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Good news for low-down payment home buyers! FHA has reduced their mortgage insurance premiums effective 1/26/2015.


We rarely saw FHA loans in California in the past because their loan limits were so low. That all changed when the mortgage meltdown happened and FHA raised their loan limits. For a while it seemed like FHA loans were the majority of loans being made. So when FHA changes their guidelines, it has a pretty big impact on the mortgage market.


Mortgage insurance is actually broken into two different types on every FHA loan. There is the upfront mortgage premium (a lump sum that can be paid at closing or added to the loan balance) and then there is a monthly insurance premium. As recently as 2007, the upfront fee was 1.5% and the monthly premium (which is paid as part of the monthly payment) was .5%. Starting in 2008 FHA started losing tremendous amounts of money, so they started raising their fees, which they did 6 times from 2008-2013. They wound up at 1.75% for the initial premium and 1.35% for the annual premium. This was a huge increase as FHA struggled to stay solvent. They also changed the rules regarding how easily the monthly insurance premium could be removed, which means they made it harder to stop paying it.


Now that home values are on the rise again, fewer loans are going bad and FHA is collecting premiums longer than they used to, FHA has decided to lower their upfront premium to 1.35% and the annual premium to .85% for FHA loans of less than $625,500. This may save the average buyer $150-250 per month, depending on their loan amount. So if you were just shy of qualifying for your home of choice before, call your lender back!


For the last two weeks I’ve given you the arguments for why real estate prices may go up this year, and also the arguments for why they may go down. This week I’ll share with you the arguments for why prices may be fairly flat.


The strongest argument for a flat market is affordability. In 1995, homes in our area were REALLY inexpensive when compared to the rest of the Bay Area, so that’s why new home builders came out here in droves to build homes, hoping the buyers would follow, and they did. But by 2005 (before the crash), our homes were almost as expensive as some of the surrounding areas like Livermore and San Ramon. Right now, our homes are still VERY affordable when compared to San Jose and San Francisco and we are still less than a comparable home in Livermore or San Ramon. However, while we are “affordable” again compared to those areas, the average income earner in our area can still just afford to buy our average home. This could slow our price appreciation.


Interest rates are still incredibly low, and with falling oil prices some people think rates will stay low this year. We saw a surge of new home builders here last year, but that seems to have slowed a bit. Lenders are making loans again for people who qualify, but aren’t making “crazy” loans like they used to.


From my viewpoint, when I see a home go on the market that is $10-20K too low, it will get multiple offers within a week. Conversely, when I see a home go on $10-20K too high, it will sit. So buyers are ready to recognize a “good deal” but they aren’t willing to overpay for a home, either. All of the above seems like a recipe for flat, to maybe mildly increasing prices this year. We’ll have to wait and see how it all turns out.


Last week I laid out the case why real estate prices may continue to increase in 2015. This week I’ll discuss why some people think prices may decline instead.


The first thing they talk about is declining affordability. This means that the average income-earner is having trouble affording the average home. Prices have risen drastically the last year or two, but household income hasn’t risen by the same amount. This time around lenders want to make sure buyers can actually AFFORD to make their house payment before they’ll make them a loan, so this is putting a cap on how much of a loan people can qualify for.


At the same time, I am seeing many reports that delinquency rates are rising again. There were a LOT of loans made about 10 years ago where the mortgage payment would be artificially low for the first 10 years, then it would shoot up dramatically. In addition there were a large number of loan modifications approved over the last 3-5 years where again the payment is low for a short period of time, and then rises quickly. This is creating a situation where large numbers of people are being faced with a house payment they can’t afford.


Lastly there is a large number of investors who bought homes at the “bottom” of the market and rented them out. They really don’t want to be landlords long-term, so they may put those properties back on the market to cash in on the appreciation.


These three factors may contribute to a sharp rise in inventory right at the time that the average buyer can’t afford to buy at those prices. We’ll have to wait and see how it pans out!


This is the first part in a series of articles where I’ll lay out the case for what may happen in 2015 to the real estate market. There are good arguments to suggest the market will keep going up, and there are also arguments for why price appreciation may slow. I’ll discuss the argument for an increase first.


The economic recovery started about 5 years ago and after “muddling through” the first few years, there are signs the recovery is real. Employment is growing for the 25 to 29 age group faster than most other age groups. This is a good sign since they are the likely first-time home buyers which are desperately needed. Their #1 concern that has held them back from buying a home the last few years has been a shaky job market.


Oil prices have dropped tremendously and are predicted to continue to drop. This means lower gas bills and lower home heating costs. This puts more money in people’s pockets and also bolsters consumer confidence.


Mortgage rates continue to be low due to low inflation and also because of low oil prices, as well. This also helps people afford to buy homes. Rates have been low for a long time, so low rates won’t necessarily mean higher home prices, but if we were to see HIGHER interest rates that could certainly put a damper on prices.


Rents have increased dramatically the last few years. This makes housing still very attractive when some renters would see their monthly payment go DOWN if they were to buy a home, or at least not go up very much compared to the rent they are paying.

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