HOME PRICES RAPIDLY RISE

Dated: 11/14/2017

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HOME PRICES RAPIDLY RISE | IS HISTORY REPEATING ITSELF?
THE ECONOMY: NOVEMBER 14, 2017

‘Rapid Price Increases Will Not Last Forever’

The current growth in home prices is echoing the lead-up to the recession. Is history repeating itself?
The answer is likely not, according to a recently released realtor.com® report. Building is lacking in many markets—one hallmark 10 years ago was over-construction—and credit standards are more stringent, says Danielle Hale, chief economist of realtor.com.  “As we compare today’s market dynamics to those of a decade ago, it’s important to remember rising prices didn’t cause the housing crash,” Hale says. “It was rising prices stoked by subprime and low documentation mortgages, as well as people looking for short-term gains—versus today’s truer market vitality—that created the environment for the crash.”
In 2016, home prices (the national median home sales price) were 2 percent higher than they were in 2006, the report reveals. Pre-recession prices have returned in 31 of the 50 largest metropolitan areas.  In contrast with 2006, however, are today’s credit conditions. Currently, the median FICO score for a mortgage is 734; the median in 2006 was 700. Builds and flips are also different from 2006—starkly. The credit environment, among other factors, is keeping a lid on unfettered flipping and over-construction. In 2006, one household formation generally equaled 1.4 single-family housing starts; in 2016, that number shrank to 0.7 single-family starts. Flips accounted for 5 percent of sales in 2016; in 2006, they comprised 8.6 percent.
“Lending standards are critical to the health of the market,” says Hale. “Unlike today, the boom’s under-regulated lending environment allowed borrowing beyond repayable amounts and atypical mortgage products, which pushed up home prices without the backing of income and equity.”
Additionally, economic indicators point elsewhere. Employment was healthy then and is now, but inventory is limited more today—at a 20-year low. Presently, the average months supply is 4.2; in 2007, the average months supply was 6.4. “The healthy economy is creating more jobs and households, but not giving these people enough places to live,” Hale says. “Rapid price increases will not last forever. We expect a gradual tapering as buyers are priced out of the market—not a market correction, but an easing of demand and price growth as renting or adding roommates becomes a more affordable alternative.”
Source: NAR


WHAT ARE MORTGAGE POINTS | SHOULD YOU PAY THEM?
THE ECONOMY: NOVEMBER 14, 2017

When people want to find out how much their mortgages cost, lenders often give them quotes that include loan rates and points.

What Is a Mortgage Point?
A mortgage point is a fee equal to 1 percent of the loan amount. A 30-year, $150,000 mortgage might have a rate of 7 percent but come with a charge of one mortgage point, or $1,500.

A lender can charge one, two or more mortgage points. There are two kinds of points:

  1. Discount points

  2. Origination points

Discount Points
These are actually prepaid interest on the mortgage loan. The more points you pay, the lower the interest rate on the loan and vice versa. Borrowers typically can pay anywhere from zero to three or four points, depending on how much they want to lower their rates. This kind of point is tax-deductible.

Origination Points
This is charged by the lender to cover the costs of making the loan. The origination fee is tax-deductible if it was used to obtain the mortgage and not to pay other closing costs. The IRS specifically states that if the fee is for items that would normally be itemized on a settlement statement, such as notary fees, preparation costs and inspection fees, it is not deductible.

How do you decide whether to pay mortgage points, and how many? That depends on a number of factors, such as:

  • How much money you have available to put down at closing

  • How long you plan on staying in your house

Points as prepaid interest reduce the interest rate—an advantage if you plan to stay in your home for a while—but if you need the lowest possible closing costs, choose the zero-point option on your loan program.

By the Numbers…
A lender might offer you a 30-year fixed mortgage of $165,000 at 6 percent interest with no points. The monthly mortgage principal and interest payment would be $989. If you pay two points at closing (that’s $3,300) you might be able to drop the interest rate down to 5.5 percent, with a monthly payment of $937. The savings difference would be $52 per month, but it would take 64 months to earn back the $3,300 spent upfront via lower payments. If you’re sure you will own the house for more than five years, you save money by paying the points.

©2017 Bankrate.com

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David Sarnowski

David is a seasoned real estate professional, specializing in residential sales, rentals and investment properties. David is a 15 year resident of the New Jersey Gold Coast, with the local knowledge n....

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