy a rental property in today’s environment and put it on the path to be paid off in 12-15 years. Just think how your life would change if you owned a couple of rental properties free and clear! For building long-term wealth it’s tough to compete with rental property ownership. That’s the one thing that will never change.