Here's a great follow up story to yesterdays PMI topic.
The reports coming out today are that the FTHBs are getting back into the market.
I found a small chart showing the cost differences between renting and buying in various markets. I have a couple of complaints about this graphic.
The first thing I have to say is that this is gross. Not bad gross, BIG gross. Gross in the that it broadly covers the US.
What size magnifying glass should we be using?
I see report after report on housing declines.
If I look at specific areas in the bay area, or the country I get radically varied numbers.
Median Existing Home Sales for Oct. in the bay area (as a group) were identical to those a year ago, $614,000. So we were unchanged year over year. We were if you look at the bay area in general.
In that same period, Santa Clara County went up 3% yet Napa dropped 8.7%
Want to focus even closer?
I have a motorcycle friend, Alan who just opened a therapeutic massage business in Los Gatos.
I'm using Alan as an example because he's a well educated and thinking person who would have done his due diligence homework.
Moving from SLO, if he was looking at Los Gatos charts depending on the actual zip code he'd see two drastically different pictures.
Zip 95033 gave it's residents a 33.6% drop year over year!
That's a huge hit! Why would he ever think about moving?
Maybe it's a good buying opportunity?
That aside, if he looked at Los Gatos' zip just one away 95032 - he'd see appreciation of 10.5%!
Get the idea?
It also is a very short term graph. It deals with just the here and now.
It does not account for appreciation over time.
It does not account for tax deductions.
I had a Probability and Stats professor who drilled into us students that we had to know the time frame, the sources, and the facts that go into any graph. You have to be careful.
Enough of the graph. Let's talk about FTHBs.
The share of first-time home buyers dropped earlier this year to its lowest level since 1987, according to the National Association of Realtors. First-time home buyers now account for 36% of home purchases, according to a study released last month by the Realtors group, down from 40% in the three previous years.
First-time buyers play a key role in the housing market. They provide a source of new demand for homes, and they also make it possible for owners of entry-level properties to trade up, creating a ripple effect that affects higher-priced sectors of the market. Declining affordability has made it difficult for many first-time buyers, an important factor in the recent housing downturn.
First-time buyers are particularly sensitive to rising housing costs, in part because they don't have equity from an existing home they can tap as prices shoot higher. And lower incomes provide less of a cushion when monthly payments climb. In a sign of just how hard it is for first-time buyers to come up with the cash needed to buy a home, 45% of first-time buyers bought their home with no money down, according to the recent National Association of Realtors survey, up from 43% a year earlier.
How and why did that happen?
In part, as the Lenders saw the demand for 100% financing, they responded by creating reasonable programs to allow the high LTV loans. Because values were appreciating at a pretty good clip a FTHB saw the opportunity to act and did so. Many of them got in using short term loans. These may have been ARMs with fixed period portions. The "credit window" was wide open. Underwriters and the guidelines they wrote loans by were very lenient to say the least.
Flash forward to today:
That same credit window is closing.
It won't shut, and it may not even be noticed to most.
Simple fact is that as more and more lenders take bigger and bigger hits on defaults in their portfolios they have to adapt and make changes. You will not read this in any newspaper, nor on the TV. The last thing a lender's marketing department wants is for potential borrowers to feel they cannot qualify and hence not even make an application. And really, they are right. They want to get you in the door, make the application, then turn you down if they have to. Remember this, turning you down costs them money. The only way they are going to make any money is on approving people. We're all in the business of completing loans.
But they are smart enough to know that there is no way the average or even highly informed borrower could possibly make that determination on their own.
I did a quick search of news articles and here's the one and only snipet I could find on the topic:
"New guidelines for nontraditional mortgages, recently issued by federal banking regulators, could make it tougher for some first-time buyers to use these products. Some lenders are also beginning to tighten their standards as mortgage delinquencies rise.
I'm sure everyone else saw that too - right?
Here's an analogy for you...
You find out you need to have your gal bladder removed.
You want to educate yourself as much as possible.
So you go online and gather as much info as you can.
You talk to as many other people who had the same operation.
You talk to doctors, nurses, and those guys that give you the laughing gas.
You even find out your Brother's Wife's best friend used to perform the same operation on underprivileged Pygmies in the jungle bask in the day. You even get a 2nd opinion.
He thinks you need to lose some weight and have the operation at the same time.
No matter how much you think you know - will you ever know as much as the guy who is going to ultimately make the incision?Moral of the Story:
You have to use professionals who know, professionals you trust.
Additionally, I have to say these same professionals have to be able to trust you too.
But that's a story for another day.