Affordability Hits Record High on Low Rates & Price Drops

Original post By The Tim on November 11, 2011 / Seattle Bubble

Here’s a headline from the Seattle Times that’s sure to get some attention: King County housing-affordability index best in 17 years

Thanks to declining prices and record-low interest rates, houses in King County are more affordable now than they’ve been in at least 17 years, a new score card says.

The county’s “housing affordability index” score, a measure devised by the Washington Center for Real Estate Research at Washington State University, hit a record high of 127 in the third quarter.

The median price for the third quarter this year was $350,000, the center’s latest score card says, down 10.3 percent from the same quarter last year.

Interest rates also hit new lows, said Glenn Crellin, the center’s director, and the county’s median family income — despite persistent high unemployment — remained relatively stable.

“You put those three together and you get greater affordability,” he said.

Sure enough, as far back as you can get median price info from the NWMLS, the affordability index for King County has never been higher. In the chart below I have plotted affordability by month rather than quarterly like the WCRER, which means I have also included October, when rates and home prices both went even lower, driving the affordability index higher still:

It’s important to note what the Affordability Index is, and what it is not. In short, it’s simply a measure of the monthly expense of buying a median-priced home, relative to the median household income. A high affordability index doesn’t mean that every home is priced fairly; it just means that the monthly payment on homes are highly affordable relative to incomes. If you want the long version, hit this post: What the Heck is the Affordability Index, Anyway?

To get an idea of why the affordability index is at a record high, take a look at this view of two of the three components that go into the calculation:

Interest rates are at an all-time low, while home prices are at early 2004 levels. When homes were cheaper pre-2004, interest rates were fifty to one hundred percent higher than they are today.

For those that are interested, I also calculate the affordability index for Snohomish and Pierce Counties, where I only have price data back through 2000:

While homes are still quite expensive compared to most of the ’90s, today’s artificially-low interest rates make the payment on those homes more affordable than ever, which is why in the Seattle Times article linked above, I am quoted as saying that “It’s a great time to buy if you want to keep your monthly payments low.”

The qualification “if you want to keep your monthly payments low” is key. If you’re a monthly payment buyer, it is indisputably a better time to buy than it has been since at least 1993. The data doesn’t lie.

Does that mean it’s a great time for everyone to buy a home? Nope. As I pointed out later in the article, the moment you sign the closing documents on a home, you effectively lose ten percent of its value, since that’s about how much it will cost you to sell the home. Since home prices are likely to continue slipping for the next few years or at best remain flat, if you’re not planning on staying put for a good long time, it’s still a better idea to rent, regardless of high affordability.

Bottom Line: Myself and Sound Mortgage , Inc provide complementary pre-approvals for our clients and sound advice on mortgage products to best meet your goals and objectives. So take the time to get pre-approved so you have a pre-approval letter ready to go when you find that great deal, since they tend to go very fast in this market. Give me a call today 253-686-6690

Buying a foreclosed home "Things You Should Know"

A tide of foreclosed properties has been sweeping into the beleaguered housing market, bringing down property values, dislocating families, and sending municipal governments scrambling to manage the crisis. But some buyers see a once-in-a-lifetime opportunity in the gloomy headlines; they are buying up foreclosed properties at ultra-low prices.

Sound Mortgage, Inc. and Fairplay have teamed up to provide turnkey solutions for our clients to succeed in buying foreclosures. Contact me for more information. Below is information should you decide to “go it alone”

Land Mines
"You have to know how to do a title search," or you could end up thinking you've just bought a home by paying off a $100,000 mortgage only to find out that was just the second mortgage and you had to pay another $200,000 to take ownership.

"Suddenly that great buy isn't such a good deal. You also have to be aware of [any] liens on the property because you're going to be responsible for those as well."

On top of that foreclosure homes are sold "as is" which means that the 25 – 40 percent you just saved on the purchase price can easily be eaten up by unforeseen expenses such as repairs not immediately apparent in an exterior inspection. That's because when you buy a home in foreclosure, you may not be able to look inside let alone have an inspector detect structural problems that you'll need to fix before moving in.

Something else to think about -- people who lost their home in foreclosure very likely couldn't afford to maintain their property.

So be prepared to pay for any problems such as electrical or plumbing repairs, leaky roofs, or even vandalism by angry homeowners who break things or punch holes in walls and doors, an unacceptable but not that uncommon way that some homeowners deal with the angst of losing their home to foreclosure.

Just remember that they're losing a home and you're benefiting from their loss so they may want to take out some of that rage on the new buyer the only way they can, by trashing the home that they've lost.

Three Ways to Buy
There are three ways you can buy foreclosures and each one has its own distinct discipline.
They are:

• Pre-foreclosures, where you buy directly from a homeowner before the bank forecloses;
•At auction, where you place a bid, possibly in competition with others;
•From a real estate company. This is called an REO.

Pre-foreclosures "Pre-foreclosures are appealing because they require the least amount of capital, and almost all the information you need is available.

"You can inspect the house and conduct a title search so you won't have any surprises. With a pre-foreclosure, the owner signs a deed and gives you the property.

In return, you acquire the mortgage that comes with it. Plus you have to make the mortgage current by giving the bank any back payments.

The key with pre-foreclosures is to make the sale 'subject to mortgage.' On average you might make ten to 20 percent."

At Auction The exact mechanism varies from one state to another. Auctions can be held on courthouse steps, in the county clerk's office, or in front of the foreclosed house.

"Auctions also carry the most risk, at the same time; they can also offer the greatest reward. Sometimes you can make as much as 40% on an auction foreclosure. But you have to know what you're doing."

In an auction, buyers can't inspect the home in advance of the auction, they have to pay in cash, usually with a cashier's check, and sometimes the current homeowner simply refuses to move out. It then becomes the buyer's responsibility to evict the old owner.

Auctions also tend to attract real estate investors seeking a great bargain that they intend to flip (resell) for a quick profit.
If you're looking for a home to live in, an auction may offer way to go over paying retail prices.

REO Real Estate Owned properties or (REOs) represent the third way to buy foreclosures.

"Reo is least risky in terms of what you're buying, you get to fully inspect the property, demand a clear title, and the sale can be subject to getting a mortgage.

Most banks sell foreclosure properties through a broker. They are considered the safest and also the least financially rewarding of all foreclosure buying options. But properties sold this way also tend to be in better shape.

The downside is that you probably won't get as good a deal as you would with an auction or dealing directly with homeowners who are in a pre-foreclosure category.

Financial Considerations
When considering buying a home that's gone into foreclosure there are a number of financial considerations that have nothing to do with the property that could put you between a rock and a hard place.

For example, when you go to an auction, “Winning bidder must pay cash via cashier’s check at the auction”

Another possible complication is something mentioned earlier, a "lien." A lien is a legal claim against a home.

There's a fairly good possibility that someone who can't make mortgage payments may owe money elsewhere. Therefore, you have to conduct what's called a "title search" that should uncover any liens.

Common liens stem from unpaid taxes -- either property taxes or income taxes -- in which case the federal, state or local government could have a claim against the foreclosed property.

Other liens may include unpaid contractors or HOA dues etc. Some liens are wiped off the property at foreclosure and some are not. Those not removed at the foreclosure sale will remain intact until the money is paid which means that you will have to pay off the liens on the foreclosed property you are buying, and even though you're not the one who didn't pay the property taxes the last few years. “You need to know what you’re doing”

Be forewarned -- you won't be able to get title insurance that provides protection against anyone challenging you for ownership of the property.

Default Letter
The foreclosure process starts when the lender sends the homeowner a letter regarding the default, usually after the first missed mortgage payment. Thirty days must be given for a person to pay the past-due amount, and lenders must give the homeowner a date by which the money is due.

If the homeowner doesn't respond or "cure" the default, the lender can post a notice of sale at the courthouse. Foreclosure auctions in Pierce & King County Washington are usually held on Friday mornings. The auction happens outside, rain or shine.

What's Required
If you are thinking about becoming a professional real estate investor, or just looking to buy a great deal, we can educate and assist you to succeed since all the due diligence, title search information and fix up costs are provided to our investors.

We even have conventional long term financing options available for our investors who want to buy and hold investment properties. Should you decide to go it alone then?

"You need to be able to do your own title searches” You need to be able to price or appraise property to determine any equity. You need to know how to fix up a property and then how to market it. And finally, if you're buying at auction, you need to have enough cash."

To put it simply, buying a foreclosure is not just risky business, it's one gamble where the house doesn't always win.

Every Thursday evening, Fairplay provides “Investor Workshop Training” and immediately following they have “Investor Cafe” where they review all the targeted good deals for the auction Friday morning. Contact me for information if interested in attending one of these meetings.

Crazy home deals await the creditworthy

The article below really gets to the heart of just what a great time it is to buy a home. In earlier posts on my blog (find them on the right "blog Archive") I mention the inflation hedge alone is powerful vs. renting. We may never see record low rates combined with these low prices available in the market today.

By Kathleen M. Howley
Bloomberg
Businessweek

Bargains abound and rates are at record lows — for those who qualify

When Cynthia and Gerald Matthews relocated from Ottawa to Bloomington, Ind., house hunting had some pleasant surprises. “It was much cheaper than we thought it would be,” says Cynthia Matthews, who bought a three-bedroom, brick neocolonial-style house for 5 percent less than the $196,999 asking price and got a mortgage rate close to 4 percent. “To say it’s a buyer’s market would be an understatement.”

People like the Matthewses who survive the scrutiny of mortgage lenders are getting the best deals of the five-year U.S. housing bust — and perhaps the best deals of a generation — after a 31 percent decline in home prices since 2006. It’s the bright side of an otherwise bleak real estate market: Good houses at cheap prices are plentiful, and mortgage rates are at record lows — an average of 3.94 percent for 30-year loans during the first week of October.

“It’s hard to see the possibility of losing on a home purchase right now, with these mortgage rates,” says Dean Baker, an economist who in 2005 predicted that house prices would tumble. “Prices may go lower, but not by much.” .

Buying a $300,000 home with a 4 percent mortgage means a monthly payment of $1,145, assuming a 20 percent down payment. The Mortgage Bankers Assn. predicts that prices may decline an additional 3.5 percent by mid-2012, while mortgage rates will increase by a half-point. If that proves accurate, that home would sell for $289,000, while the monthly mortgage bill would be $1,171. “Even if there is another recession, people who can qualify for a mortgage won’t gain anything by playing the waiting game,” says Nariman Behravesh, chief economist at IHS in Englewood, Colorado. .

Getting those low rates can be a grueling process. Fannie Mae and Freddie Mac, which securitize about two-thirds of new U.S. mortgages, have enacted the strictest qualification standards in more than a decade as they try to improve the credit quality of their portfolios. .

Christine Trendell bought a house two months ago in Canton, Mass., a suburb of Boston, where real estate prices fell 25 percent through early this year before gaining 10 percent in the recent quarter, according to the National Association of Realtors. The wood-shingled house, built in 1920, has a screened-in front porch. Trendell and her husband had to submit a pile of bank statements, retirement-fund tallies and years of tax returns that stacked almost two inches high, she says. The lender required them to fax their pay stubs repeatedly near the end, she says, to make sure they still had their jobs. They were able to get the mortgage because they have pristine credit records, she says. “The low rates made it affordable to buy the house, but we didn’t know if we were going to be able to get a loan,” says Trendell. “Rates don’t matter if you can’t get a mortgage.”

Buyers are still cautious about taking advantage of deals. Sales of previously owned homes were down 31 percent in August from their 2005 peak, according to the NAR. Neither economist Baker nor Karl Case, co-founder of the Case-Shiller home price index, expect property bargains to be a cure-all for the worst housing collapse on record. Says Case: “Houses are cheap right now, but a lot of people are too scared to buy, no matter what kind of deal they get.” .

The bottom line: Home prices down 31 percent since 2006 and mortgage rates averaging 3.94 percent mean bargains for buyers with good credit ratings. .

By Kathleen M. Howley updated 10/24/2011 5:24:49 PM ET