- Interest rates are still below historic numbers.
- 88% of property managers raised their rent in the last 12 months!
- The credit score requirements for mortgage approval continue to fall.
In today’s housing market, where supply is very low and demand is very high, home values are increasing rapidly. Many experts are projecting that home values could appreciate by another 5%+ over the next twelve months. One major challenge in such a market is the bank appraisal.
If prices are surging, it is difficult for appraisers to find adequate, comparable sales (similar houses in the neighborhood that recently closed) to defend the selling price when performing the appraisal for the bank.
Every month in their Home Price Perception Index (HPPI), the disparity between what a homeowner who is seeking to refinance their home believes their house is worth, as compared to an appraiser’s evaluation of that same home.
“While a 1 or 2 percent difference in home value opinions may not seem like a lot, it could be enough to derail a mortgage.
A homeowner [or a buyer] could be forced to bring more cash to closing in order to make a mortgage work if the appraisal is lower than expected. On the other hand, if an appraisal comes in higher, they could be surprised with more equity than they had planned. Either way, if owners are aware of their local markets it will lead to smoother mortgage transactions.”
The chart below illustrates the changes in home price estimates over the last 12 months.
Every house on the market has to be sold twice; once to a prospective buyer and then to the bank (through the bank’s appraisal). With escalating prices, the second sale might be even more difficult than the first. If you are planning on entering the housing market this year, let’s get together to discuss this and any other obstacle that may arise.
According to Freddie Mac’s latest Primary Mortgage Market Survey, interest rates for a 30-year fixed rate mortgage are currently at 3.96%, which is still near record lows in comparison to recent history!
The interest rate you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power.
Purchasing power, simply put, is the amount of home you can afford to buy for the budget you have available to spend. As rates increase, the price of the house you can afford will decrease if you plan to stay within a certain monthly housing budget.
The chart below shows what impact rising interest rates would have if you planned to purchase a home within the national median price range, and planned to keep your principal and interest payments between $1,850-$1,900 a month.
With each quarter of a percent increase in interest rate, the value of the home you can afford decreases by 2.5% (in this example, $10,000). Experts predict that mortgage rates will be closer to 5% by this time next year.
We previously reported how a shortage of inventory in the starter and trade-up home markets is driving prices up and causing bidding wars, creating a true seller’s market. At the same time, in the premium home market, an over-abundance of inventory has started to see prices come down and put buyers in the driver’s seat, creating the beginning of a buyer’s market.
Last week, the National Association of Realtors released their Existing Home Sales Report which shed some additional light on the impact of inventory levels on sales in each price range.
The chart below shows the year-over-year difference in sales at each price range.
The under $100K range has shown declines in recent years due to the shortage of distressed homes available for sale (just 5% of sales this past month, compared to 35% in January 2012). Sales in the next two price ranges are no doubt being hindered by low inventory as buyers compete for the same home.
NAR’s Chief Economist, Lawrence Yun, explained:
“Those able to close on a home last month are probably feeling both happy and relieved. Listings in the affordable price range are scarce, homes are coming off the market at an extremely fast pace and the prevalence of multiple offers in some markets are pushing prices higher.”
The biggest surprise? This is the first time in years where the $1M and up price range had the highest jump in sales when compared to last year and to all other price ranges (29.1%)! The two price ranges right underneath the $1M range were a close second and third. As the price went up, so did the sales!
With additional inventory available in the higher price ranges, and the economy improving, many luxury buyers are finding it easier to find their dream homes. Yun commented,
“The job market in most of the country is healthy and the recent downward trend in mortgage rates continues to keep buyer interest at a robust level.”
If you are one of the many homeowners who is looking to sell your starter or trade up home and move up to a luxury home, now is the time!