With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
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2017 Seller’s Market for Home Owners
The conversation then turns to a discussion of a recent report Steve read which suggested that 2017 is going to be a great year for home sellers. Terry argues that home inventory numbers buttress this point of view. Inventory dropped almost 10% in 2015 alone. With supplies of homes below normal for the past couple of years, demand has risen sharply. This, of course, puts sellers at a distinct advantage. However, if interest rates continue to go up, even at the moderate pace they’ve increased in the past year, it may dampen buyer’s purchasing clout and reign in this seller’s market.
Despite the favorable market and bidding wars in some locations, many would-be sellers have stayed on the sidelines, reluctant to put their houses on the market, which perpetuates low inventory. While people who have to move typically bite the bullet and sell their homes and relocate, many who are contemplating moving into a bigger or smaller home don’t feel the same urgency to sell. Terry believes she knows why: because these same people have yet to figure out where they might move to. A kind of holding pattern or stalemate has taken hold of potential sellers where they don’t want to list their homes until they’ve found another one, but they can’t make an offer or close on a new property until they’ve sold the one they’re currently occupying. As Terry aptly puts it, “A seller is nothing more than a soon-to-be buyer.” Her advice to people in this situation is to commit to selling the house and accept the need for temporary housing while searching for a new home. Renting a couple of PODs and hunkering down for a few months with the in-laws or in an apartment is a small price to pay for securing your next home. Steve uses his own experience to make an analogous point that a similar mindset based on taking a leap of faith is necessary when buying a home. At some point, you just have to pull the trigger.
FHA announces lower mortgage premium rate for 2017 *
The Federal Housing Administration (FHA), a program of the Housing and Urban Development Department, claims to be the largest insurer of mortgages in the world. For decades, its role in guaranteeing loans— particularly first time home buyer loans—has made the dream of home ownership available to millions who otherwise would have been priced out of that dream. Many of the loans it insures are for low down payment buyers, some of whom are unable to raise more than 3% of the home price for a cash deposit. This compares to historic averages of 20% down for conventional, non-FHA loans. The tradeoff for those taking an FHA loan is the addition of a significant MIP (mortgage insurance premium) to the monthly mortgage. FHA premiums are typically higher than PMI (private mortgage insurance) payments, but PMI is not available to low down payment or low credit score buyers.
In January 2017, the FHA, at the prompting of the outgoing Obama administration, announced that it was lowering the cost of mortgage insurance from 0.85% to 0.6% of the home price annually. The way FHA MIP works is that borrowers must first pay 1.75% of the loan value up front, though this amount is often rolled into to the loan itself. Going forward, FHA mortgage holders pay a MIP equivalent to 0.85% of the loan annually. This 0.85% fee is what the FHA just reduced to 0.6%. This rate reduction brings MIPs back to levels not seen since before the 2008 mortgage meltdown. Terry notes that the FHA raised MIP rates in the wake of the crisis to compensate for the added risk of foreclosures which were triggering millions in insurance payouts. These premium increases excluded large numbers of potential buyers, swelling the ranks of renters. While it took a major beating, the FHA eventually raised its reserves to meet Congressional mandates and was allowed to lower MIPs and make more unconventional loan guarantees. It is a sign of the strength of the housing market in 2017 and the economy writ large that MIPs are reverting to pre-crisis levels.
Lower insurance premiums for FHA loans—even just this 0.25% cut—can make a difference for potential buyers. It can help them meet debt-to-loan ratios needed for a more favorable interest rate, and it frees up cash. Steve notes that the savings on a $300,000 mortgage can be as much as $200 per month.
*Disclaimer: This segment was recorded prior to the Executive Order to reverse the FHA fee reduction.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Round-Up. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 28-year veteran with Coldwell Banker located in sunny Boca Raton, Florida. Welcome back to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: Hey, we have some really good news for those people that are using FHA loans to buy homes. What is it?
Terry Story: Well, they’re lowering the costs. Yay!
Steve Pomeranz: We love that.
Terry Story: This is good news.
Steve Pomeranz: So …
Terry Story: Basically, what they’re doing …
Steve Pomeranz: Yeah, go ahead.
Terry Story: … Basically, what they’re doing is they’re cutting the annual premium for the mortgage insurance. When you buy a home, FHA, you have to purchase mortgage insurance, and it’s a percentage point. They’re lowering that percentage point, so, basically, it’s going to cost you less to get that mortgage. We saw that as the market, Steve, was going down; they started increasing these base-points, as they call them, in order to collect more insurance to protect them against foreclosures and the losses that they incurred for houses going into foreclosure, in essence.
Steve Pomeranz: Now, let’s back up for a second. If you put 20% down on a home, you don’t have to pay any mortgage insurance. A mortgage …
Terry Story: That’s…
Steve Pomeranz: … Insurance is a premium that you pay to the bank. So, the bank—if you’re putting less than 20% down—the bank can protect itself if you go into default. It’s an insurance policy that you pay for. Now, if you take an FHA Loan and you’re putting down 3 1/2%, obviously, you’re below the 20%, so there’s going to be mortgage insurance. The way it’s priced is as a percentage of the mortgage and what Terry is saying is that the percentage used to be .85%. We really say it as 85 basis points. That’s an easier way to say it, 85 basis points, that’s been reduced to 60 basis points or .60%. That saving means that your monthly outflow, the amount that you have to pay for your mortgage, goes down. That’s what we’re talking about. So, Terry, what happens in the market place, and how does it positively affect a buyer other than the fact they’re monthly payment is lower? But what else does it mean to them?
Terry Story: Well, basically, every time you cut the cost of the mortgage insurance, it means that the borrower meets their debt to income ratio required to purchase a home. So, it helps them be able to purchase a home, get into a house. We saw that when they increased the premiums; we went from a 1.4 million, say 1.4 million renters to 1.6 million renters. It made for a lot of people not being able to purchase a home just by raising those basis points that you’re referring to from 55 basis points to 90 basis points, which doesn’t sound like a lot …
Steve Pomeranz: It is.
Terry Story: … But it really is. It took out quite a few people from being able to buy a home. So now by doing the reverse, we should…it should have the same reverse effect where it’ll allow more people to be able to purchase.
Steve Pomeranz: Yeah. I mean on a $300,000 house, it’s a couple of hundred dollars a month, so, that is, it’s really quite significant when you think about it. Now you also want to realize that if the economy turns again and there’s more foreclosures and the FHA wants to protect itself even more, they’re going to raise the cost of this. So, this is really …
Terry Story: That’s right.
Steve Pomeranz: … A mirror of the fact that things are pretty good in the economy. So much so, that there’s less—a lot less—defaults. As a matter of fact, I understand they’ve gone back, the number of defaults or bankruptcies, or foreclosures rather, are where they were before the crisis. That’s …
Terry Story: That’s right.
Steve Pomeranz: … Excellent news, right?
Terry Story: Excellent news.
Steve Pomeranz: All right. Moving on to something else here. You know there’s been a recent report that has been put out that said why 2017 may be a very good year to sell your house.
Terry Story: Oh, can I answer that one, Steve?
Steve Pomeranz: Please do. I’m really going to be very surprised on how you answer it. Go ahead.
Terry Story: Housing inventory has been below normal for more than two years. If you’re looking to sell your house, now’s a great time. The demand is really really strong.
Steve Pomeranz: Yeah.
Terry Story: We need the inventory. It dropped 9% year-over-year from 2015 to November 2015. The inventory [crosstalk 00:05:04].
Steve Pomeranz: Dropped. Yeah.
Terry Story: So, basically, what that means, when you have low levels of inventory, it’s a seller’s market. The prices are rising. That’s why we see the interest rates creeping up to try to slow things down. To be honest with you, I need houses to sell. I went to so many appointments in 2015 thinking, “Oh, yay, everyone’s going to put their homes up for sale.” Nope. They’re still haven’t put their homes up for sale. I go visit these same people—again 2016—they still haven’t put their homes up for sale. So, I’m hoping …
Steve Pomeranz: What’s the problem? Why?
Terry Story: I’ll tell you what the problem is. They don’t know where they’re going. If you think about it, a seller is nothing more than a soon-to-be buyer.
Steve Pomeranz: Yeah, so they’re either moving up—I mean there’s got to be a reason. They’re relocating or they’re moving up to a bigger house or they’re moving down to a smaller house.
Terry Story: Right. So, the ones that have to move, they’re being …they put up for sale. But the people that are looking to move up or move down—especially if they’re trying to move up and they don’t see anything that they like—are like, “Well, we can’t sell our house. We have no place to go.” So, last year, Steve, I had to try to put deals together contingent on people’s houses selling because they’d fall in love with a house, but they can’t buy it because they have to sell their home. So, you’re caught in this, you know, wheel that just keeps spinning and spinning and spinning.
I tell folks, “Look, the only way this is ever going to happen is you have to commit yourself to selling your home. If you have to find temporary housing, do it. Stay with your in-laws, whatever the case may be; and you will find a house; you won’t be that long at the in-laws.” That’s the level of commitment it takes right now to try to buy a home while you’re trying to sell a home at the same time.
Steve Pomeranz: About 3 1/2 years ago, I was looking for a new home and we looked everywhere. I mean we really drove our broker crazy… which, you know, I don’t know how you guys do it, quite frankly. But, after a while, we ran out of homes to buy and so, you know, I don’t want to say I settled. I love my home, but there was just a time that I just had to pull the trigger. And maybe the price was a little higher than I expected to pay, but interest rates were low enough and the math really really worked out, and I’m a happy camper. So, it’s…that’s I guess a lesson for buyers, but for sellers, this is the time, in a seller’s market, if you’re thinking about moving—and whether you’re moving up or moving down—this is the time to sell. 2017 is a very good time to sell. So, Terry, one last question for you.
Terry Story: Sure.
Steve Pomeranz: When is the best time to sell a house?
Terry Story: Right now.
Steve Pomeranz: And when is, when is the best time to buy a house, Terry?
Terry Story: Absolutely, right now. Don’t miss these opportunities.
Steve Pomeranz: Spoken like a true real estate professional, as I know you are. My guest as always Terry Story. Terry’s a 28-year veteran with Coldwell Banker located in Boca Raton. She can be found at terrystory.com. To hear this conversation again, don’t forget to join us at stevepomeranz.com, because this is the Steve Pomeranz Show, spelled POMERANZ. Stevepomeranz.com, thanks, Terry.
Terry Story: Thanks for having me, Steve.