The latest buzzword on the street is “shutdown,” and apart from being buzzworthy, it’s actually very real. National parks are closed and hundreds of thousands of government workers have been told to stay at home.
Fortunately, active military continues to serve and air traffic controllers, prison guards, and border patrol agents remain on the job.
But how does the shutdown affect the mortgage industry? Well, it depends on the type of loan involved, though just about everything will be impacted to some degree.
FHA Loans
The most popular government loans are insured by the Federal Housing Authority (FHA), which operates under the Department of Housing and Urban Development (HUD).
HUD noted that it has 8,709 employees “on board as of pay period ending September 7, 2013.”
In the event of a shutdown, limited staff will remain on hand to handle certain business activities, including FHA loan processing.
Take a look at the chart above to see how few employees would be working during a shutdown…not very many.
In other words, while FHA loans will still continue be processed, there will definitely be delays.
Fortunately, FHA lending has become a lot less popular due to higher premiums, which should offset some of the carnage.
Also note that Ginnie Mae, which guarantees mortgage-backed securities (MBS) backed by federally insured or guaranteed loans, will see its staff slashed, though it said it will “continue to perform its critical and essential functions.”
VA Loans
Despite the U.S Department of Veteran Affairs (VA) being very much a government agency, it will continue to operate many of its operations, including its core medical facilities and home loan processing.
So borrowers looking to obtain a VA loan should expect business as usual, barring any delays that result from the overall shutdown.
If you’re attempting to get a VA loan, patience should probably be exercised as precautionary measure.
USDA Loans
The USDA, while seemingly an agency dedicated to agriculture, also operates a popular zero down home loan program reserved for rural locations.
As a result of the shutdown, the entire USDA website is currently down. Well, there’s a nice little message about the shutdown, but you can’t access any key information.
Additionally, the USDA Rural Development Guaranteed Housing Loan Program appears to be on hold during the shutdown. In other words, nothing is doing at the USDA until politicians learn to get along.
However, the USDA will continue to handle existing customers funds, such as processing escrow accounts to avoid tax penalties.
Fannie Mae and Freddie Mac
While Fannie and Freddie aren’t technically government entities, despite being in government conservatorship (don’t ask), these conventional loans are also being impacted by the shutdown.
First off, government workers whose employment is directly affected by the shutdown could run into snags during the loan underwriting process, seeing that lenders need to verify employment in order to sell their loans to Fannie and Freddie.
As a result, Fannie Mae released guidance on a few workarounds, advising lenders that they can obtain verification of employment (VOE) after the loan closes, but before it is sold. This is actually already permitted, so perhaps just a reminder.
The pair also require lenders to complete requests for borrower tax returns (IRS) and social security numbers, both of which will be difficult to obtain in light of the government shutdown.
Fannie is revising its policies temporarily to allow lenders to obtain the transcripts and complete validation after loan closing, but before loan delivery. In other words, buying some time.
So the hope is that lenders who sell their loans off to Fannie and Freddie will continue to underwrite and process loans on the basis that the shutdown won’t last long enough for them to be stuck with the loans.
Additionally, loan servicers have been advised to waive late payment fees if the borrower’s mortgage payment is late because of a government furlough.
Servicers are also being encouraged to offer Unemployment Forbearance to employees affected by the shutdown, assuming they’re unable to make housing payments.
For the record, even non-conforming loans and jumbo loans will be affected by the shutdown, seeing that lenders may still need to call on government agencies for certain information, so no loans are entirely exempt.
At the end of the day, patience is the name of the game here. Ideally, the shutdown won’t last too long and none of this will matter. But in the meantime, expect delays if you’re attempting to get a mortgage. And pray mortgage rates don’t spike in the process.
More on the housing affordability front, which I think is a growing concern as the housing market continues to recover and possibly get somewhat ahead of itself.
On Friday, RealtyTrac reported that monthly housing payments increased an average of 21% in the fourth quarter of 2013 from a year earlier.
The rise in housing payments was attributed to both an uptick in mortgage interest rates and an improvement in home prices.
During the fourth quarter of 2012, the average monthly housing payment for a three-bedroom home was $714, based on a 20% down payment and a 3.35% 30-year fixed mortgage rate.
A year later, that figure was $865, thanks in part to the 30-year fixed rising to 4.46% and home prices rising roughly 10%.
The housing payment includes the mortgage, homeowners insurance, taxes, and maintenance, less the estimated income tax benefit.
Incomes Can’t Keep Up with Surging Home Prices
While a $150 per month increase might not sound like much, it’s a lot more problematic in higher-cost regions of the United States.
For example, in Los Angeles County the minimum qualifying income to purchase a median-priced home is now more than $95,000, up from $68,000 a year ago. That’s nearly a 40% jump!
Nationwide, the average minimum household income needed to qualify for a median-priced home increased to $41,544 in the fourth quarter, up from $34,262 a year prior, using a max front-end DTI ratio of 25%.
The three highest minimum qualifying incomes were in Northern California, including San Francisco County ($228,569), Marin County ($177,922), and San Mateo County ($170,284).
Homes were also quite expensive on the East Coast, as evidenced by the minimum qualifying incomes in Arlington County, Virginia ($158,474) and Hudson County, New Jersey ($142,684).
The largest increases in estimated monthly housing payments were in Contra Costa (CA) and Sacramento (CA) counties (up more than 50%), Wayne (MI) and Oakland (MI) counties (up more than 45%), and in Clark County, Nevada (up 43%).
Housing Payments Still Cheaper than Rents in Most Counties
Though the days of low rates and bargain home prices are pretty much over, housing payments are still lower than rents in most counties nationwide.
In fact, the average fair market rent for a three-bedroom home (as determined by HUD) during the fourth quarter still exceeded the estimated monthly housing payment in 91% of counties analyzed (296 out of 325).
However, the 29 counties where it was cheaper to rent than buy accounted for about 20% of the population.
And in the 15 most populated counties analyzed, estimated monthly housing payments were up an average of 34% from a year earlier.
That made it more expensive to buy than rent is six of those 15 counties; a year ago, just one of those counties was deemed more expensive to buy.
The good news is most investors have probably lost interest in the housing market, making it more of a buyer’s market nowadays.
But as RealtyTrac vice president Daren Blomquist aptly pointed out in the press release, financed homeownership is beginning to become “dangerously disconnected” with sluggish incomes.
I suppose this is the danger of artificially low mortgage rates. It also means all-cash buyers still have quite an upper hand, seeing that they only need to concern themselves with the asking price.
Homeowners opt for ARMs instead of fixed mortgages for a number of reasons, but it’s mostly to save money.
After all, adjustable-rate mortgages are offered at a discount compared to fixed mortgages, and the level of discount varies based on how long the ARM is fixed.
The shorter the fixed-rate period on an ARM, the lower the interest rate. So if you want the lowest rate, you need to go with a one-year ARM as opposed to a 7/1 ARM.
Back in the mid-2000s, it wasn’t uncommon to see 1-month and six-month ARMs, which adjusted after just a month and six months, respectively.
Clearly this made for a lot of uncertainty, especially for less sophisticated homeowners who were often aggressively pitched such mortgages.
To make matters worse, lenders offered better pricing, or rather commissions, on ARMs with prepayment penalties.
Long story short, a ton of naïve homeowners wound up with short-term ARMs and three-year prepayment penalties, meaning they couldn’t refinance (or even sell in some cases) once interest rates went up.
As home prices tanked and monthly mortgage payments went up, the housing market imploded. The irony is that many of those who took out ARMs before the most recent housing crisis (to save money) lost their homes because of them.
Could We Repeat History Again?
But times have changed, right? Perhaps. The prepayment penalty is largely a thing of the past, and ARMs are a lot less popular these days thanks to ultra-low fixed rates.
However, the ARM-share of mortgages has been inching up lately, mainly because home prices are on the rise and borrowers see value in getting a discount for the first several years of their loan.
There also seems to be this belief that rates aren’t going to rise anytime soon, so why not go with an ARM and save lots of money?
Unfortunately, it’s that line of thinking that could land a lot of these borrowers in a tough spot a few years down the road, even if they qualify at the fully indexed rate today.
First off, payments can become unmanageable after a reset, especially if the borrower’s financial situation changes for the worse. And let’s face it; nobody’s job/income is set in stone.
Secondly, if rates do rise and you seek a refinance, you need to qualify. It’s never a guarantee to qualify for a mortgage. It’s also not cheap to refinance.
To alleviate some of these concerns, two financial literacy advocates have come up with a few ways to make ARMs safer.
Introducing the Safer ARM
John Bryant, the founder of Operation HOPE, and Robert Gnaizda, a founder of Greenlining Institute, have proposed a few ways we could make mortgages safer without impeding access to credit.
Their first suggestion is to require non-profit financial education before a low- or moderate-income family can take out any type of ARM, or interest-only mortgage for that matter.
Secondly, they believe no ARM should have a term that is less than the median time Americans own their primary residences, which is roughly seven to nine years.
In other words, you would only be allowed to take out a 7/1 or 10/1 ARM, and if you were considered a low- or moderate-income borrower, you’d have to complete a homeowner education class as well.
The pair also believes no institution should be able to offer interest-only mortgages to borrowers with less than a $5 million net worth. Don’ worry Mark Zuckerberg, you’re okay.
They argue that had these measures been in place a decade ago, the crisis would have never happened.
Reforming the QM Loan
Aside from taking issue with ARMs and IO options, Bryant and Gnaizda think the Qualified Mortgage rule could benefit from some tweaks as well.
They believe Fannie Mae and Freddie Mac should consider any 30-year fixed mortgage with a minimum seven percent down payment as a QM loan.
But only if the borrower’s income doesn’t exceed the median and the home is valued at no more than 90% of the region’s median price.
These loans wouldn’t require mortgage insurance either, though lenders would be able to charge a premium of 50 basis points for the first five years of the loan to compensate for risk (and even longer if the borrower fell delinquent).
Again, these borrowers would have to complete both pre- and post-financing education, though they could also receive a temporary waiver for up to six months of housing payments if unemployed or sick after five years or more of homeownership.
They plan to discuss these ideas with financial institutions, though similar warnings/suggestions thrown around a decade ago seemed to fall on deaf ears.
Housing affordability across the country is especially tough in the nation’s urban areas, but in the country’s largest metros it’s often the suburbs that are the least affordable.
A new Zillow analysis examines the financial burden of housing payments in urban, suburban and rural parts of the country. Finding a home within their budget is the top concern for both renters and home buyers, according to the 2018 Zillow Group Report on Consumer Housing Trends, but where a home is located can affect that budget, forcing many to accept tradeoffs.
Urban home buyers nationwide have to dedicate a larger share of their income to monthly mortgage payments (26.5 percent) than buyers in the suburbs or rural areas do – 20.2 percent and 13.4 percent, respectively. In urban areas of the Seattle metro, for example, buyers would need to dedicate 40.4 percent of their income to monthly housing costs, more than they would have to in either the suburbs (27.4 percent) or rural areas (24.4 percent). The same hold true in less than a third of the country’s largest markets.
The suburbs are the most common destination for today’s home buyers, with 48 percent of all buyers purchasing a home in the suburbs. Yet suburban living is a bigger financial burden for buyers in nearly half of the country’s largest markets (17 of the top 35 metros), compared with the costs of urban or rural housing.
In San Diego, for example, paying for a suburban home requires 40.9 percent of the median household income. Mortgage payments on a rural home would take up 37.3 percent of the median income, and housing costs for an urban home would require 35 percent of the typical income.
“Choosing where to live depends on many factors other than strictly financial terms. The size and space of the home, and the nearby amenities have to meet your needs, or come as close as possible,” said Zillow Director of Economic Research and Outreach, Skylar Olsen. “How close you can come to those ideal options is always limited by what you can afford, and tradeoffs are almost always necessary. Finding a home in your budget can be a stressful process, whether you’re looking to buy or rent. The difference between an urban core or more distant suburb could make all the difference.”
Across the country, renters signing a new lease typically spend more of their income on monthly housing costs than homeowners do, in large part due to still-low interest rates for buyers. The difference between national affordability trends and what is happening in the 35 largest housing markets is more pronounced for renters.
Nationally, rental payments in an urban area require 36.8 percent of the median household income each month, well above the commonly recommended 30 percent. Suburban rents are also slightly above that threshold, requiring 31.8 percent of the median household income. Rural rents nationwide are the smallest financial burden, taking 23.9 percent of the typical income.
Urban rents in the Dallas market take up a much larger share of income than those in suburban or rural areas of the metro. The financial burden for urban renters exceeds the 30 percent standard, with the typical urban rent requiring 38.8 percent of the median income.
However, in about two-thirds of the biggest U.S. housing markets rents are least affordable in the suburbs, where rental supply is slow to grow. Renting a home in the suburbs of Chicago, for example, requires 30 percent of the median income, more than what would be required in either urban or rural parts of the metro.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
After years of competitive bidding wars and rising prices, a new study from Zillow shows it might finally be a good time to buy a home in many U.S. markets.
Zillow researchers looked at three factors to determine which of the largest U.S. housing markets are becoming more buyer-friendly and found that some previously prohibitively competitive markets – including Seattle and Las Vegas – have turned into the best places for buyers this winter.
The three buyer-boosting metrics Zillow considered are:
An increase in the share of listings with a price cut. Price cuts indicate homes are sitting on the market longer – which means more options for buyers, less competition for homes and more room for buyers to negotiate. Many recently white-hot markets have seen large jumps in the share of for-sale listings with a price cut.
Projected increase in rent appreciation over the next year. Rent appreciation has slowed recently, but as mortgage affordability deteriorates due to rising mortgage rates, rents could begin to increase again as some would-be buyers put their buying plans on hold. We know that nearly half of renters consider buying while they’re looking for a home,i and the potential of rising rents also factors in to when it’s a good time to buy.
Affordability relative to the past. We looked for markets where mortgage affordability is poor – but not worse than it was historically. With interest rates on the rise, and mortgage affordability already closing in on its historic norm, prepared buyers may want to enter the market before housing payments become historically unaffordable.
Based on those factors, Zillow found that the cities of Orlando, Boston, Seattle, Las Vegas, Charlotte, Columbus, Portland, Sacramento, Minneapolis and Dallas were the top ten markets for buyers this winter.
“The housing market always lets up a little in the fall, when kids are back in school and the home shopping season wraps up for the holidays,” said Zillow Senior Economist Aaron Terrazas.
“But this fall and winter are shaping up to be more favorable for those buyers who have struggled to get into the housing market for several years amid red-hot competition. Mortgage rates are rising, but will climb much further in 2019 and early 2020. As purchase affordability deteriorates, expect rents to pick back up as some would-be buyers put their plans on ice. Renters who were thinking of buying and decided to hold off may want to take another look this winter, as a steady clip of mortgage rate increases chips away at affordability and more homes become available on the market.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
[Editor’s note: Originally published on Linkedin.]
COVID has demonstrated how fragile and interdependent many of the systems are that we know as “daily life.” Not unlike a Jenga tower, if one piece is removed, the entire structure can crumble. In this brief, I will make a radically practical policy suggestion for how we can assure that one critical piece in the tower, housing, can be stabilized through federal policy so that it does not contribute to structural collapse.
The housing finance system has vast complexity to it, but it can be boiled down to the following basic sequential transactions that sustain it: renters and homeowners with mortgages pay landlords and lenders monthly, who in turn pay their investors and creditors.
When enough renters and owners can’t or don’t pay their obligations in a relatively short time period disrupting the flow of payments further down the pipeline, then the whole system faces jeopardy. This is the scenario we are currently facing.
In 2009, the federal government response to the housing market collapse can be characterized as a “save the institutions” approach. Although there were consumer-oriented programs such as the Home Affordable Refinance Program (HARP), they were generally too little, too late, and too complex to navigate. Millions of Americans lost their single-family homes, and millions more suffered as rental housing became less and less affordable in many markets during the recovery of 2010-2019. Government poured billions of dollars into the private institutions that finance housing, while millions of homeowners were displaced and the market was “cleansed,” allowing many that participated in the financial collapse to re-enter the market and reap billions in profits refinancing with different owners the very same properties that had been previously leveraged. This was not our best effort at policymaking that supports a sense of the American Dream that we often reference when it comes to housing in this country.
In 2020, we need a major “save the citizen” approach that also will benefit a healthy and robust housing finance system. I am proposing a relief program that is targeted at the foundation of the housing value chain: the renter and mortgage payee. If our goal is to stabilize people’s housing not just for their own financial security and well-being, but also so we can assure that the most number of people can properly socially isolate themselves until we return to an all-clear mode, then we need to provide immediate financial assistance to pay rent and mortgages that will keep renters and homeowners in compliance with their financial obligations, and therefore housed. Landlords and mortgagors will continue to receive their full payments and their investors and creditors will continue to receive whatever is due them. Americans remain housed, the housing finance system remains intact, and it buys us time to get to a more permanent solution.
One-time payments of $1,200 on a means-tested basis are not going to do the trick. Aside from being too little and too late for many, this money is likely not enough to cover the housing payment even if it was fully dedicated to that, and secondly it is likely to be used for other immediate needs such as food and medicine.
Under a proposal I am calling the Housing Emergency Loan Program (HELP), the federal government will provide every American with access to a low-interest loan for up to 12 months of their housing costs (monthly rent or mortgage payment) that they do not need to pay back until the end of a 10-year term (sufficient time to pay back small amounts over time). In order to assure that the money is used to keep people housed, the payments will go directly to landlords or mortgagors and, to keep it relatively simple, the loans will be made on a quarterly basis, thereby covering three months of housing payments. Furthermore, this loan program should be available to anyone who applies regardless of income. Means testing creates two distinct problems. First, it greatly slows down administration and increases costs (someone has to do the verification and compliance). Second, we are currently in a crisis that has put many families whose incomes previously may have put them squarely in the middle or even upper income quartiles on shaky ground. If suddenly a family loses both its earners and there is no immediate income then why would we want to punish them for their prior economic success as they face financial ruin and possible eviction moving forward?
HELP is designed to be effective, simple, and executable. Because it is a loan, the government can expect to receive this money back in 10 years. Rather than a giveaway, a loan with a very modest interest rate of 50 bps is likely to diminish fraud and abuse. Since the Fed has indicated its willingness to print money to keep the credit markets afloat, let’s use that same spirit (and magical printing press) to provide renters and mortgagees with credit that can save the system from the bottom up, at least until we get through this very uncertain period. Borrowers would self-certify their rent or mortgage payment amounts. They would be less likely to inflate these because it is a loan that must eventually be repaid. Plus, since the money does not come to them but rather their landlord, there is little incentive to cheat.
In order to make this work, the program would require an online process that enables efficiency and accountability. Fortunately, we have the information technology systems that can make this work. A borrower would apply for the loan (again, minimum of 3 months of their housing payment) and identify their landlord using the landlord/mortgagor’s EIN number, which the government would require those entities to provide to their tenants/mortgagees (they are public record anyway). The borrower would be assigned a unique account number. That account number would then be shared with the landlord by the tenant and the landlord could then claim the proceeds in the account, at which point funds would be transferred to the landlord/mortgagor electronically. If a tenant sets up an account then a lender/mortgagor would not be allowed to refuse the money or take action to remove the renter/mortgagee for the period covered by the loan proceeds. All of this can be set up relatively quickly using off-the-shelf technology that would not require a vast bureaucracy.
What would all of this cost the government? Well, since it is a loan, in theory, nothing. But in terms of near-term outlays, let’s assume that half of all mortgagees and renters avail themselves of the HELP program for 6 months’ worth of housing costs. Assuming 40 million renters paying an average monthly rent of $1,500 ($180 billion in loans) and 50 million mortgagees with average monthly payments of $1,100 ($165 billion), that’s a total of $345 billion. Further assuming that the program costs $1 billion to operate over 10 years, the compounded repaid interest of $17 billion would accommodate a default rate in the 3-4% range for the program to break even.
The HELP program would take tremendous pressure off the housing system while we work to find longer-term solutions for a more stable and rational housing market that is not so vulnerable to COVID-like events. Most importantly, it would keep millions of Americans in their homes during this tumultuous period and contribute to the nation’s general welfare, which requires people to stay at home – but only if they have one.
Whatever the governmental response is to keep people housed, I hope it incorporates the following principles: 1) keep people in their homes (both rental and homeownership) without disruption AND ensure the solvency of their landlords and mortgagors, protecting both citizens and the housing finance system equally; 2) provide resources that are quick and easy to access with minimal administrative requirements that are not overloaded with fear of fraud provisions; and 3) use technology to provide expediency, transparency, and accountability.
Homebuyers are returning to the market thanks to record low mortgage rates and declining home prices, according to the National Association of Home Builders.
The group cited an 11 percent rise in single-family permits in February, along with modest gains in new and existing home sales.
“The number of households that can afford to purchase a home today is 55.4 million, compared with 38.4 million two years ago, according to figures compiled by NAHB,” the release said.
“That’s an increase of 17 million households from conditions just two years ago and the best housing affordability number we have seen in years,” said NAHB Chairman Joe Robson. “We are now seeing the first signs that buyers are returning to the marketplace.”
A typical family can now purchase a home for $20,000 less in annual household income than they could two years ago, while savings $500 a month on housing payments, the homebuilders claim.
Interestingly, just a $1,000 home price drop would open up the market to another 250,000 prospective homebuyers.
“With home values in many markets at the lowest level since 2003, an $8,000 tax credit available to first-time home buyers, fixed-rate mortgages under 5 percent, and an outstanding selection of homes to choose from, buyers are starting to recognize that this has the makings for a one-time opportunity to break into the market,” said Robson.
So might as well build some more homes to keep up with all that “underlying demand” right?
The trade group said it wants to add another 500,000 single-family homes to the current inventory overhang to correct today’s “anemic construction rate.”
They believe such construction would result in over 1.5 million new jobs and nearly $80 billion in wages across manufacturing, trade, and service sectors.
That’s pretty sweet, but what’s wrong with all the vacant, available houses out there at the moment?
David Bach is perhaps best known for coining the term the latte factor, a phrase that has almost become a joke in personal finance circles. That’s too bad, really, because Bach has some good ideas. And the latte factor is a marvelous concept, applicable to many people who casually spend their future a few dollars at a time. Bach’s most popular book is The Automatic Millionaire. I’ve referred to it often, but never reviewed it until today.
The Automatic Millionaire is based on sound financial concepts. The author encourages readers to eliminate debt, to live frugally, and to pay themselves first. But the core of his book is unique: rather than develop will power and self-discipline, Bach says, why not bypass the human element altogether? Why not make your path to wealth automatic?
The Latte Factor
Bach argues that wealth is not a product of what we earn, but of what we spend.
Most people believe that the secret to getting rich is all about finding ways of increasing their income as quickly as possible. “If only I could make more money,” they declare, “I’d be rich.” How many times have you heard somebody say that? How many times have you said it yourself? Well, it simply isn’t true. Ask anyone who got a raise last year if their savings increased. In almost every case, the answer will be no. Why? Because more often than not, the more we make, the more we spend.
Bach has an excellent point. Remember how you used to live when you were in college? How much did you spend each month? How much do you make now? If you lived like a college student, what sort of monthly surplus would you have now? If you lived like this for five years, how much could you sock away? What if you lived like a college student for ten years?
Even if you choose not to reset your lifestyle to what it once was, Bach suggests that it’s important to examine your current expenses for subtle small drains. If you drink a latte a day, you’re probably spending about:
$3.50 a day
$105.00 a month
$1250.00 a year
$12,600 in ten years
Each person’s latte factor is different. For my wife, it’s actually lattes. For me, it’s comic books. Regardless, Bach says that if instead of spending money on our splurges we invested an equal amount, we could be well on your way to becoming millionaires. He’s doing nothing more than stressing the incredible power of compound returns.
In essence, a latte doesn’t just cost you $3.50. It costs you $3.50 plus the potential compound returns over the next 20 or 30 or 40 years. You’re not just spending pocket change — you’re spending your retirement.
If we can forego these indulgences and funnel the money toward savings, we’ll profit in the future. But the problem is — we like our 180-degree nonfat lattes. We’re not about to give them up. How do we bypass the human element?
Make It Automatic
You’ve all heard that you’re supposed to “pay yourself first”. But what does this really mean? This concept simply states that before you pay your bills, before you pay your taxes, before you pay anything else, you set money aside for yourself. This isn’t money to spend, but money to save for the future.
“But how can I do this?” you might say. “I only make minimum wage.” It doesn’t matter. This principle says that no matter how much you earn, you must force yourself to set aside something for your future. If you don’t do it, nobody else will.
But, Bach says, human nature makes this difficult. Most of us think we don’t have enough to pay ourselves first. Whether we earn $8 per hour or $80 per hour, there’s always something to spend the money on. Bach writes:
In order for Pay Yourself First to be effective, the process has to be automatic. Whatever you decide to do with the money you’re paying yourself — whether you intend to park it in a retirement account, save it as a security blanket, invest it in a college fund, put it aside help you buy a house, or use it to pay down your mortgage or credit card debt — you need to have a system that doesn’t depend on following a budget or being disciplined.
The best way to do this is to make our savings automatic. For some people, this is easy. If your employer offers a retirement account such as a 401k, take advantage of it. Max it out. Contact your human resources department and request that a fixed percentage — 5%, 10%, 15% — be transferred from your paycheck to your retirement account. It’s best to do this now, but if you think you can’t possibly survive without the money, then wait until your next raise. Instead of taking the raise in your paycheck, have the increased income set aside in your retirement account. Continue to live on the amount you’ve been earning.
What if your employer doesn’t offer a 401k? What if you want to do this on your own? Open an Individual Retirement Account. “Whatever type of retirement account you open, arrange to have your contributions automatically transferred into it, either through payroll deduction at work or an automatic investment plan” run by a bank or brokerage firm.
Related >> What is a Roth IRA? A Short and Simple Guide
Make It All Automatic
If you can make saving for retirement automatic, why not do the same thing with your other financial obligations? The Automatic Millionaire features chapters on how to automate emergency fund savings, how to automate housing payments, how to automate debt payments, and how to automate tithing (or charity contributions). Bach’s basic tenet is this: by removing human nature, we can automatically do the right thing with our money. We can strive to become “automatic millionaires”.
(Much of Bach’s writing reminds me of my own pursuit of paperless personal finance.)
Related >> Frugality Advice from Millionaires
Conclusion
If you have your personal finances in order, you probably don’t need to read The Automatic Millionaire. But if you’re struggling to gain control, this book can make a big difference. I read it in the winter of 2005-2006, as I was beginning to take control of my money. I learned a lot.
I’m not sure that it’s important to own The Automatic Millionaire — once you’ve read the book, you get it — but I think many people can learn a lot from what Bach has to say. This book is ubiquitous. You probably know a money-savvy friend from which you can borrow a copy. I guarantee that your local public library has it. If you’ve been struggling to set up a retirement plan, I encourage you to read The Automatic Millionaire. It just might change your life.
In December 2021, when the 30-year fixed mortgage rate still averaged 3.1%, a borrower could get $700,000 mortgage that required monthly payments of principal and interest of just $2,989.
Fast-forward to Wednesday, and a $700,000 mortgage taken out at the current average mortgage rate of 6.90% would equal a $4,610 per month payment, which is $583,000 more over 30 years than that mortgage issued at a 3.1% rate. When adding on insurance and taxes, that monthly payment could easily top $6,000. Not to mention, that calculation doesn’t account for the fact that U.S. home prices in June 2022 were 12% above December 2021 levels and 39% above June 2020 levels.
Mortgage planners like John Downs, a senior vice president at Vellum Mortgage, have the hard job of breaking this new reality to would-be homebuyers. However, unlike last year, Downs says most 2023 buyers aren’t surprised. The sticker shock, the loan officer says, is wearing off.
Just before speaking with Fortune, Downs wrapped up a call with a middle-class couple in the Washington D.C. area, who told him they were expecting a mortgage payment of around $7,000.
“The call I just had was a typical area household. One person makes $150,000, the other makes $120,000. So $270,000 total and they said a payment goal of $7,000. I’m still not used to hearing people say that out loud,” Downs says.
Even before these borrowers speak to Downs—who operates in the greater Baltimore and Washington D.C. markets—they’ve already concluded that these high mortgage payments will be “short-lived,” and they’ll simply refinance to a lower payment once mortgage rates, presumably, come down.
To better understand how homebuyers are reacting to deteriorated housing affordability (and scare inventory levels), Fortune interviewed Downs.
This conversation has been edited and condensed for clarity.
Fortune: Over the past year, mortgage rates have spiked from 3% to over 6%. How are buyers in your market reacting to those increased borrowing costs?
John Downs: I must say, the reaction today is quite different from last year. It’s almost as if we have lived through the “7 stages of grief.” We appear to have entered the “acceptance and hope” phase.
With all the reports pointing to home prices stabilizing, one might think that buyers are comfortable with these rates and corresponding mortgage payments. The reality is quite different. Many would-be homebuyers have been pushed out of the market due to affordability challenges through loan qualifications or personal budget restraints. Move-up buyers also find themselves in the same predicament.
As a result, my market (Baltimore-DC Metro Region) has 73% fewer available homes for sale than pre-pandemic, 57% fewer weekly contracts, and an 8% increase in properties being relisted. (Information per Altos Research) As a result, prices have remained relatively stable due to the balance of buyers outweighing sellers.
I’m seeing buyers today taking the payments in stride for various reasons. Their incomes have risen dramatically, upwards of 25-30% since 2020, and the income tax savings through the mortgage interest deduction is now a meaningful budget item to consider. Many also say, “I can always refinance when rates come down in the future,” which leads to a sense that this high payment will be short-lived.
When I say buyers are comfortable with these payments, I know there are also two to three times more buyers who run payments using online calculators who opt out of having conversations in the first place! To prove this, our pre-approval credit pulls (a measure of top-of-funnel buyer activity) are running about 50% lower than pre-pandemic.
Among the borrowers you’re working with, how high are monthly payments getting? And how do they react when you give them the number?
For the better part of the last decade, most of my clients would enter a pre-approval conversation with a mortgage payment limit of no more than $3,000 for a condo and $4,500 for single-family homes. It was rare to see numbers higher than that, even for my higher-income wage earners. Today, those numbers are $4,000 to $6,500 respectively.
To my earlier comment, active buyers today seem to expect it. It’s as if they are comfortable with this new normal. Surprisingly, the debt-to-income ratios of today (in my market) are very similar to where they were five years ago. Income is ultimately the great equalizer. Yes, the payments are dramatically higher today, but the buyers’ residual income (post-tax income minus debt) is still in a healthy range due to local wages.
Remember, we are still talking about a much smaller pool of buyers in the market today so this conversation is skewed towards those with more fortunate lifestyles.
Tell us a little bit more about what you saw in the second half of 2022 in your local housing market, and how that compares to the first half of 2023?
There are dramatic differences between those two periods. In the second half of 2022, there was nothing but fear. The stock market was under stress, inflation was running wild, and housing began to stall. Across the country, inventory began to rise, days-on-market pushed dramatically higher, and price decreases were rampant. The safest bet then was to do nothing, and that’s just what buyers did. The mindset was, “I will wait until prices fall and rates push lower before I buy.”
The start of 2023 sparked a reversal in many asset classes. The stock market found a footing and pushed higher, mortgage rates rebalanced, property sellers adjusted their prices, and employers began pushing out significant wage increases. As a result, housing stabilized, and in some areas, aggressive contracts with multiple offers, price escalations, and contingency waivers became the norm.
The strength in housing was not as universal as it was in 2021. There were very hot and cold segments, depending on location and price point. The affordable sector (<$750,000 in my market) and higher-end (>$1.25 million) seemed to perform very well with heightened competition. The mid-range segment is where we noticed some struggles. One common theme is that buyers at every price point seem much more sensitive to the property’s condition. When the housing payments are this elevated, it doesn’t take much for the buyers to walk away!
What do you make of the so-called “lock-in effect”— the idea that existing market churn will be constrained as folks refuse to give up those 2-handle and 3-handle mortgage rates?
I believe the “lock-in effect” is very real. My opinion is based on countless conversations I’ve had in the past 6-9 months with homeowners who want to move but can’t. Some cannot afford to buy their current home at today’s value and rate structure. Others just cannot stomach the significant jump in payment to justify the increase in home size or the preferred location.
I believe the reason we are seeing struggles in the mid-range home is that the traditional move-up buyer is stuck. In my market, that would be the person who sells the $700,000 home to purchase at $1 million. They currently have a PITI housing payment of $2,750; the new payment would be $6,000 rolling their equity as a down payment. That jump is too much for most, especially those with a median income. That payment would have been $4,500 a couple of years ago, which was much more manageable.
Based on what you’re seeing now, do you have any predictions on what the second half of 2023 might look like? And any thoughts on the spring of 2024?
Despite high rates, the desire to buy a home is still high for many. Given the lag effects of Fed tightening (raising interest rates) coupled with an overall improvement in inflation, one can assume mortgage rates have topped out and will continue to improve from here. Think of playing with a yo-yo on a down escalator, up-and-down movement but generally pushing lower. As rates improve, affordability and confidence will shift, bringing out more buyers and sellers.
I believe this will be supportive for home values and give buyers more choice as inventory increases. Keep in mind, most sellers become buyers, so the net impact on inventory will be negligible. Knowing that some sellers will keep their current home as a rental, one could argue that inventory will worsen. At least buyers will have more house options each week, a stark difference from today.
When discussing strength in housing, thinking through local dynamics is crucial. The DC Metro area has a diverse, stable job market which I do not see reversing if an economic slowdown occurs. We didn’t have a tremendous push towards short-term rentals as many other areas and the “work-from-home” (WFH) environment had most people stay within commuting distance to the cities.
One thing I expect is an unwinding of WFH in 2024. In fact, I’m already experiencing that. Many clients are being called back to the office, either through employer demands or fear they will be exposed to corporate downsizing efforts. As a result, I expect underperforming assets (D.C. condos and single-family rentals in transitional areas of the city) to catch a bid while single-family rentals in the commuting neighborhoods plateau from their record-setting appreciation over the past few years.
Housing market affordability (or better put the lack thereof) is at levels unseen since the peak of the housing bubble. Do you have any advice on how would-be buyers can ease that burden?
This may be the most complex question because everyone is at a different place in life. For the better part of the last 20 years, my consultation calls were 20 to 30 minutes long, and we could formulate a great plan. Today, that pushes over an hour and usually requires a detailed follow-up call. If I had to sum up all my conversations, I would say it comes down to forecasting life and patience.
Forecasting is a process where you map out life over the next two to three years—discussing job stability, income projections, saving and investment patterns, debts rolling off (or being added), kids, schools, tuition, etc. From there, talking about local market dynamics such as housing supply, population growth, and interest rate cycles and projections. This helps formulate a solid budget to use for a home purchase.
Patience can mean several things. For some, it means renting for a period of time to save more money or ride out periods of uncertainty. For others, it could be looking for the right sale price mix and seller concessions for rate buy-downs, closing costs, etc. Sometimes it means being patient with your desired location. Maybe you just can’t have that specific house in that specific area for a few years and settling for the next best location is good enough for now. Housing used to be a stepping stone for many but the low-rate environment of the past few years allowed everyone to get what they wanted right away. We seem to have lost the art of having patience in life.
This story was originally featured on Fortune.com
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In December 2021, when the 30-year fixed mortgage rate still averaged 3.1%, a borrower could get $700,000 mortgage that required monthly payments of principal and interest of just $2,989.
Fast-forward to Wednesday, and a $700,000 mortgage taken out at the current average mortgage rate of 6.90% would equal a $4,610 per month payment, which is $583,000 more over 30 years than that mortgage issued at a 3.1% rate. When adding on insurance and taxes, that monthly payment could easily top $6,000. Not to mention, that calculation doesn’t account for the fact that U.S. home prices in June 2022 were 12% above December 2021 levels and 39% above June 2020 levels.
Mortgage planners like John Downs, a senior vice president at Vellum Mortgage, have the hard job of breaking this new reality to would-be homebuyers. However, unlike last year, Downs says most 2023 buyers aren’t surprised. The sticker shock, the loan officer says, is wearing off.
Just before speaking with Fortune, Downs wrapped up a call with a middle-class couple in the Washington D.C. area, who told him they were expecting a mortgage payment of around $7,000.
“The call I just had was a typical area household. One person makes $150,000, the other makes $120,000. So $270,000 total and they said a payment goal of $7,000. I’m still not used to hearing people say that out loud,” Downs says.
Even before these borrowers speak to Downs—who operates in the greater Baltimore and Washington D.C. markets—they’ve already concluded that these high mortgage payments will be “short-lived,” and they’ll simply refinance to a lower payment once mortgage rates, presumably, come down.
To better understand how homebuyers are reacting to deteriorated housing affordability (and scare inventory levels), Fortune interviewed Downs.
This conversation has been edited and condensed for clarity.
Fortune: Over the past year, mortgage rates have spiked from 3% to over 6%. How are buyers in your market reacting to those increased borrowing costs?
John Downs: I must say, the reaction today is quite different from last year. It’s almost as if we have lived through the “7 stages of grief.” We appear to have entered the “acceptance and hope” phase.
With all the reports pointing to home prices stabilizing, one might think that buyers are comfortable with these rates and corresponding mortgage payments. The reality is quite different. Many would-be homebuyers have been pushed out of the market due to affordability challenges through loan qualifications or personal budget restraints. Move-up buyers also find themselves in the same predicament.
As a result, my market (Baltimore-DC Metro Region) has 73% fewer available homes for sale than pre-pandemic, 57% fewer weekly contracts, and an 8% increase in properties being relisted. (Information per Altos Research) As a result, prices have remained relatively stable due to the balance of buyers outweighing sellers.
I’m seeing buyers today taking the payments in stride for various reasons. Their incomes have risen dramatically, upwards of 25-30% since 2020, and the income tax savings through the mortgage interest deduction is now a meaningful budget item to consider. Many also say, “I can always refinance when rates come down in the future,” which leads to a sense that this high payment will be short-lived.
When I say buyers are comfortable with these payments, I know there are also two to three times more buyers who run payments using online calculators who opt out of having conversations in the first place! To prove this, our pre-approval credit pulls (a measure of top-of-funnel buyer activity) are running about 50% lower than pre-pandemic.
Among the borrowers you’re working with, how high are monthly payments getting? And how do they react when you give them the number?
For the better part of the last decade, most of my clients would enter a pre-approval conversation with a mortgage payment limit of no more than $3,000 for a condo and $4,500 for single-family homes. It was rare to see numbers higher than that, even for my higher-income wage earners. Today, those numbers are $4,000 to $6,500 respectively.
To my earlier comment, active buyers today seem to expect it. It’s as if they are comfortable with this new normal. Surprisingly, the debt-to-income ratios of today (in my market) are very similar to where they were five years ago. Income is ultimately the great equalizer. Yes, the payments are dramatically higher today, but the buyers’ residual income (post-tax income minus debt) is still in a healthy range due to local wages.
Remember, we are still talking about a much smaller pool of buyers in the market today so this conversation is skewed towards those with more fortunate lifestyles.
Tell us a little bit more about what you saw in the second half of 2022 in your local housing market, and how that compares to the first half of 2023?
There are dramatic differences between those two periods. In the second half of 2022, there was nothing but fear. The stock market was under stress, inflation was running wild, and housing began to stall. Across the country, inventory began to rise, days-on-market pushed dramatically higher, and price decreases were rampant. The safest bet then was to do nothing, and that’s just what buyers did. The mindset was, “I will wait until prices fall and rates push lower before I buy.”
The start of 2023 sparked a reversal in many asset classes. The stock market found a footing and pushed higher, mortgage rates rebalanced, property sellers adjusted their prices, and employers began pushing out significant wage increases. As a result, housing stabilized, and in some areas, aggressive contracts with multiple offers, price escalations, and contingency waivers became the norm.
The strength in housing was not as universal as it was in 2021. There were very hot and cold segments, depending on location and price point. The affordable sector (<$750,000 in my market) and higher-end (>$1.25 million) seemed to perform very well with heightened competition. The mid-range segment is where we noticed some struggles. One common theme is that buyers at every price point seem much more sensitive to the property’s condition. When the housing payments are this elevated, it doesn’t take much for the buyers to walk away!
What do you make of the so-called “lock-in effect”— the idea that existing market churn will be constrained as folks refuse to give up those 2-handle and 3-handle mortgage rates?
I believe the “lock-in effect” is very real. My opinion is based on countless conversations I’ve had in the past 6-9 months with homeowners who want to move but can’t. Some cannot afford to buy their current home at today’s value and rate structure. Others just cannot stomach the significant jump in payment to justify the increase in home size or the preferred location.
I believe the reason we are seeing struggles in the mid-range home is that the traditional move-up buyer is stuck. In my market, that would be the person who sells the $700,000 home to purchase at $1 million. They currently have a PITI housing payment of $2,750; the new payment would be $6,000 rolling their equity as a down payment. That jump is too much for most, especially those with a median income. That payment would have been $4,500 a couple of years ago, which was much more manageable.
Based on what you’re seeing now, do you have any predictions on what the second half of 2023 might look like? And any thoughts on the spring of 2024?
Despite high rates, the desire to buy a home is still high for many. Given the lag effects of Fed tightening (raising interest rates) coupled with an overall improvement in inflation, one can assume mortgage rates have topped out and will continue to improve from here. Think of playing with a yo-yo on a down escalator, up-and-down movement but generally pushing lower. As rates improve, affordability and confidence will shift, bringing out more buyers and sellers.
I believe this will be supportive for home values and give buyers more choice as inventory increases. Keep in mind, most sellers become buyers, so the net impact on inventory will be negligible. Knowing that some sellers will keep their current home as a rental, one could argue that inventory will worsen. At least buyers will have more house options each week, a stark difference from today.
When discussing strength in housing, thinking through local dynamics is crucial. The DC Metro area has a diverse, stable job market which I do not see reversing if an economic slowdown occurs. We didn’t have a tremendous push towards short-term rentals as many other areas and the “work-from-home” (WFH) environment had most people stay within commuting distance to the cities.
One thing I expect is an unwinding of WFH in 2024. In fact, I’m already experiencing that. Many clients are being called back to the office, either through employer demands or fear they will be exposed to corporate downsizing efforts. As a result, I expect underperforming assets (D.C. condos and single-family homes in transitional areas of the city) to catch a bid while single-family homes in the commuting neighborhoods plateau from their record-setting appreciation over the past few years.
Housing market affordability (or better put the lack thereof) is at levels unseen since the peak of the housing bubble. Do you have any advice on how would-be buyers can ease that burden?
This may be the most complex question because everyone is at a different place in life. For the better part of the last 20 years, my consultation calls were 20 to 30 minutes long, and we could formulate a great plan. Today, that pushes over an hour and usually requires a detailed follow-up call. If I had to sum up all my conversations, I would say it comes down to forecasting life and patience.
Forecasting is a process where you map out life over the next two to three years—discussing job stability, income projections, saving and investment patterns, debts rolling off (or being added), kids, schools, tuition, etc. From there, talking about local market dynamics such as housing supply, population growth, and interest rate cycles and projections. This helps formulate a solid budget to use for a home purchase.
Patience can mean several things. For some, it means renting for a period of time to save more money or ride out periods of uncertainty. For others, it could be looking for the right sale price mix and seller concessions for rate buy-downs, closing costs, etc. Sometimes it means being patient with your desired location. Maybe you just can’t have that specific house in that specific area for a few years and settling for the next best location is good enough for now. Housing used to be a stepping stone for many but the low-rate environment of the past few years allowed everyone to get what they wanted right away. We seem to have lost the art of having patience in life.