As most of you know, I either attend or speak at many national events. While out and about, I receive a lot of real estate questions like, “how is the market?” or “what are home prices doing?” I enjoy receiving these questions in that I love talking real estate any chance I get. While these are good questions and I enjoy giving my interpretations of the market, what concerns me are the questions that are not being asked; questions that I deem are those we probably want to be asking. Examples of such questions are “I heard the FHA guidelines are changing, what does that mean?” or “Tell me more about the tax credit and when does it expire?” Or, “If I am thinking of selling my Austin house this year, is there a better time to sell?”
So, since such questions are not being asked in my day-to-day conversations, I thought I would ask them for my readers – because I think the answers to them is information many of us really want to know.
Q: I hear that FHA guidelines are changing. Is this true? And if so, what does this mean?
A: Yes, FHA has recently announced many changes to their loan programs.
- First, FHA is increasing the up-front financed mortgage insurance premium (MIP). The current MIP is 1.75% and is proposed to increase to 2.25%. This means for every $100,000 loan, it will cost you an additional $250 +/- in up-front premium charged. UPDATE 03/28/10: FHA is officially increasing MIP on Friday April 3rd. The new MIP will be in effect on Monday, April 5th.
- Second, FHA is changing the seller concessions from 6% to 3%. This means that, on a $100,000 loan, a seller would only be allowed to pay up to $3,000 of your closing costs. Currently, a seller can contribute up to $6,000, which is enough to cover most of the closing costs and prepaids necessary to obtain the maximum FHA loan.
Q: Will it really make much difference if I wait or don’t take advantage of the tax credit?
We have said this before, but if you are considering buying an Austin home in 2010, it makes prudent financial sense to take advantage of the incentives that are time sensitive. The pragmatic reasons follow:
- If you will take advantage of FHA financing (loan amounts up to $288,750), waiting will only cost you more money. As I mentioned before, the cost of FHA financing, due to the national delinquencies, is increasing.
- If you are a First-time Homebuyer, you have until April 30th to take advantage of <up to> a $8,000 tax credit. That is $8,000 that will NOT be available to you after May 1! Learn more about the tax credit.
- If you are a Move-up Homebuyer, you have until April 30th to take advantage of <up to> a $6,500 tax credit. That is $6,500 that will NOT be available to you after May 1! Learn more about the tax credit.
- Interest rates have been highly favorable because the Fed is buying mortgage-backed securities, which is keeping interest rates artificially low. The authority to buy these securities is reported to end in April. This means that Interest Rates will most probably increase once the Fed quits printing $trillions in cash to help the housing market.
So by waiting, what could it mean? To make the numbers real, let’s produce a few likely scenarios:
| Scenario | Buy Now | Buy Later | Cost of Waiting |
| Scenario 1: First Time Homebuyer FHA Loan | |||
|
Home Price |
$250,000 | $250,000 | $0 |
|
Down Payment 3.5% |
$8,750 | $8,750 | $0 |
|
FHA loan amount |
$245,471 | $246,670 | +$1,207 |
|
Max seller paid concessions |
6% | 3% | -3% |
|
*Closing Costs |
Zero <seller pays all> | $750 <seller can only pay $7,500> | +$750 |
|
Tax Credit |
$8,000 | $0 | -$8,000 |
|
** Interest Rate |
5.25% | 7.25% | +2% |
|
Total out of pocket |
$750 | $9,500 | +$8,750 |
|
Total monthly payment: |
$2,001 | $2,333 | +$332/month |
|
|
|||
| Scenario 2: Move-up Homebuyer Conventional Loan | |||
|
Home Price |
$250,000 | $250,000 | $0 |
|
5% down |
$12,500 | $12,500 | $0 |
|
Loan Amount |
$237,500 | $237,500 | $0 |
|
Tax Credit |
$6,500 | $0 | -$6,500 |
|
** Interest Rate |
5.25% | 7.25% | +2% |
|
Total out of pocket |
$12,600 | $19,100 | +$6,500 |
|
Total payment |
$2,037 | $2,346 | +$309/month |
* Closing Costs guestimated to this amount
** We have no idea how high Interest Rates will jump – we simply took a more historical Interest Rate to make our ‘what if’ calculation
Q: Based on the graphs, what would it cost to wait?
- Scenario 1: costs an extra $8,750 out of pocket plus an extra $332/month
- Scenario 2: costs an extra $6,500 out of pocket plus an extra $309/month
Q: But these incentives are for buyers only; why do I care as a seller?
In many of my conversations of late, people are talking about waiting until the Spring or Summer to sell. However, by then the buyer incentives (tax credits) will be gone, financing will be more difficult and if interest rates rise the cost of buying increases. What do you think this will do to the pool of buyers in the market available to buy your home? Enough said?
At the GoodLife Team, our advice to both buyers and sellers is to learn what the REAL market conditions are and what they mean to you in terms of your dollars and cents. And, after understanding the current real estate marketplace, then make a prudent decision that matches your goals. Don’t get caught up in the media hype and don’t listen to what others are saying that are likely to not really know what they are talking about. Get informed, make good decisions. In other words, ask good questions of your real estate professional and lender.
Let me know your thoughts!
Krisstina
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Krisstina, Isn’t it true that after those incentives expire, prices will have to fall without the government support? If prices fall, you will lose nothing by waiting because you will borrow less and pay less. Please comment.
FANTASTIC ARTICLE KRISSTINA!!! COMMON SENSE APPROACH IS REFRESHING!
Wow~very well written! Thank you for breaking this down into language that the layman can understand, and what it really means to the general public.
Smart. Important. Generous. Nice work.
Mr. Bubble, It actually would be nice to know what prices will do once the tax credits expire. Will they fall or remain the same? One way to predict what they might do is to compare pre tax credit prices to post tax credit prices.
The original $7,500 tax credit was announced in August of 2008. The current $8,000 tax credit was announced in early 2009.
Let’s compare July 2008’s closed numbers to September 2009’s to see if the credit had any immediate impact on what buyer’s were willing to pay. In July the average sales price of a single family home in Austin was $257,946 compared to $243,686 in September. So actually the average price DROPPED ~$14,000 after the tax credit took effect. Now let’s compare the numbers to after the current $8,000 tax credit took effect. July 2009’s average sales price was $245,921, a $12,000 drop from a year prior. So according to these numbers the tax credit has not artificially inflated prices, and to the contrary pricing has fallen since the original tax credit came into effect.
Tax credit aside, the housing affordability index (takes into account home prices, wages, and interest rates) tells us housing has not been this affordable in more than 30 years.
Great article putting the changes into economic terms. I agree that there are many factors which would stimulate a buyer (or seller!) to move now – presumably these are the aims of the housing stimulus legislation. And one could see that the FHA changes are to protect the FHA from default / under-capitalization. Now that FHA loans make up 30% of the purchase market and 50% of the first time home buyer purchase market, it seems that increases in FHA loan fees / charges will impact a broad swathe of the market.
As Mr. Bubble (great name!) says though, the analysis looks at the housing market being constant. I think it’s very hard to predict what a rise in interest rates would do in the very short term to housing demand – will house prices continue to rise or instead drop as demand drops and things get more expensive?
And there’s a section of the buying pool that might well be waiting for the tax credit to dry up – single people who earn more than the income limits to get the tax credit might be best served by waiting for their $124,000-per-year-earning competition to take advantage of the tax credit and then sweep up the sellers who are left having to sell when that demand decreases.
I agree that if demand is high now, then it’s notionally a “good time to sell” for the same reasons that it’s a “good time to buy”. I think trying to time the market is hard, especially without good advice from a professional. Keep the advice and illustrations coming!
Nice, accurate post about why it doesn’t make sense to wait for either first time or move up buyers. Especially if their using FHA financing. I would expect things will definitely get tougher as far as requirements with FHA as the pendulum swings towards more conservative underwriting. Combine that will the Federal Reserve pulling back and ceasing purchase of mortgage backed securities in the next few months, higher interest rates are coming.
Well done Krisstina and your team. You’re bringing huge value to the Austin market.
Kevin
Mr. Bubble … Your comment is logical in that we can assume, due to economic principle, that prices will drop assuming demand drops– due to lack of government incentives. Yes, it is possible that prices in Austin could drop, but it might be flawed to think that the savings from a drop in price will be a wash to the savings from the current government incentives. I will have to do some calculations and will post those next week, but without doing the math, I speculate that artificially low interest rates, government cash, and lower fees is a better deal for a home buyer than slightly lower prices . And, for a home seller, it is a better time to sell when there are more buyers in the market and they potentially can charge a little more for their house due to the subsidies in the market. When interest rates go up, fees go up and credits are gone, bottom line, it will be more expensive for a buyer to buy a home and that means it will be more difficult for a seller to sell.
My point is: if you are planning on buying or selling in 2010 — waiting vs. acting may not be the most prudent choice. I am certainly not trying to convince anyone to buy or sell just because the incentives exist…just not be a fence-sitter if moving is in the cards.
Thank you for the post.
Krisstina
Ryan — Thank you for the post on my blog article. Please feel free to share it with your pending buyers who may be on the fence.
Garry and I enjoyed having lunch with you last week. Garry will be in touch to show you some interesting dirt;)
Thanks again,
Krisstina
Charlie, Kevin and Garreth~
Thank you for the adding your insights and grounding to the Blog. Your contributions made it a more complete and valuable article. I value the sharing of interpretations with other professionals that I hold in high regard in the industry.
Thanks again,
Krisstina
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