Thursday, March 13, 2008

Is it a good time to buy?

For Americans wanting to buy a new home, there are always two time frames to consider:
Now and Later

It's why prospective home buyers love to ask the question: "Is now a good time to buy?" If now is not a good time, they reason, certainly later must be. Strangely, though, "Is now a good time to buy?" is a question that people ask their real estate agent but never Mr.Mortgage.

It's probably a good thing, because we have have seen a lot of changes over the last few months and we're expecting a lot more this year. But it's okay. You can ask me now: "Is now a good time to buy?"

And I answer: "Absolutely and unequivocally yes, if you have a five year time horizon."

Now is a good time to buy -- not because home prices are flat or because sellers are willing to make a deal-- but because none of us mortgage guys can predict what the mortgage market will look like "later". "Now" is full of knowns. "Later" is full of unknowns. Mortgage markets are seizing and lenders have no choice but to limit what they will lend and to whom. Stated income has largely disappeared and FICO requirements have increased dramatically in the last few weeks.

It may appear that lenders are going overboard with their restrictions but that's not the case at all. Lenders are simply more concerned about not wasting money than they are about making money. They have made far too many trips around the middle east and asia raising capital to "waste" it on a high risk borrower. Remember a loan is a earned, it isn't one of your rights below freedom of speech.

Today, a bank doesn't mind if it passes on 9 good loans in a stack of applications if it means that it also passes on the 1 bad one that's in there. Jumbo Mortgages are only a small percentage of the bank's balance sheet, but it's the uncertainty about the demand for mortgages by investors that makes them nervous. If mortgage bonds become worth less, the little guy could eventually topple the giant bank much like david vs goliath.

The first major change we expect to see is with second mortgages. Currently, 90% home equity lines of credit are available from most banks. Judging from the recent decreases of 150k Countrywide customers HELOC loan limits in CA and Chase limiting HELOCs to 80% LTV max and 65% in Las Vegas, we expect that percentage to fall to 80% or lower very soon.

The second major change we expect are more credit score-based fees. Currently, a 680 score puts mortgage applicants in the safe zone from credit-score based fees.
Expect that minimum score to raise to 720.

The third major change we expect is for the declining market designation to expand. This will force every home buyer to need an additional 5 percent (or more) of his own funds beyond what the bank's lending guidelines will allow. If you needed a 10% downpayment now, you may need a 15% downpayment later.

The fourth major change we expect is based on property type. New construction condos are in ample supply in many cities and that may create an overall weakness in pricing. If a single-family home requires a 20% downpayment, banks may protect themselves by requiring 25% downpayments on condos.

And the last major change we expect is for every mortgage product in existence to get a complete makeover. New minimum standards will apply in all categories.
It's impossible to know what these new standards will be, but expect mortgage lenders to follow their losses and trim their menus accordingly. If you find yourself in the same Risk Class as other homeowners with high default rates, expect a tough road ahead. We have seen rates from Fannie Mae on adjustable rates for low FICO borrowers move from 7%-8% to 10%+. Investors are demanding higher rates to compensate for the enormous defaults. Someone has to pay the tab.
So back to the question: "Is now a good time to buy?"

Yes it is. Not because homes may be priced right, though, but because mortgage products should look very different come this Fall. And no matter how "cheap" the home, you can't buy it if you can't get financing for it or write a check for it. If you are considering buying or refinancing look at your mortgage options now.