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Financial Reasons to Buy a Home

To a large extent, the decision to buy a home is an emotional one. Life events, like getting married, having children or landing a dream job are exciting times and often lead to serious consideration of buying a home. The National Housing Survey released quarterly by Fannie Mae suggests that this is not uncommon as most Americans buy a home for emotional reasons like having a good place to raise children, a place where their family can feel safe, space for their family and control over what happens to the living space. What about financial considerations?

Buying a home is likely the largest purchase most Americans will make during their lifetime. Maybe the home has become such an ingrained part of American life that as long as we qualify for a loan the rest of the financial picture doesn’t really matter to us. Maybe, but shouldn’t financial reasons for buying a home should carry at least as much weight as the emotional reasons? Here are five financial reasons to buy a home that we think are pretty important considerations.

You are paying for a roof over your head whether you own it or rent it. The question is, would you rather pay off your own debt or your landlord’s? There are certainly situations where it makes more sense to rent than own but in the long run it is almost always more financially beneficial to own.

Owning a home is a form of “forced savings.” Let’s face it, putting off saving in order fund a lifestyle is the American way. With a house, part of the monthly payment goes toward principal and becomes equity in the home. That equity is, in essence, a savings account. The beauty of this savings account is that it is tough to spend because the only way to get to it is to sell the house.

Housing is a great leveraged investment. By leveraged we mean money has been borrowed against it in order to purchase it. Sure it is possible to buy gold, stocks, and many other investments with borrowed money but it is much easier to finance a home or even an apartment building. Even if you don’t consider your home to be an investment consider this: A two percent increase ($3000) in the value of a home bought for $150,000 with 20 percent down payment ($30,000) translates to a ten percent gain on cash invested. In the same scenario but with only 10 percent down payment, the same two percent rise in the value of the house becomes a 20 percent return on cash.

Owning a home offers tax advantages. It is always wise to consult a tax professional when it comes to the tax ramifications of owning a home but it could also be very beneficial. In most cases mortgage interest paid on a primary residence can be deducted on the Federal Tax Return. If you have ever looked at the amortization schedule for a 30-year mortgage then you know that can be a substantial amount of money. Hopefully your local property taxes don’t equal the amount paid in mortgage interest but they too are tax deductible.

Potentially more significant than deductions is the ability to exclude capital gains on a primary residence. Single taxpayers can exclude up to $250,000 in gains (appreciation) realized when selling their primary residence and married tax payers filing jointly can exclude up to $500,000. The exclusion is available to those home owners who have lived in the house that was sold for two of the previous five years.

Hedge against inflation by owning a home. Historically real estate has performed quite well against the Consumer Price Index which is the primary indicator of inflation. The linked page shows that real estate values aren’t likely to be affected by inflationary pressures and, in fact, almost always rise faster than inflation.

These financial reasons to buy a home probably won’t ever be more important to American home buyers than the emotional reasons noted above but we can keep them in our back pocket for those times when we want logic to prevail.

Ending Fannie Mae and Freddie Mac: What it Could Mean

In a speech last week President Obama endorsed reducing the role that the United States government plays in the housing sector. One way he proposed to do that is by closing the doors of Fannie Mae (Federal National Mortgage Association, FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation, FHLMC).

“They’re not really government but not really private sector; they’re known as Freddie Mac and Fannie Mae,” Obama said. “For too long, these companies were allowed to make huge profits buying mortgages knowing that if their bets went bad taxpayers would be left holding the bag.”

For decades, Fannie Mae since 1938 and Freedie Mac since 1970, these two entities have bought mortgages from lenders that conformed to a set of lending guidelines essentially guaranteeing those mortgages and allowing banks to take the proceeds from the sale and lend the money again. If lenders were to lose the “guarantee” that they could sell their conforming mortgages to FNMA and FHLMC many fear we could see a rise in interest rates and the disappearance of the 30 year mortgage.

Higher interest rates appear to be unavoidable in any scenario where Fannie Mae and Freddie Mac cease to exist. Mark Zandi, Moody Analytics chief economist was quoted was quoted by the Associated Press as having said, “It will mean higher mortgage rates. The question is, how much higher.” At this early point in the discussion many economists believe mortgage rates would be one half of a percentage point higher without the government sponsored enterprises.

A lack of government guarantees could also make 30-year fixed-rate mortgages much harder to find. Banks would be less willing to offer those products without government support because the conventional mortgage as we know it is not a “money maker” for financial institutions. Just take a look at the terms offered for commercial mortgages (which are not backed by a government sponsored entitiy) to see what mortgages could look like without Fannie Mae and Freddie Mac. Commercial mortgages are most often amortized over shorter periods (20 – 25 years) with the interest rate only fixed for 5 years at a time.

For his part, Obama said he wants to preserve borrowers’ access “to safe and simple mortgage products like the 30-year, fixed-rate mortgage.” That would mean that the U. S. government can’t totally wash it’s hands of the mortgage finance system. President Obama seems to favor a solution along the lines of a bill introduced to the U. S. Senate in June.

Senators Bob Corker and Mark Warner’s bill proposes Fannie Mae and Freddie Mac be replaced by a Federal Mortgage Insurance Corp. that would continue efforts to build a common securitization platform to help small lenders issue securities. It also would continue the two companies’ existing guarantees. Under the bill private lenders (banks) would be required to hold 10% of the amount of the loan in equity capital to cover any first loss of the loans.

The Federal Mortgage Insurance Corp would be modeled after the Federal Deposit Insurance Corp. It would collect insurance premiums from the industry and maintain an insurance fund. The FMIC’s insurance would kick in only after a “substantial amount” of private capital is exhausted to “bring in credit investors who bear the risk of default while maintaining liquidity for the housing finance system.”

The House of Representatives is reportedly also working on a bill to reform housing finance but as of this writing details of the bill were not available.

Strong Housing Market in Bend Oregon

The real estate market in Bend, Oregon continues to show strength as the Federal Housing Finance Agency( FHFA) releases first quarter 2013 numbers for their House Price Index (HPI). Click here to view full size image.

The House Price Index shows homes in the Bend Metropolitan Statistical Area (MSA) had price gains of 7.69 percent year over year from the first quarter of 2012 through the first quarter of 2013. Those gains are enough to rank as the 20th best price improvement of all 374 Metropolitan Statistical Areas in the United States. The top three MSA’s for price gain were Phoenix-Mesa-Glendale, AZ (15.27%), Bismarck, ND (12.81%), and Stockton, CA (11.38%).

During the first quarter of this year home prices in Bend rose 3.71 percent according to the FHFA report. That is a better gain than 13 of the 19 MSA’s that ranked above Bend for annual percentage price improvement.

Oregon ranked 11th among all 50 states in the House Price Index. For the 12 months ending March 31, 2013 house prices in Oregon rose 10 percent. In the first quarter of this year prices were up 3.4 percent. The three states with the highest percentage price gains over the last year were; Nevada (22.0%), Arizona (19.8%) and California (16.6%).

The House Price Index for states was calculated using home sales price information from mortgages sold to or guaranteed by Fannie Mae and Freddie Mac. Transaction information from county recorder offices and the Federal Housing Administration was added to data from Fannie Mae and Freddie Mac in calculating the House Price Index for Metropolitan Statistical Areas.

A little more than one year after Business Insider called Bend the best real estate market to be invested in for the next five years it appears that while their predictions may not have been 100% accurate (so far), the House Price Index numbers do support the notion that Bend is one of the best places in the United States to be invested in real estate.

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Unemployment Forbearance Programs

If you are unemployed and behind on your mortgage or in danger of default there are two new programs just announced this month that may offer some hope in the form of reduced or suspended mortgage payments. Fannie Mae and Freddie Mac have announced new Unemployment Forbearance Programs to assist borrowers who are experiencing financial hardship due to unemployment. Loan servicers are encouraged to implement these new policies and procedures immediately but the Freddie Mac program is required to be in place effective February 1, 2012 and the Fannie Mae program March 1, 2012.

The eligibility requirements for borrowers whose mortgages are part of either Fannie’s or Freddie’s portfolio are essentially identical. Borrowers must have a financial hardship due to unemployment. Borrowers must be delinquent on their loans. The mortgage must be for a property that is the borrower’s primary residence and the residence cannot be vacant, condemned or abandoned.

The initial forbearance does not require either of the Government Sponsored Enterprise’s (GSE) approval as long as it is not for more than six months. The reduced or suspended payments can be extended but not so long that it would cause the mortgage to be delinquent for more than 12 months. Additionally, any extension would need to be approved by the appropriate GSE and there would be a couple new eligibility requirements placed on the borrower. The borrower could not have cash reserves that exceed 12 months of monthly housing expense and the monthly housing expense must be greater than 31% of household income (excluding unemployment benefits).

Now, here is the kicker. Forbearance is not synonymous with forgotten. Once the borrower is again employed or is no longer eligible for the program the money that the borrower otherwise would have paid during the forbearance period is required to be paid back. It can be paid back in a lump sum or a repayment plan. Borrowers unable to repay must be considered for another foreclosure prevention plan according to procedures outlined by Fannie Mae and Freddie Mac.

Will New Rule Affect Our Ability to Buy Homes?

Maybe you have heard of the Dodd-Frank legislation signed into law last year. More likely, you haven’t. The law is aimed at overhauling financial regulations as a response to the subprime mortgage scandal and financial meltdown a few years ago. Depending on who you talk to, the new regulatory rules being spawned by this law are fantastic for consumers, bad news for consumers, horrible for the financial industry or all of the above. I don’t want to get into the politics of the law but I do want to mention a rule that has come out of this legislation that could make it difficult for a large number of people to obtain a mortgage and ultimately buy homes.

This proposed rule is a result of a provision in the Dodd-Frank Act that requires lenders to maintain a stake in mortgages sold to investors. For years lenders to less than perfect borrowers have sold loans to third parties in an effort to reduce their risk and to increase liquidity. We all know what happened when people started defaulting on those loans over the last few years. As a result, the intention of part of the Dodd-Frank Act is to encourage lenders to tighten their underwriting guidelines by requiring them to maintain a 5% stake in any loans made to marginal borrowers and then sold to third parties. The theory is that this would reduce the number of loans that default because lenders would still have a vested interest in the success of those loans. It’s a noble cause to save us from ourselves as so many other laws have attempted to do in the past. The trouble is, now that no fewer than six regulatory agencies have come together to create a rule to enforce the Act, many are wondering if anyone but perfect borrowers will be able to obtain a mortgage.

The proposed rule defines what loans will qualify for exemption from the 5% risk-retention requirement placed on lenders. Essentially, it boils down to only loans to borrowers that fall under a new debt to income ratio cap and have a 20% down payment will qualify for the exemption. What I think is most worrisome is that there appear to be limits on lenders written into this rule that would restrict the number of loans qualifying for the exemption. Some people are estimating that as many as 66% – 90% of all loans currently being sold to/securitized by Fannie Mae and Freddie Mac would fail the exemption test.

The big fear is that lenders won’t want to write any loans that fall into the 5% risk-retention requirement. However, if there is money to be made, and there will be, someone will be willing to take the risk. The question is, what will be the cost of that risk that will be passed on to the borrower? Will the increase in fees or interest rates be prohibitive? The good news, for now, is that this rule is just a proposal. The housing industry is too big a part of our economy to be put at risk by prohibiting people from buying homes. There is a lot of opposition to this proposed rule and it is coming not only from bankers and bank lobbyists but also from those who have been critics of lending practices. Will they be able to get regulators to re-evaluate and re-write the rule? Let’s hope so.

Financial Reasons to Buy a Home

Ending Fannie Mae and Freddie Mac: What it Could Mean

Strong Housing Market in Bend Oregon

Unemployment Forbearance Programs

Will New Rule Affect Our Ability to Buy Homes?

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