Another day, another affordable home loan program launches, this time “OneDown” from Guaranteed Rate.
As the name implies, you only need to put 1% down when purchasing a home, which is about as close to zero as it gets.
If you’re wondering why lenders are offering such mortgages, it comes down to affordability, or a lack thereof.
Home prices remain at or near all-time lows, despite some pullback a few months back.
And mortgage rates remain stubbornly high, with the 30-year fixed close to 7%.
Guaranteed Rate OneDown: Their 1% Down Home Purchase Loan
If you’re in the market to buy a home, despite those pesky high interest rates (and home prices), you might be feeling a little stretched.
To alleviate some of that burden, Guaranteed Rate has joined other lenders in launching a 1% down mortgage, which they call OneDown.
As you may or not know, Fannie Mae and Freddie Mac offer loans with just 3% down, such as HomeReady and Home Possible.
But apparently that is still too much for some buyers, so Guaranteed Rate is chipping in an additional two percent contribution towards that down payment.
They will provide 2% or up to $2,000 (whichever is lower), meaning you’ll probably get the full $2,000 in most cases unless you’re buying a sub-$100,000 home? I don’t think those exist anymore.
On top of that, OneDown also provides borrowers with a $1,000 contribution toward their lender fees, such as underwriting, processing, origination fee, etc.
So you can reduce your cash outlay at closing via a smaller down payment and fewer closing costs.
Who Qualifies for Guaranteed Rate OneDown?
If the program sounds interesting, let’s talk about qualifying.
Like many other homebuyer assistance programs, this is geared toward first-time home buyers.
That means you can’t currently own a home, and it must have been three years since you owned a home in the past.
And while no geographic restrictions apply, there are income limits. Your area median income (AMI) must be under 80%, which you can look up here.
Additionally, the loan must be for the purchase of a primary residence. No second homes or investment properties.
The property itself must be a single-family residence or condo/townhouse. It’s unclear if multi-unit properties are permitted.
You must also contribute a minimum of 1% down payment from your own funds, and you’ll likely need at least a 620 FICO score.
Lastly, at least one borrower (assuming there are multiple) must complete a homebuyer education course if all occupying borrowers are first time home buyers.
I believe the $3,000 ($2k down payment and $1k closing costs) comes via a grant and lender credit, meaning it doesn’t need to be paid back.
But always verify with the company itself before moving forward.
Tip: You may be able to combine this offer with a seller paid temporary buydown as well to lower your monthly payment too.
Is Guaranteed Rate OneDown a Good Deal?
While it’s nice to get some financial assistance, Guaranteed Rate isn’t alone here. There are several other lenders offering similar deals.
For example, Guild Mortgage 1% Down Payment Advantage is basically the same deal, but with up to $5,000 in down payment assistance. That’s up to $3,000 more than Guaranteed Rate.
The difference is they offer a 1% temporary buydown instead of the 1% lender credit toward closing costs.
Then there’s Rocket Mortgage ONE+, which comes with a 2% grant as well and mortgage insurance at no cost to the borrower.
Another possible winner is the new U.S. Bank Access Home Loan, which offers up to $12,500 in down payment assistance and a lender credit up to $5,000. But it has geographic restrictions.
You also find similar deals in your local city or state that provide a non-repayable grant. So be sure to check those options as well.
Ultimately, if you plan to use Guaranteed Rate anyway, this is a bonus $3,000 in value assuming you max it out.
And that could make the dream of homeownership a little bit easier, especially with mortgage rates and home prices so high at the moment.
Just always take the time to compare options, and consider the big picture, including mortgage rate, lender fees, and so on.
It might be possible to find a different lender that charges less, thereby saving you money a different way.
Just outside of Chicago is the picturesque town of Naperville, where you’ll find beautiful natural scenery like the DuPage River. If you’re considering moving to Naperville, then you may be wondering whether to rent versus buy a home in the area. Even in today’s real estate market, there are pros and cons to consider if you’re renting or buying a home in Naperville, making it that much harder to decide what fits your goals.
If you’re looking to buy a home in Naperville, the current median sale price for a home is $587,201 as of July. Or if you’re checking out apartments for rent in Naperville, the average monthly rent for a two-bedroom apartment is $2,263. Depending on what you can afford and today’s mortgage rates, it may be that renting is cheaper than buying. But, there are many reasons why buying a home now may be more beneficial for your needs than renting. In this Redfin article, we will delve into the pros and cons of renting and buying in Naperville, helping you make an informed decision based on your unique circumstances. Let’s get started.
Advantages of buying a home in Naperville
Increase in investment opportunities
The home prices in Naperville, and the surrounding areas, have been steadily increasing year over year. This trend shows market growth and a greater possibility in investment return. Becoming a homeowner is more likely to offer a good financial gain in the future.
Money in your own pocket
The question, “Why rent when you can own?” applies much to our market. Owning a property allows you to stop paying another to live and start building equity into your own asset. In addition, the rental market in Naperville is typically lucrative, leaving a great opening to become an investor if you wanted to rent your home to another in the future.
Disadvantages of buying a home in Naperville
Interest rates
The increase in interest rates has made home buying more expensive. Home prices have still stayed strong and lenders are finding new creative ways to help with the rate increase, but buyers are still up against finding the right affordability. This increase in interest rates has made buyers have to adjust their monthly budget to fit their home buying wants or make exceptions in their home search to better fit their budgetary needs.
Low inventory
If you consider yourself more of a picky buyer, you may have a difficult time finding the perfect home as we have low inventory in the Naperville area. With low inventory, you’re more likely to run into multiple offers and bidding wars. In addition, buyers are having to make exceptions for some of their home wants or compete in those multiple offers, especially when homes are updated or renovated.
Determining if you are ready to buy a house in Naperville
There are several factors to consider if you’re deciding whether to rent vs buy in Naperville this year. Here are five points to look at:
1. Time of year: Naperville is a highly seasonal market. Time of year is a huge factor to consider when both selling and buying. You’ll typically see more inventory available in the spring and summer. During this time, homes usually sell faster, at a higher price, and you’ll have more competition. Less inventory is typically available in the fall and winter. However, there is typically less competition during that time and more likely to get a home at a lower price.
2. Financial stability: Before starting your homebuying journey, it’s important to understand your finances – including having a good credit score and a stable income. Be sure to set aside some additional funds for down payment, closing costs, home inspection fees, and additional expenses that are part of the homebuying process. It’s also good to build an emergency fund in case you incur any unforeseen costs.
3. Personal goals: You’ll also want to evaluate your personal goals and priorities before deciding to buy a home in Naperville. Are you looking for a move-in ready home or a renovation project? Do you want a home with modern upgrades or historic charm? Determining what’s important to you in a home can help you figure out if buying a home in Naperville aligns with those goals.
4. Long term commitment: Compared to renting an apartment, buying a home is a significant financial investment and time commitment. So, if you’re not sure you’ll be living in the area for more than a few years, it may be better to continue renting vs buying in Naperville.
5. Housing market conditions: When considering buying a home in Naperville, it’s essential to evaluate the current housing market conditions and how they impact how much house you can afford. Understanding whether it’s buyer’s or seller’s market can help you gauge competition – and help adjust your expectations. Currently, Naperville is in a seller’s market, meaning there are more buyers looking to purchase a home than there are homes on the market.
If you’re unsure whether you’re ready to buy, consider consulting with your real estate or financial advisor to fully understand your options.
Is it competitive to buy a home in Naperville?
We’re seeing less inventory in the Naperville market, making home buying competitive. It’s common to see multiple offers on properties, and a home’s time on the market to be short before it goes under contract. This is especially true when it comes to homes that are under 20 years old or were recently renovated to trending styles. Offers typically include over list price, appraisal waivers, and as-is or waived inspections. With high interest rates, we have also seen an increase in cash or large down payment buyers.
Advantages of renting a home in Naperville
Maintenance costs and availability
Just as home prices have risen, so have the costs of contractors and materials. If you have home maintenance that you want to complete, it can be more costly and take a while to find a contractor. Renting helps you avoid these additional costs, as many of these costs will be covered by your landlord.
Easier to move on from a property
Leases typically have an end date and tenants can choose to leave when following the cancellation terms of the contract. This allows tenants a little more flexibility to “get up and go” without the uncertainty of selling their investment as they don’t own the property.
Disadvantages of renting a home in Naperville
Renewal changes and rent increases
Typical leases have a set time of expiration, whether it’s 6-months, 12-months, or month-to-month. When your lease ends, your landlord has the ability to end the lease, make modifications to the lease, or change the charges of the lease. This can leave you having to find new living options or increase in your monthly expenses to continue to live in the property. In addition, some leases allow cancellations prior to the lease ending, which may have a renter trying to find a new option of living quicker than they anticipated.
Limitations to design
When renting, you’re paying to live in the landlord’s property. Therefore, there are typically more restrictions to using their property. This usually includes many limitations on personalizing the space such as type of flooring, painting, light fixtures, etc. This makes it more difficult if you want to add your own touches to make the home feel more like your own.
Renting vs buying in Naperville: A real estate agent’s final thoughts
I personally believe there is never a “bad” time to buy a home. The biggest focus should be to review your main goals for buying to identify if it’s a good time for you specifically. Ask yourself – How long do I see myself in this home? Do I have an interest in renting it in the future?; and if so, is the property rentable? Does this home fit all of my needs? Can I take on the disadvantages of buying a home? If you’re finding answers to be more yes than no, it’s a great time for you to buy.
For nearly two years now, hesitant buyers have been asking agents the same question: “Are we in a bubble?” We don’t think so. On today’s State of the Market podcast, real estate experts Kelly Skeval and Karen Hollands share their market predictions for 2022. After that, they discuss several investment strategies that have been proven effective in both buyer and seller markets time and again. Other topics covered include 2022’s hottest real estate markets, whether or not to raise rents during the pandemic, and why first-time home buyers have it so hard right now.
Listen to today’s show and learn:
Want to be a guest host on State of the Market? [1:34]
About Karen Hollands [2:27]
Real estate predictions for 2022 [3:15]
FSBO homes hit 40-year low [5:40]
Why Karen likes FSBO leads [7:08]
Why sellers should use an agent [10:22]
Are we in a housing bubble? [13:52]
A strong sign that we’re not in a bubble [15:27]
Karen’s experience as a landlord in New York [24:04]
Why first-time home buyers have it so hard right now [25:42]
Why Kelly isn’t raising rents for her tenants [28:19]
Smart real estate investment strategies for the younger generation [33:25]
Why Tampa will be 2022’s hottest market [35:38]
2022’s top five hottest markets (according to Zillow) [37:39]
How home preferences vary between baby boomers and millennials [39:19]
How far $1.3M will go with markets in Maine, New Mexico, and New York [41:09]
Related Links and Resources:
Thank You Rockstars! It might go without saying, but I’m going to say it anyway: We really value listeners like you. We’re constantly working to improve the show, so why not leave us a review? If you love the content and can’t stand the thought of missing the nuggets our Rockstar guests share every week, please subscribe; it’ll get you instant access to our latest episodes and is the best way to support your favorite real estate podcast. Have questions? Suggestions? Want to say hi? Shoot me a message via Twitter, Instagram, Facebook, or Email. -Aaron Amuchastegui
As expected, the FHA has begun relying on government appropriations to operate, the first time in its 75-year history.
Of course, the $800 million in requested funds from Congress will only go towards its reverse mortgage program, which HUD Secretary Shaun Donovan called “very sensitive to the projected path of long term house price appreciation.”
In other words, when you insure a reverse mortgage at a certain home price, say $250,000 at time of loan origination, and the value subsequently drops to $200,000, the FHA loses big.
The FHA hasn’t asked for any money for its conventional mortgage program, but it seems like they’re easing into this whole bailout thing by starting with less traditional mortgages.
Their capital ratio has dipped to just three percent, down from six percent the previous year, barely clear of the Congressionally-mandated two percent bench mark.
This has been the result of rising delinquencies and increased FHA loan demand, which has grown unhealthily for the past year and change as subprime loans got phased out.
“FHA volume has grown consistently,” said Donovan in prepared remarks. “As recently as 2007, FHA volume for its flagship mortgage insurance program was $60 billion. By 2008, the volume had grown to $181 billion.”
“For FY 2009, we are expecting $290 billion in forwards. For our FY 2010 budget, we are asking Congress for the authority to endorse an even higher volume – up to $400 billion in authorization for FHA insurance.”
I guess you can call it consistent, it’s always rising, but I don’t know if that type of growth is anywhere close to healthy.
“FHA’s market share – which was at just 1.9% in the fourth quarter of 2006 and reached 23.7% in the fourth quarter of 2008 – means that we must continue to ensure that FHA can play its critically important countercyclical role, serving as a backstop to the private mortgage market,” he said.
Interestingly, if it hadn’t been for the extinguishment of seller funded downpayment assistance loans, the FHA would have needed appropriations of $2.5 billion to operate.
Instead, the FHA is projected to return over $1.7 billion to taxpayers in 2010.
“Seller funded downpayment assistance loans accounted for 14 percent of all FHA loans outstanding, but generated 31 percent of all FHA foreclosures and 31 percent of all losses on foreclosed-properties,” he noted.
A family living in Sunset Heights, close to the center of Houston, Texas, is parting with their home for just $1.
But in order to get your hands on the 1,056 square foot, 2-bedroom, 1-bath property, you need to write an essay and submit a $150 entry fee.
So in total, you’re looking at $151 if your essay is selected and the $1 purchase contract is written up.
The house is located at 213 E. 23rd Street, Houston, TX 77008. Per Zillow, it was actually sold on September 30, 2013, and currently has a Zestimate of $339,299.
So the owner would only need about 2,267 entries to get that value. By the way, the home was sold for just $281,000 less than two years ago.
About the Home
The home was built in 1920 and sits on a 5,300 square foot lot across from “the adorable Halbert Park.” I can’t vouch for its adorability seeing that I’ve never been to Houston.
However, it does have a WalkScore of 78, meaning you should be able to get to trendy shops and restaurants without the need for four wheels.
And the owner renovated the bathroom in 2014, adding new tile, a sink, and some plumbing work. Old carpets were also removed to reveal the original hardwood underneath.
The kitchen received some upgrades in 2013 and washer/dryer connections were also added for convenience.
Why They’re Doing It?
If you’re wondering why the owner, Michael Wachs, is selling his home for just a buck, he explains on his website that “we have made home ownership in an expensive and competitive market more affordable.”
But he stresses that he’s not rich, and that the $150 entry fees should be enough to cover the mortgage he has on the home.
Wachs apparently got inspiration from a similar sale in Maine, and figured this would be a good way for a person to acquire a home without a pricey mortgage.
In order to make an offer, you must complete a 200-word essay explaining why you would like to purchase the home and submit a non-refundable $150 offer fee. I’m assuming a heartwarming narrative will work wonders here.
Essays should not contain identifying information so they can be read and judged anonymously.
Assuming your essay is chosen, a contract will be written up for $1 to purchase the home. The buyer will be responsible for all taxes, including real estate transfer taxes, property taxes, and all fees, including lawyer’s fees.
Also keep in mind that a free and clear home still comes with costs such as taxes, insurance, and ongoing maintenance.
The home is being sold as-is and no repairs will be made by the seller.
And here’s the kicker folks – the seller is a Realtor! So that might explain why he’s selling his home this way. Call it “free” marketing and lots of buzz and perhaps even a higher-than-expected sales price.
Offers are being accepted until June 13th if you’re interested.
The nation’s second largest multiple listing service, Bright MLS, will begin allowing listing agents to put in a blanket offer of compensation for buyer brokers of zero dollars or more, starting on August 9.
This change appears to possibly diverge from a National Association of Realtors rule, which states that listing agents must make an offer of cooperative compensation to buyer brokers in order to list a property on the MLS.
While Bright MLS, which serves clients in Delaware, Pennsylvania, Maryland, Virginia, New Jersey, Washington, D.C., and West Virginia and represents 42 Realtor association, acknowledges that this is a small change, as previously the lowest amount allowed was one cent, it says this is a large change in terms of transparency.
“We are making this small change to underscore the complete flexibility of Bright subscribers to engage in transparent negotiations with their clients,” the firm wrote in an announcement on its website. “Bright’s MLS supports the most efficient marketplace by making property information widely and transparently available, and by facilitating blanket offers of cooperative compensation available to all buyer brokers on an impartial basis.”
The MLS noted that this change does not impact its impartial system of offers of cooperative compensation, and that offers of compensation remain negotiable and at the discretion of the home seller.
“Bright has always offered flexibility and has never specified a cooperative compensation amount,” the announcement states. “Sellers could agree to have their broker enter as little as one cent in the compensation fields, which was as close to zero as one could get. With this update, a listing agent will continue to be able to enter the cooperative compensation amount agreed upon with their seller client, from zero and up, and continue to negotiate compensation at their client’s direction.”
In an email, a spokesperson for Bright MLS said the MLS does not anticipate this impacting its relationship with NAR.
“Bright is making an independent business decision responsive to the needs of our subscribers – and the consumers they serve,” the statement read.
In addition, NAR said it supports Bright MLS’ decision.
“Bright’s view is consistent with the purpose of NAR’s policies, which are designed to ensure information is efficiently distributed to facilitate the transaction of real estate to the benefit of buyers and sellers. So long as cooperating brokers are aware of the offerings made by listing brokers, that purpose is achieved. NAR has long said listing brokers and their clients are the ones who determine the amount and makeup of the offer to cooperating brokers,” Mantill Williams, NAR’s vice president of communications, wrote in an email. “Practically speaking, the difference between one penny and $0 is negligible, and regardless, those offers are always negotiable. These policies ensure brokers are efficiently sharing information they and their clients need through their local, independent broker marketplaces. Without these policies, brokerages would not know important information about listings and they would have to rely on piecemeal information collected in inefficient ways that could negatively affect their ability to serve their clients and ultimately the U.S. economy.”
With three class action lawsuits — Nosalek, Burnett, and Moehrl — currently progressing through the courts, buyer broker compensation has been a hot topic. Bright MLS is currently listed as one of the 20 MLS co-conspirators in the Moehrl lawsuit, named after its lead plaintiff. The Moehrl suit is the largest of the three cases and defendants include NAR, Anywhere Real Estate, HomeServices of America, RE/MAX and Keller Williams.
MLS Property Information Network (MLS PIN), which serves clients in the New England area, recently signed off on a settlement in the Nosalek lawsuit in which it agreed to pay $3 million and to stop requiring sellers to offer buyer broker compensation. Unlike Bright MLS, MLS PIN is owned by broker owners and does not have to adhere to NAR rules.
A multiple listing service settled a lawsuit challenging Realtor commission rules for $3 million, a possible harbinger for several ongoing actions by home sellers alleging listing requirements are anticompetitive.
The case, Nosalek v. MLS Property Information Network, had class action status and was filed in the U.S. District Court for Massachusetts. Only the MLS agreed to a settlement, according to a June 30 legal filing. Other defendants in the case, both franchisors and brokerages, were not part of the agreement.
Sellers, along with the Department of Justice, are pushing for a major change to the real estate industry’s compensation structure that both its proponents and opponents agree will affect every party involved in home buying.
“Life after all of this is gonna be quite different,” Dennis Norman, a real estate broker and owner of More, Realtors, said. “And I don’t know if NAR survives because we’re talking about massive, massive amounts of money.”
Rules by the National Association of Realtors and associated multiple listing services, which are databases real estate brokers use to list and search for properties, are at the crux of all three major lawsuits — Nosalek v. MLS PIN, Sitzer v. NAR and Moehrl v. NAR. All three cases cite the Sherman Antitrust Act.
The Nosalek plaintiffs didn’t sue NAR, although they did go after realty companies like Century 21, HomeServices of America and Keller Williams. Their initial complaint, filed in December 2020, cites MLS PIN rules on Realtor commissions that say listing brokers must include a fee for the buyer’s representation on each property.
This is because of a coupled compensation structure: most home sellers pay for both the buy-side and sell-side broker fees.
Sellers who don’t offer a fee on the MLS PIN can’t list their home on the service. The lawsuit says this complicates the selling process because buyer agents use the MLS to search for their clients and popular websites like Zillow also use it for their home listings.
Another complaint in the lawsuit says if sellers offer a lower-than-normal fee, buyer agents can see this on the MLS and will likely steer their clients away from the listing.
As part of the settlement, MLS PIN agreed to change its rules on the topic, eliminating the compensation listing requirement. They will also require brokers to inform buyers that they can negotiate the buyer-broker fee and inform sellers that they can elect not to pay it.
HomeServices of America and its affiliates recently filed for summary judgment on the case, arguing there’s no evidence the company conspired with the MLS PIN to inflate commissions.
Both the Sitzer and Moehrl cases contain similar complaints, but are focusing on the NAR as well because of its strong influence on listing service rules: 97% of regional MLSs are affiliated with the NAR and follow its code of ethics, according to by T3 Sixty, a real estate consultant firm.
If the Sitzer and Moehrl lawsuits compel NAR to uncouple with MLSs as some industry voices like Norman are expecting, on top of large damages, the organization and its local chapters would lose their major draw: member-only access.
“I think that’s almost the last bullet for the associations,” Norman said. “MLSs are gonna have their challenges too… but they still have what everybody wants and they’re good for the consumer.”
How Realtors get paid Coupled commissions have been around for a long time. With this system, home sellers pay their listing broker 5% to 6% of the final sale price after closing. That commission is then divvied up evenly between sell-side and buy-side agents, who interact with the customers, and their broker agencies. The majority of each half goes to the agent.
For example, after selling a $300,000 house, a seller pays $15,000 in Realtor fees. Agents receive $6,000 each and their brokers $1,500 each for the sale. The buyer doesn’t pay any fees.
“The whole compensation system doesn’t make a lot of sense,” Steve Brobeck, a senior fellow at the Consumer Federation of America and a self-described public interest advocate, said.
Why are Realtors compensated this way? It evolved from the original system used in 1908 when the first iteration of NAR, the National Association of Real Estate Exchanges, was founded, according to a report by T3 Sixty.
Back then, the industry relied on an exclusive representation system: sellers hired a single listing broker for a fee. Buying brokers were sub-agents of listing brokers, and both sides had a fiduciary duty to sellers. When property sold, listing agents gave their sub-agents a portion of the commission fee.
Eventually, the industry moved away from the subagency model to properly align fiduciary duties, but it didn’t move away from coupled compensations.
“It’s a weird system,” Ann Schnare, a former Freddie Mac executive who ran a study on the compensation structure, said. “Admittedly, it wouldn’t be the first to come to mind, but the fact is that’s what exists… changing it, I think, would be unnecessarily disruptive.”
The NAR has a similar outlook: it resists the lawsuits’ efforts to outlaw shared commissions because they say it’s optional and the rate is negotiable.
Critics of the system like Brobeck point to uniform commission rates despite this negotiability. Brobeck found that in 24 cities across the country, 88% or more of home sales had buy-side commission rates between 2.5% and 3% in a CFA report.
“This rate uniformity is striking evidence of the lack of price competition in the residential real estate industry,” Brobeck said in the report.
Other antitrust lawsuits Legal action over commission fees began in 2018, when a 10-year settlement between the DOJ and the NAR expired. Before crafting a new agreement, the DOJ and Federal Trade Commission held a joint workshop about competition in the real estate industry.
In 2020, the DOJ filed a new lawsuit against the NAR under the Sherman Antitrust Act and simultaneously settled with the association. The settlement required several changes to NAR’s code of ethics to provide “greater transparency to consumers about broker fees.”
The settlement banned buyer brokers from advertising their services as free unless they receive zero compensation from any source. It also prohibited these brokers from searching MLSs by filtering out properties with low commission fees and pushed for greater transparency on those sites.
Because of the settlement, many MLSs began to publicly post commission fees for each property. Redfin and Zillow followed suit. For the first time, homebuyers saw how much their agent would earn from each listing.
But then, the DOJ pulled out of the settlement in 2021 because it prevented them from investigating the association’s rules further.
The Moehrl and Sitzer lawsuits popped up around the same time as the DOJ’s initial workshop.
On March 6, 2019, Christopher Moehrl sued Realtor companies “for conspiring to require home sellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount, in violation of federal antitrust law.”
Then, in April 2019, Joshua Sitzer and Amy Winger, Scott and Rhonda Burnett and Ryan Hendrickson filed a similar lawsuit in Missouri.
Both plaintiffs sued the NAR along with large national broker franchisors: Realogy (now Anywhere Real Estate), HomeServices of America, RE/MAX Holdings, and Keller Williams Realty, as well as HomeServices affiliates BHH Affiliates, HSF Affiliates and The Long & Foster Companies.
Real Estate Exchange, a real estate brokerage, also filed an antitrust lawsuit in 2021 against the NAR, Zillow and Trulia. The lawsuit alleges that Zillow’s search features prevent “transparent access to home inventory.”
Will cash-constrained homebuyers suffer? NAR argues in press releases about the lawsuits that the coupled compensation system fosters market competition because it frees up cash for buyers, allowing them to make a larger down payment.
A study funded by HomeServices of America, a defendant in all three suits, supports the claim. It declares that unless lending changes come in tandem with revisions to this commission structure, it would hurt “minorities, lower income households, and first-time home buyers” the most.
Consumer advocates argue that agent fees won’t hurt buyers because their cost is currently built into home prices. If sellers no longer pay both agent commissions, home prices will fall, and buyers will have the same net cost.
Schnare, one of the study’s authors, said because most finance their home with a mortgage, that’s not true.
“If everything was cash, it wouldn’t make a difference,” Schnare said. “What seems like a small adjustment can make a big adjustment on what they can afford to pay and, you know, potentially hurt the lower end of the market, but with ripple effects upwards.”
Brobeck says this concern is exaggerated, and that lenders will adapt accordingly: “the only reason that argument has any force at all is because the industry supports buyers not being able to finance their commission on the mortgage.”
But Schnare’s study found it’s not that simple.
In order to avoid hurting cash-constrained buyers, lenders would need to change underwriting standards, specifically the loan to value ratio, which represents the borrower’s equity position in the property. This is the most powerful measure of default, the study says, and including an “extraneous factor” like buyer agent fees in the ratio could decrease its predictive accuracy. Schnare says government-sponsored enterprises, the Federal Housing Administration and the Department of Veterans Affairs are unlikely to approve of this change.
Even if they did, it would “require regulatory approval and coordination across multiple parties along the mortgage supply chain,” so Schnare expects it to be a lengthy, expensive process. In the meantime, first time homebuyers would struggle to pay broker fees out of pocket.
“We have what we have, we’re not starting from scratch,” she said. “That’s a big ask for something where the benefits are not entirely certain.”
But the CFA and REX both dismissed the study, citing its funding and accusing it of a faulty premise.
Either way, the industry might be forced to change — both the Sitzer and Moehrl lawsuits are going to trial and many expect the plaintiffs to win. The Sitzer trial is scheduled for Oct. 16, and the Moehrl trial will likely begin early 2024.
“I would not be surprised if there was a settlement before them in both cases,” Brobeck said. “And then the question is, will this settlement really lead to effective price competition?”
A new housing development built along a canal near the Mokelumne River is viewed on May 22, 2023, near Stockton, California.
George Rose | Getty Images
Lawrence Yun has as big a stake in the Federal Reserve’s moves as any economist: As the chief economist for the National Association of Realtors, his industry is a target of the Federal Reserve’s efforts to tame inflation with higher interest rates.
But the housing’s industry’s bigger problem right now may be the bond market, and specifically, spreads between treasuries and mortgage rates that suggests homebuyers’ economic challenges may not decline even as the Federal Reserve is nearing the end of its interest-rate hikes. There is a historically-wide difference between the 10-year treasury bond, a benchmark for pricing mortgages, and the actual price of an average 30-year loan. Usually around 1.75 percentage points, and as low as 1.3 in 2021, the so-called mortgage spread is hovering at more than 3 percentage points now. And that is propping up mortgage rates, keeping home owners from selling their homes and buying nicer ones, and hurting first-time buyers, Yun said.
“Buyers know 3.5% mortgages aren’t coming back,” Yun said. “So 5.5% would bring out buyers.”
Why mortgage spreads should move lower
Logically, mortgage spreads should move down sharply from here, thanks to the recent spate of good economic news, and bring relief to home buyers who have seen affordability deteriorate sharply since 2020.
Traditionally, spreads widen when markets fear a recession. They spiked before the financial crisis of 2008, for example. Collapsing spreads help revive housing activity after a recession arrives, or can prop up the housing market in a crisis, which happened in 2021 as the Covid pandemic threatened an economic crash. But as the Fed began raising interest rates in March 2022, mortgage rates rose even faster than bond yields.
The case for wide spreads this past year was two-fold. Partly, it was rooted in the idea that the 10-year treasury yield would rise as the Fed hiked more. Fear of a 2023 recession also contributed — evidenced by a sharp widening of spreads in March, after Silicon Valley Bank failed.
Now, both cases are evaporating. Last week’s inflation report showed consumer prices rose just less than 3% for the 12 months ending in June, down from more than 9% a year earlier. Low inflation should persist into the fall, because the government’s measure of housing inflation lags private market data that has been moving lower since last summer. The consumer price index is expected to only start to reflect the now year-old dip in rents and home prices in parts of the U.S. by year-end.
At the same time, the Atlanta Federal Reserve Bank’s tracking estimate of second-quarter economic growth now sits at 2.3% belying predictions of an early-2023 recession that were widespread.
The recent inflation news pushed the 10-year treasury lower, touching 3.76% after reaching 4.09% earlier in July. Mortgage rates also dropped, to 6.89% last Friday from a recent peak of 7.22%, according to Mortgage News Daily. But the spread between the two was little changed.
How much the big mortgage spread costs homeowners
If the spread between 10-year bonds and mortgages were to revert to normal, it would make a huge difference in monthly payments for home buyers.
On a $500,000 mortgage, for example, a 7% interest rate spits out a monthly payment of $3,327, plus taxes and insurance. That falls to $2,934 if rates go to 5.8%, which would represent a 2 percentage-point gap between treasuries and mortgage rates, and to $2,777 with mortgages at a spread of 1.5 percentage points — back within the range of the long-term average, 1.75 points.
The closing of spreads alone would save that borrower $6,600 a year in payments. A $500,000 loan would typically require about $150,000 in pretax annual income.
“People consider changing their cable company for $30 a month,” Yun said. “$600 a month is a big number.”
A narrowing of spreads last fall, which reversed in February and March, helped stabilize a falling real estate market, according to Logan Mohtashami, lead analyst for HousingWire in Irvine, Calif.
But bond market and housing experts are skeptical of whether the spreads will narrow, and mortgage rates fall, as fast as homebuyers might like.
The Fed is widely expected to raise the Fed funds rate at its meeting on July 25-26, with futures prices implying a 96.1% chance of a quarter-point increase, according to the CME Group Fedwatch Tool. That will support Treasury yields, at least in theory.
More than that, the Fed has stopped buying up mortgage securities as the bonds on its balance sheet mature. That depresses the price mortgages can command in secondary markets or from federally-backed loan buyers like Fannie Mae and Freddie Mac, and puts pressure on lenders to demand wider spreads from borrowers, said Rob Haworth, senior investment strategy director at U.S. Bank in Seattle.
Banks may also seek bigger spreads on loans made in the next few months because of the risk the mortgages will be repaid quickly when borrowers refinance next year as rates fall, he added.
“One might attribute it to quantitative tightening,” Haworth said. “The Fed is a seller.”
Indeed, the Fed has signaled that it doesn’t want mortgage rates to fall soon, according to Mohtashami, citing comments made by Minneapolis Federal Reserve Bank president Neel Kashkari who said in February that lower rates and a hotter market would “make our job harder” in controlling inflation.
“I assumed the spreads would stay high until the Fed cried Uncle and started cutting rates,” Mohtashami said. “If the banking crisis hadn’t happened in March, they would be lower.”
But markets have defied the Fed before, as recently as this week, when the 10-year Treasury yield dropped even as traders remain convinced the central bank will hike rates at least once more.
If the drop in inflation is sustained — a big if — and rising consumer confidence pushes any recession further into the future, markets are likely to reset interest rates with or without the central bank.
The Fed will raise rates at least once more, but the second rate increase many investors have expected may be delayed or canceled if inflation stays tame, said Doug Duncan, chief economist at Fannie Mae. That would let last week’s modest dip in mortgage rates continue, even though Fannie doesn’t expect the central bank to cut interest rates until at least early next year, he said.
How banks think about lending rates
Fannie Mae’s forecast calls for rates to be near current levels through 2023. But the Mortgage Bankers Association of America sees the 30-year rate dipping to 5.2 percent next year.
Banks’ reaction to changing spreads may be tricky to predict, Duncan said. On the one hand, banks would have to watch out for more prepayments if interest rates come back down, pressuring them to keep spreads wide, he said. But that might be overwhelmed by an increase in the value of mortgages that banks already own, as loans from the late 2010s and 2020 that pay lower rates regain value they lost as rates rose, he said. In that case, more banks would probably be more willing to let spreads fall, he added.
Mortgage rates could come down quicker than expected if banks respond to rising mortgage-bond values by relaxing spreads, Duncan said. When the Fed tried to talk markets into tightening credit in 2013, mortgage spreads actually became smaller, loosening mortgage credit, Haworth said.
“Unless rates go back to 3 percent, banks are still going to be better off, even if prepayments pick up,” Duncan said.
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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An astonishing compound in Big Sky Country comes with a pyramid and a spaceship. You read that right.
The three-bed, three-bath, off-grid property, which includes a Quonset building, sits on just under 28 acres in Ennis, MT, and is listed for $5,250,000.
The place actually came onto the market in 2019 for $2.2 million but with only 10 acres of land.
“All three buildings on the property are quite unique,” explains listing agent Richard Mayo, with Coldwell Banker Distinctive Properties. “The owner of the property designed and built them all himself. It was built to specifications for efficiencies and to capture the most sunlight.”
The owner has been living in a small, pyramid-style building.
“It’s situated in such a way that it catches maximum sunlight to maximize efficiency,” Mayo says. “But the big building that probably caught your eye is called the laboratory.”
This structure looks a bit like a three-story spaceship.
“The basement story with the garage doors is vehicle storage and a full machine shop and laboratory and an experiment station, where [the owner] invents things,” Mayo says.
The lab has a definite lived-in look.
“The second story is where [the owner] lived at one point and is probably 2,500 square feet and [has] three bedrooms,” Mayo notes.
One of the bathrooms is very colorful and close to an area the owner used as a sound stage. There’s an additional stage area is outside.
The home’s third level offers a different vibe, though.
“The top floor is a room that is completely white, and full of south-facing windows, and is really super light and bright,” Mayo says. “It would be an awesome greenhouse or something. You could have your own inside garden.”
Mayo says he has known the seller for about 30 years and helped him sell some agricultural land to pay for the construction of this compound.
“When I first saw it, I was totally in awe of what he has done and how he has done it,” Mayo says.
He explains that while the spaceship-shaped building is in reasonable condition, the pyramid could use some TLC. The roughly 5,500-square-foot Quonset building has never been used and is in perfect shape.
“You can have a number of different things inside,” Mayo notes. “It’s a beautiful building with a full commercial kitchen. It would be perfect for groups of people who wanted to gather for conventions or whatever.”
Solar and wind energy systems are in place, allowing the property to function independent of any municipal utilities. The land is close to Big Sky Resort and is surrounded by mountain and valley vistas.
So, who might be most enticed by this property?
“The perfect buyer is someone with a flair for creativity and someone who appreciates design, and structure, and the environment it is in,” Mayo says. “It could be some group or company that wants space to manufacture things—or a group that want their privacy and yet be kind of close to amenities.”