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Thinking Of Buying a House? Don’t Think Too Long

MarketWatch recently reported that Americans are taking out the biggest mortgages on record, and location has little to do with it. The message is the same for buyers and sellers from Tucson, Arizona; St. Paul, Minnesota; or Portland, Oregon.

MarketWatch, a subsidiary of Dow Jones & Company (itself a property of Rupert Murdoch’s News Corp) is a financial reporting website. The financial data on home mortgages is taken from a survey which dates back to 1990.

Plotted on a graph, this data flatlines in 2008 and begins rising again in 2012. The amount of rise reflects a substratum of confidence: when nothing is worth anything, property is still worth something, and people will continue to buy it.

With higher prices comes a crunch. Buyers have to be willing to pay for what they want, and sellers are calling the tune. For many, it means offering more for less, and forget the second bathroom (“You know a little bit about plumbing, don’t you, honey?).

It also means going to the bank with an impeccable financial pedigree. Qualified buyers (those with FICO scores of 763, or 62 points higher than the 2015 median) are going in with five percent.

Only the best borrowers are getting loans today, writes Laurie Goodman, co-director of Urban Institute’s Housing Finance Policy Center. And these loans are so thoroughly scrubbed and cleaned before they’re made that hardly any of them end up going into default.

Of course, each additional five percent down means the loan’s terms are more favorable. Unfortunately, with the rapid increase in home values – even during the recent dip – it is no longer within the realm of possibility that first-time buyers will have much more than five percent to put down, so major mortgage lenders now ask for a down payment between 5 and 10 percent. This is not your father’s mortgage, Millennials!

The 5 percent on entry-level prices of between $150,000 and $300,000 is a good place to be if you are a Millennial in a job whose wages are going up rather than stagnating (as is happening to the rest of us). If you aren’t one of the fortunate few, you will be carrying more debt and less equity, even as time goes on, because everything you buy is getting more and more expensive.

Sadly, there are fewer and fewer homes in that entry-level price range, because home builders are focusing on the top end ($750,000 to $1,000,000 in San Francisco, for example) instead of the bottom, and most of the post-war housing boom still standing (and in the entry-level price range) has already been purchased.

In addition, today’s homeowners (in the entry level bracket) have more debt and less equity now than they did in 2005, or at the top of the home-buying bubble that eventually burst.

It’s a good time for lenders though, especially the more risk-averse. Default rates are less than 2 percent – the default rate for the period 1999 to 2003 – and far below the 13 percent that existed during the housing bubble. According to Goodman, this near-zero-default environment is clear evidence that the mortgage lending industry needs to” open up the credit box” and lend to borrowers with less-than-perfect credit.

“At some level, we’re sort of running out of customers,” agrees Sam Khater, deputy chief economist at data provider CoreLogic.

In fact, owners of entry-level homes – those in the $150,000 to $300,000 range — have more debt and less equity now than they did in 2005, at the height of mortgage mania. In today’s home-loan market, a 1,900-square-foot home selling for $56,516 in 2015 dollars can be had for a 3.65-percent, 30-year-fixed rate mortgage.
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