Those of you who know me well know I call 'em like I see 'em. If you are thinking about taking advantage of one of the two generous tax credits currently on the table or buying a home for any other reason in 2010, you need to be looking at houses NOW.
There are three primary reasons why the next 100 days are going to be the busiest days of the year in real estate.
1) Tax Credits to Expire April 30
The $8,000 first-time buyer tax credit and the $6,500 "move up" tax credit (for those who have owned a primary residence at least five of the previous eight years) will expire April 30. You don't have to close by April 30, but you must have a property under contract by that date. In other words, if you haven't gotten your education, done your shopping, written your contract, negotiated your deal and cleared inspections by April 30, there is no guarantee you will receive a tax credit.
And if what happened at the end of 2009 is any indication (when buyers thought last year's tax credit was expiring), by early March the market will be flooded with buyers chasing limited inventory - that spells higher prices, fewer concessions and more compromise as buyers settle for "what's left" instead of what they want.
And if what happened at the end of 2009 is any indication (when buyers thought last year's tax credit was expiring), by early March the market will be flooded with buyers chasing limited inventory - that spells higher prices, fewer concessions and more compromise as buyers settle for "what's left" instead of what they want.
2) Fed to Discontinue Purchasing Discounted Mortgages
Why have interest rates been in the 4's and 5's for the past year? Part of it is that the economy has gone sour, but perhaps a bigger reason is that the Federal Reserve took the unprecedented step last year of committing to purchase $1.25 trillion (with a "t") in mortgages at discounted rates.
Experts estimate that the Fed's intervention has artificially lowered rates by as much as one full percent. But the Fed announced in December it would end its mortgage purchasing program in March. In simple English, the Fed has been the largest purchaser of low-yield mortgages for the past year. Without the Fed, rates have nowhere to go but up. And the Fed's out of the market 70 days from today.
Experts estimate that the Fed's intervention has artificially lowered rates by as much as one full percent. But the Fed announced in December it would end its mortgage purchasing program in March. In simple English, the Fed has been the largest purchaser of low-yield mortgages for the past year. Without the Fed, rates have nowhere to go but up. And the Fed's out of the market 70 days from today.
3) FHA Tightens Guidlines, Again
With traditional bank lending severely curtailed by the economic meltdown, the Federal government has stepped into the void by making FHA (government-insured) loans the mortgage of choice for almost 50% of today's first-time buyers. Overall, FHA market share is close to 40%, when as recently as four years ago FHA accounted for less than 5% of the overall market.
Why are banks not lending? Their fingers have been burned, badly, and they simply won't touch anything with risk. But because ours is a credit-based economy, which will essentially collapse without the availability and free flow of credit, the government took extraordinary steps to keep lending via the FHA program.
Now the bad news... with all the risk FHA has taken on by making loans when no one else would, regulators are demanding that FHA tighten up its operations. This week FHA announced that, starting in April, it would be increasing the "up front" mortgage insurance premium (a surcharge tacked on to the base loan amount) from 1.75% to 2.25%, and increasing the annual mortgage insurance premium (which creates the reserves FHA uses to cover bad loans) from .50% to .55%. On a $200,000 loan, these new changes will cost borrowers more than $1,000 in additional costs.
In short, it's going to become more expensive to purchase a home, both through higher fees and costs plus the pain of higher rates. The problem with a higher rate mortgage is that it makes home ownership more expensive in perpetuity, or at least until you pay off your loan. The low rate environment we have been in is a gift to today's homebuyers, but the party is likely nearing an end.
Taking these things together, we're three months away from higher rates and higher FHA costs at the same time the tax credit is taken off the table.
Don't wait until March or April to compete with thousands of other buyers - commit and get serious about your search RIGHT NOW!
