In the immediate aftermath of the housing bubble, mortgage loans were hard to come by for most consumers. Even for aspiring buyers whose credit and savings had largely weathered the big crash, strict terms and conditions placed on lending made buying a home difficult. On top of that, many credit unions and local lenders who would accommodate buyers with imperfect credit profiles or smaller savings found themselves shuttered by rolling bank failures. The result of this sudden contraction of credit locked out young people, whose jobs and savings were often zapped in the economic downturn that followed, as well as people who found themselves underwater and seeking refinancing on their first loans. In all, the result was a market bloated with foreclosures and buyers who, for various reasons, were unable to purchase them. As we’ve seen, this cycle took years to even begin to right itself.
All of this seems like old hat now. Lending, it a lot of ways, is back. Depending on where you live though, what the local housing market is doing can influence your ability to secure a loan . . . and can influence the type of loan you should choose.
Reading the tea leaves when it comes time to secure a loan involves looking at both the national housing market, as well as the current options available to you. Many markets, particularly those in distant suburban, exurban, and rural communities, are still undervalued to their healthy market fundamentals. This is also true in many major urban centers hit hardest by recession and de-industrialization, such as cities along the rust belt where properties are upwards of fifteen to twenty percent undervalued according to Trulia. As of January of this year, home prices across the board were undervalued 2 percent.
Other cities are pushing in the other direction, where limited housing stock and high dollar investment are pricing out even upper middle class buyers. Housing in cities like Austin, Honolulu, and various cities in California are overvalued more than 10 percent according to this same metric. In order to purchase a home in cities like San Francisco, a household needs to earn a minimum of nearly $120,000 yearly. Minimum. Smaller cities like Denver that were once considered affordable are spiking and a rush on housing is beginning as limited stock drives competition. In essence, cities that have jobs are becoming unaffordable and places that are still recovering aren’t growing along with the rest of the market (which means less equity, less personal wealth for homeowners, and less local tax revenue).
What does this mean for home buyers? Across the board, low interest rates and skyrocketing nationwide rents make buying a home right now favorable for those who can afford a mortgage. When deciding between a fixed rate or one of several types of adjustable rate mortgages, knowing how to anticipate home value growth will give you the tools (and the numbers) you need to find your most favorable terms, as well as help you plan for a future refinance.
– People living in volatile markets run more risk of finding themselves underwater when locked into ARM mortgages with balloon payments, for example. If you’re living in a booming housing market, knowing how much anticipated housing stock will be built can be a window into how growth will sustain (and anticipate any bubbles that may affect when you borrow and how). Along with considering how long you will stay in your home, this can help you understand where the top of the market is for sale prices and value, and get the heads up on if the timing is right.
– For the more expensive markets, such as many in coastal California, high home prices and the larger down payments associated with them may limit even affluent first-time home buyers to FHA loans and ARM loans. Buyers should anticipate refinancing once they have adequate equity and can cover paying closing costs again for loans with high mortgage insurance or interest-only/ballooning payments.
– In sluggish housing markets, rate hikes associated with lower interest adjustable loans mean less of a hit-to-the-pocket compared to hot or expensive markets, thanks to lower home prices. In many cases, home prices are still quite low compared to where they would be historically, meaning great deals are available for buyers and investors alike. However, investing somewhere that will grow in value is key, and knowing the types of urban design that appeal to home buyers will help you stay above water, even in places where growth is slow.
The lending climate, by and large, is trying to keep up with this wide range of vacillations without creating the type of unstable, unregulated lending that led to utter disaster a mere eight years ago. Lenders are now required by law to prove that their borrowers have the means to pay back the loan, so as to prevent the type of rolling foreclosures and failures that characterized the crash. Especially for buyers with lower credit scores or other financial factors that may greatly influence their terms, the strength or weakness of the local market can determine what types of loans will be favorable and which may end up being a time bomb.