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Worried About Thin Credit? Get Back On The Grid!

Terry Story, Thin Credit

With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL

Building Materials and Other Costs of Home Building Rise

Steve starts off today’s segment with Terry Story by talking about reports which implore new home buyers to “Act Now before prices go up!” Terry says she just heard about these warnings recently and discovered that they are related to a 25% increase in the cost of building materials over the past year.  It turns out that lumber is in short supply due to a breakdown in a trade agreement between the US and Canada.  But that’s not the only factor driving new home building costs up.  There has also been a tightening in the labor market, which is pushing wages up for construction and trades workers.  Moreover, developed lots are disappearing and the cost of land is going up in many locales.  All of these forces are conspiring to make new home building significantly pricier.

Mortgage Rates Rising or Holding Steady?

Many potential home buyers are also anxious about mortgage rates, wondering whether their rise will perhaps put their dreams of home ownership out of reach.  But Steve and Terry have good news on this front: they believe mortgage rates probably will not go up very much in the next couple years.  Steve points out that it’s difficult to predict where interest rates are going.  The Federal Reserve manipulates the overnight Fed Funds rate to steer inflation, credit markets, and the economy, and in the last decade, they have been attempting to prop up markets and the economy by maintaining extremely low rates. The Fed Funds rate has risen by 0.25 points three times in the past year and a half, and the Fed itself has indicated it will hike target rates two more times by the same amount this year.

Mortgages are actually tied to the 10-year Treasury note, which fluctuates based on a number of factors, most importantly inflation expectations. Buyers will want a higher yield if they anticipate inflation, which eats away at that yield.  Ten-year Treasury yields have not moved up despite the increase in the Fed Funds rate, thus neither have mortgage rates. Steve argues that, as a potential home buyer, instead of following the Fed Funds rate, what you want to watch out for as the economy heats up are signs of inflation in other areas besides housing prices.  That will signal impending rises in 10-year note yields and mortgage rates.  It helps put things into perspective to remember that it wasn’t so long ago—in the 1990s—that mortgage rates were around 7%, and this was considered affordable, which it was, at least in comparison to the double-digit rates in the 1980s.  Rates today have a very long way to go before brushing up against 7%, which would require far higher inflation than we’ve seen in decades.

Thin Credit? Get Back On the Grid!

People who pay for everything with cash are at a major disadvantage when it comes to getting a bank mortgage. Banks make loans based on borrowers’ credit history, which helps determine lending rates and other parameters of those loans. Those folks who refuse to use credit cards or other forms of borrowed (and re-paid) money are essentially invisible—“off the grid” as Steve puts it—and therefore are unknown risks to lenders. Most banks will simply balk at offering mortgages to thin-credit individuals.  The irony is that many thin-credit individuals are probably in healthy financial shape and may be more responsible than others when it comes to managing their money.

Breaking out from thin-credit status to become someone whom lenders would be willing to work with is not terribly complicated.  Opening credit cards and establishing a track record of both using and paying them down can provide a fairly quick fix. But even folks who can’t abide the idea of credit cards have options: paying and documenting rent and other bills and routine expenses (utilities, child care, insurance, cell phone, and cable bills, etc.) with checks can go a long way towards establishing the kind of credit identity that lenders require.  One of the main reasons people are drawn to the cash-only lifestyle is the anonymity and privacy it provides, but these benefits must be abandoned if you want to take out a mortgage.  Steve and Terry’s bottom line: get back “on the grid” with credit cards and/or checks two or three years before you plan to buy a home.

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.

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Steve Pomeranz: It’s time for Real Estate Roundup. 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 Boca Raton Florida. Welcome back to the show, Terry.

Terry Story: Thanks for having me, Steve.

Steve Pomeranz: New home buyers, the reports say, act now before prices go up, what’s going on?

Terry Story: Yeah, this is something I wasn’t aware of, Steve. The cost of building materials jumped 25% year-to-year, which I had no idea.

Steve Pomeranz: Yeah.

Terry Story: I just thought supply and demands, that’s why new housing is going up.

Steve Pomeranz: Yeah, but there’s a reason for that and most of that is lumber because the United States and Canada are arguing about a contract, to renegotiate a contract and negotiations fell apart.  So, availability of lumber is in relatively short supply which has caused the price to go up. So, hopefully, they’ll get that fixed.

Terry Story: Yeah, I didn’t realize that.

Steve Pomeranz: Yeah.

Terry Story: I thought that was interesting and then, the NAHB Wells Fargo market index builders are citing that the problems that they’re seeing is cost and availability of labor.

Steve Pomeranz: Which is going up.

Terry Story: Yeah, cost availability of development of lots impact fees, building materials, regulations, all of these items are contributing to the prices rising as well.

Steve Pomeranz: Yeah, so the cost and availability of labor.  So, labor costs are going up, and there’s only a certain amount of labor for electricians and the like out there.  And if there’s an awful lot of building, that causes a constraint.  So, that makes them able to charge higher fees.

Also developed lots are disappearing, of course, as builders are finding everything they can find, every postage stamp, they’re building on it, especially in this area.  And other things we talked about, building material prices and the like.  So, there’s lots of reasons that prices are rising, so just in that case, prices seem to be going up.

But also, we’re starting to see the possibility of mortgage rates ticking up a little bit here.  I want to talk to you about that a little bit.  Matter of fact, one of the questions that was asked last week was: “I’m thinking about buying a house, are mortgage rates going to march steadily higher?”

What are you seeing out there Terry?

Terry Story: Well, it’s always hard to say because we know mortgage rates don’t usually rise in tandem with the Fed’s increase, sometimes they actually do the opposite direction.

Steve Pomeranz: That’s right.

Terry Story: Long-term mortgages tend to track the rate of the tenured treasury, which in turn is influenced by a whole variety of factors.

Which include investor’s expectations, future inflation, global demands, etc.  So, I don’t think it’s gonna steadily march up; I just don’t see it marching up steadily.

Steve Pomeranz: Well, first of all, you know, one thing that nobody should ever do is predict interest rates.  You just can’t predict them.  But, I don’t think a lot of people understand what you just said.

The fact that short-term rates, which are controlled by the Fed and control the cost of overnight lending between banks, it does affect corporate borrowing costs that are tied to the prime rate or tied to this rate but those are all short-term variable rates.  Mortgage rates, as you said, are based on the ten-year treasury.

And the ten-year treasury, I believe, is more influenced by expectations about inflation than really most other factors, although there are many other factors.  So, inflationary expectations are very important to a ten-year security because if you are going to loan money for ten years, you’d really want to know what inflation’s going to be because it’s going to eat away at your fixed return.

Terry Story: Sure.

Steve Pomeranz: And what we’ve really seen was when rates were increased last week, we just see a little bump higher in the ten-year yield, but now we’re seeing it come back down.  So we’re not really seeing a material change in ten-year yields, so I don’t think we’re seeing a material change in mortgage rates as well, so a little primer for all of you out there.

So, when you think about buying a house, watch that as the economy picks up, and we start to see, perhaps, increases in inflation in other areas, not just select areas like housing which have its own series of constraints, but across the board, then I think you’re going to start to see a pickup in mortgage rates.

Terry Story: I know, it’s been so long.  Remember when the interest rates were like, gosh, we even thought they were low at 7%.

Steve Pomeranz: I know, it seemed pretty reasonable at 7%.

Terry Story: I know, I remember my first home was at seven, and I’m like wow, that’s reasonable, buy, walk in.

And now, 7% [SOUND].

Steve Pomeranz: And when I entered into the investment business, which was 1981, so long ago, mortgage rates were 12% and 13% and, basically, the economy was pretty much shut down because really nobody could borrow any money.  However, savers were loving that.

Terry Story: Yeah.

Steve Pomeranz: Two and a half year CDs at 15%, I mean, can you even imagine that?  But, of course, inflation was running just very, very high as well, so the net return after inflation wasn’t all that great.

Terry Story: You can’t have it both ways.  [LAUGH]

Steve Pomeranz: No, you really can’t, you can’t.

Here’s another mortgage question.  Let’s say that I can’t get a mortgage due to something called thin credit.  Have you heard of that before?

Terry Story: Absolutely, basically, there are people out there that pay cash for everything.  They don’t believe in credit cards, so they don’t have really any proof that they’re worthy of lending money to because they don’t have a credit history.

Steve Pomeranz: Yeah.

Terry Story: And there are ways to work around that because I have seen people being turned down just because they don’t have any credit cards or established credit.  Some of the things you can do is pay by check.  For example, if you’re renting, show 12-month’s worth of checks paid on time on a regular basis.

But having thin credit, basically, means you’re credit-invisible, you’re under the radar and lenders aren’t comfortable lending to someone that they don’t know what the credit history is going to look like.

Steve Pomeranz: Yeah, I guess the first thing is you got to get on the grid.

Terry Story: Right.

Steve Pomeranz: If you’re paying cash for everything and you’re under the radar, the banks don’t know how to deal with that.

So, they’re not going to give you credit because they don’t know who you are because you’re not on the grid.  So, number one, start doing some transactions, as you said, writing checks.

Terry Story: Right, and you can do it for your rent, insurance, child care, utilities, cell phones, cable TV.  Save all those documents and be able to prove that you are credit worthy.

Steve Pomeranz: Get yourself a credit card even if it has a very low limit and pay it off.  And show that you’re a responsible person and you’ll start to get the attention of banks.  Especially if you’re really starting to consider, hey, I want to buy a house in two or three or four years.

It’s really time, I know you’re faking it and the irony of the whole thing is that you’re probably in good financial shape, or you could be, and yet because you’re not transacting the way business was done, people don’t know that, banks don’t know that, so they’re not going to give you money.

So it’s kind of an irony-

Terry Story: Right.

Steve Pomeranz: In my view but get in the grid, that’s the lesson of the day.  [LAUGH]

Terry Story: [LAUGH] Exactly, get on the grid.

Steve Pomeranz: Get on the grid.  My guest, as always is Terry Story.  Terry is a 28-year veteran with Coldwell Banker located in Boca Raton, Florida, and she can be found at terrystory.com.

Thanks a lot, Terry.

Terry Story: Thanks for having me, Steve.