The risks of zero-down loans in this market: Is this 2008 all over again?

It’s baaaaaaaaaaack….

With Bank of America recently announcing their loan option for lower-income households that requires no down payment, no closing costs, and doesn’t base the loan on a minimum FICO score, you might be wondering if this is 2008 all over again.  Can we really be repeating these kinds of loans and promoting homeownership without learning from past mistakes?

Some could argue that a major mistake of the past was that this kind of loan was given out somewhat haphazardly, without the recipients fully understanding the risks.  However, the new loan from B of A, called The Community Affordable Loan Solution, does require prospective buyers to complete a homebuyer certification course as well as housing counseling that is approved by the U.S. Department of Housing and Urban Development. So no, this is not a loan program that is widely used and is a far cry from the pre-Great Recession era. 

However, a major risk still exists that if the market takes a downward turn and home prices drop, the borrowers could end up underwater on their mortgage, meaning they owe more than the home is worth.  Do we feel confident that a certification program and housing counseling will be enough to prevent a repeat of 2008?  B of A seems to have that confidence, I, on the other hand, am not so sure.

As great as it is to build programs designed to help lower-income households, it remains a very risky double-edged sword.  When more people can buy homes, prices go up.  Higher prices help sellers, but hurts those who are trying to enter the market.   See the catch-22 here?

The bottom line is that this kind of loan will have a higher interest rate, you will still have to carry Private Mortgage Insurance (PMI), and the chances of ending up underwater are still very significant in the near term.  Before moving forward with a zero-down loan, always consider all other options first.  I’m always happy to talk about low-cost or first-time home buyer programs.

Dead lawn from the heat and drought? Think clover.

Having a clover lawn instead of a traditional grass lawn has been all the rage on social media lately.  In fact, #cloverlawn has more than 65 million views on TikTok alone.  A well-manicured grass lawn is a very traditional vision in the minds of Americans.  These are the same people who spend hundreds of dollars on harsh chemical products and sprays to rid their yards of “weeds” such as clover and dandelions.  But the truth is, a clover lawn can actually be far less expensive, easier to maintain, and better for the environment. 

With wildfires, droughts, and heatwaves impacting much of the United States this summer, and extreme heat anticipated for years to come, a smooth grassy lawn might become more than a pipe dream for many Americans.

Let’s look at some of the basic pros and cons of switching to a clover lawn. 

Pros:

  • Clover thrives in poor soil, which means less money spent on improving your soil quality.  The grounds of many new builds have low-quality subsoil.
  • Clover requires far less water than grass, therefore it is nearly drought-resistant.
  • Clover requires no fertilization.
  • Dog owner?  Pet urine will not discolor clover.
  • Clover grows slower than grass and also doesn’t get as tall, which means it is much lower maintenance in terms of mowing needs.

Cons:

  • Once clover begins to flower, it will attract bees and other pollinators, which is great for the environment (pro), but can be a problem if anyone in your home is allergic to bees (con).
  • Clover roots can spread rapidly and widely, which can end up impacting nearby flowerbeds that you may not necessarily want the clover reaching into.
  • Clover stains are harder to remove from clothing than grass stains.

Overall, clover may be the future of lawns and grass will be a thing of the past, especially with new builds.  Another great benefit of clover?  You don’t need to rip out your current lawn and start fresh.  Just don’t do anything to prevent the “weeds” in your current lawn.  Stop killing off the clover and let it move in, allow it to take over and before you know it, you’ll have naturally converted your grass lawn into a clover lawn. Clover won’t completely take over any lawn since it’s competing with everything else, but you might find is more appealing from many angles.

AirBnb: Why Feeding this Beast is Probably Not a Good Idea in the Long Run

The short-term rental industry has been repeatedly accused of driving housing prices up by contributing to the housing shortage both in the U.S. and abroad.  Some of the top travel destinations like Amsterdam, London, New York and Los Angeles gets the brunt of much of the criticism for the sheer size of their operations.  In fact, New York reportedly now has more AirBnb locations than actual apartments for rent!  That’s insane.

The theory is that AirBnb (and other short-term rental company’s like VRBO and HomeAway) are converting long-term rentals that would have housed local residents and families and putting them up on the short-term rental market for visitors, thus further decreasing an already short supply of housing.

Some data suggests that this change in the renter’s market can potentially be costing renters thousands of dollars as a result of price pressure.  Essentially, there are less rentals available, therefore the ones that do become available have inflated prices.  Supply and demand that is drastically hurting the local residents’ pockets.

It’s a tricky knot to untangle, though, because there are a lot of factors at play in the market.  Outside of New York and their insane imbalance of rentals, the rise in local prices as a direct cause of AirBnb seems to hover around only one percentage point.  It is known though that converting long-term rentals to short-term rentals shrinks a housing market already experiencing historic shortages. But how much companies like AirBnB directly cause a rise in housing prices is hard to measure.

What is clear is that as discontent grows and cities start to take action, we may see a shift in the short-term rental landscape over the next few years.  Many cities have already passed restrictions against the short-term rental market, ranging from near-total-bans, to limits on how long a property can be rented, to limits on how many people can get licenses to open an AirBnB.  I would expect these kinds of restrictions to continue to get even tighter in the coming years.

Why Staging is Still a Thing, Even in a Seller’s Market

While many homes are going under contract in the first few days they’re listed, most real estate professionals would agree that a property is more likely to stand out and receive the highest offers when that home is staged.  The right staging can really impact the buyer’s perception and help earn the seller the highest return on investment (ROI).

Staging is really about showcasing a move-in ready home that creates an emotional connection with the buyer.  Using décor that is on-trend and inviting – particularly in the common areas like the living room and kitchen – can really make a memorable impression.  Staging is really about minimizing the negatives, accentuating the positives, and making the best impression possible. My experience is that staging allows for two things: 1. Buyers to see themselves living there and 2. Envision what is possible for the property.

Some of the most common and important steps for staging a home are decluttering and depersonalizing.  Things like removing dated window treatments, strategically arranging furniture to maximize space, and sometimes even adding fresh, neutral wall colors can all make huge impacts. Once emotionally invested, buyers are more likely to commit and sometimes even increase their offers, and they are less likely to change their minds or ask for concessions.

Another huge factor in staging?  The photos!  As I’ve mentioned in a previous blog about millennials, over 99% of millennial home-buyers start their search online.  Even in this hot market, having a photo-ready property can directly influence a buyer’s decision to see a home in person.

Yes, staging is an investment.  However, the average investment is about 1% of the sale price, and roughly 75% of sellers saw an ROI of 5-15% over the asking price.  Similarly, data shows that staging helps sell homes much faster than the nonstaged competition (in a more normal market).  Lastly, the data shows that sellers who do not stage, face a higher likelihood of price reductions.

All this to say, stage your properties.  Yes, even in this market.

What is an adjustable rate mortgage (ARM)?

An adjustable-rate mortgage is a home loan when an interest rate adjusts over time based on the market.  ARMs generally start with a lower interest rate than a fixed-rate mortgage, so an ARM is a great option if your goal is to get the lowest possible rate up front and don’t wish to live there for years upon years.

The catch is that the initial low interest rate won’t last forever.  After an initial period, your monthly payment can fluctuate, which can make it difficult to plan out your budget.

With an ARM, there are two different periods called the fixed period and the adjustable period.  The initial fixed, rate period typically lasts 5, 7, or 10 years.  During this time your interest rate will not change.  Then comes the adjustment period in which your interest rate can go up or down for the remainder of the 25-year loan terms.

What about refinancing options with an ARM?  It’s certainly possible that your financial circumstances can change year over year.  You can pursue refinancing your ARM into a fixed-rate mortgage to lock in more stability.

This process is fairly straightforward.  You’ll be able to take out a new loan to pay off the original mortgage.  Next, you’ll start paying off the new mortgage.  Since a new mortgage is involved, you’ll need to go through many of the same steps it took to secure the original mortgage.  Examples of this would be providing pay stubs, bank statements, and tax returns.

An ARM could be an ideal situation for a buyer who plans to move again shortly after buying a home.  For example, if you plan to purchase a starter home, save some money, and then sell the home before the end of the fixed period, you could potentially avoid ever reaching the adjustable period.  In a case like this, the risks of an ARM are relatively minimal. In an environment where interest rates head north, these loan products will be more prevalent. Interestingly, many lending officers nor agents have familiarity with them either because they never dealt with them or they have simply forgotten about them. As I always say, who you work with matters! Make sure you pick the right people to assist you in achieving your real estate goals.

Homebuyers Guide: Tips For Getting Started With Your Search

Ok, this is a longer article than usual but only because it is SOOO important. There is a method to the madness of beginning your home purchase. After all, buying a home for the first time can be life-changing.  It’s a major investment, a major commitment, and oftentimes the start of a whole new phase of your life.  Newly married?  Buy a home.  New parents?  Buy a home.  Newly relocated?  Buy a home.  But like any major project or purchase, it is important to go into it with knowledge and proper preparation in place. Especially now!

Here are some top tips to help make the experience the best it can be:

Prepare Early
This means you should start saving well in advance of the actual purchase.  There are several costs to consider when saving and planning for a home purchase.  There is the down payment, closing costs, move-in expenses and more.  Your down payment will depend on the type of mortgage you chose, but even having a “small” down payment can still add up.  With closing costs, you’ll typically need to be prepared to pay 2-5% of the loan amount in these fees.  And move-in expenses can include things like home repairs, upgrades, and new furnishings.

Choose a real estate agent carefully
A lot of buyers start with finding a lender (more on that later), but finding the realtor first makes more sense. A good agent usually works with good lenders and can point you in the direction of one who can best help you. (They’re not all the same; trust me) In addition, your agent will scour the market for homes that meet your needs and they will help to guide you through the negotiation and closing process. But a REALLY good agent will ask you a ton of questions and get to the heart of what you’re truly looking for and get to know YOU.

Select a mortgage option and get pre-approved
A variety of mortgage options are available with varying down payment and eligibility requirements.  Some options include conventional, FHA loans, USDA loans, ARMs, and even VA loans. Make sure you know your options and the pros and cons of each one well in advance of beginning your search.  Compare mortgage rates and fees, and always look into any first-time buyer assistance programs that may be available to you.  Once you have selected the best mortgage option for you, it’s time to get a pre-approval letter.  You get this when you are ready to officially start shopping for a home and having this shows home sellers and agents that you are a serious buyer.

Start shopping
Once you’ve thoroughly gone over options with your realtor and lender, you’re ready to shop!

Rising Mortgage Rates While You’re Waiting For Your Home to Be Built

In the current market of high demand and low inventory, it’s common practice to be outbid numerous times when trying to purchase a home.  Therefore, lots of homebuyers are opting to forgo the bidding wars and simply build a house.

This can be an attractive option on paper but not necessarily simple.  Labor shortages and pandemic supply chain delays have kept builders waiting on everything from roofing supplies to doors and windows.  What was originally a 9-month project could be well into month 18 with no firm completion date in sight, depending on the builder.

Meanwhile, interest rates always have a chance of going up. Traditional lenders offer rate locks, but they don’t last long (30-90 days).  If your rate expires and your home still isn’t finished, it will end up costing a lot more than you’d planned, which leads to homebuyers getting hit with price shock at the settlement table. It is important with new construction that you investigate ALL lending options. I hate to say this, but sometimes it is better to go with the lender provided by the builder. Oftentimes, they offer nice incentives and and can offer extended rate locks to get you through any variability in interest rates.

In worst case scenarios, buyers have signed contracts to buy homes, but can no longer qualify for a mortgage to buy the same home they could afford just 6-9 months earlier.  This leads to the inevitable canceling from the homebuyers, which leaves their deposits hanging in the wind. 

As always, my team and I can help you navigate these situations. One of the worst myths in real estate is that people who build homes don’t need buyer’s agents. Here is yet another reason why this is false.

How “Aging in Place” is Reshaping the Real Estate Market

There are so many more options now that make it easier for older adults to stay in their homes as they get older.  There is in-home medical care, meal delivery services, in-home helpers for cooking and cleaning, and even ways to retrofit your home to make it more accommodating.  Fairly minimal home accommodation projects could be adding a ramp at the front door, a chair lift for the staircase, grab bars in the bath/shower, etc.

Staying in the home really allows older adults to keep their sense of dignity and independence.  However, this new norm is having a national impact on the available housing options for younger generations. 

During and after The Great Recession, it was not uncommon for more and more Boomers to continue in their jobs past the age of 65 due to the downward effects on their retirement accounts.  This left less and less job openings available for younger adults (Millennials) to jump in and start their careers.  This also had a direct impact on the average age of first-time home buyers.  Because the millennials were starting their careers at a later age, it delayed their ability to save money for a home.

Several decades ago, it was common for children to leave the home and their parents to downsize or move into nursing home or retirement communities, thus freeing up their home for someone else to purchase.  Now, fewer adults between the ages of 67 and 85 are leaving their homes, and that is causing a major shortage of available houses for sale. After all, the housing market is like a cycle and any time that cycle gets jammed up (such as older Americans not selling their homes and lots of younger ones wanting to buy), there is imbalance and throws the market for a loop. Granted there are a lot of factors contributing to housing shortages across the country but I have found this is one that isn’t talked about nearly enough. Most don’t realize that Millennials are now the largest generation and very much are into buying homes. This “aging in place” dynamic is not going to help things. Maybe in another article I’ll talk about the effect of driverless cars on the housing market. Someday maybe… But for now, this is a relatively new development the market will have to sort out.

One of the Things that Really Has Annoyed Me About this Market

There’s an old sales adage that states, “The confused mind says ‘no’”. Nothing could be truer when it comes to VA home loans. This has been truly one of the most disappointing things about this two-year run we have had in the market. VA loans seem to be thrown aside as substandard or “risky”.  As background, VA loans are guaranteed by the government and enable veterans to buy homes with no or low down payments, so why does it seem that some sellers won’t even consider offers with VA home loans?

First off, there is a misconception that because this is a zero-down mortgage, the veteran might be less likely to make it to close.  But on the contrary, this is simply the way these loans are structured to make buying a home easier for our vets. To boot, there is a huge apparatus in the background at Veteran Affairs which offer support to the civilian population trying to get these homes to settlement.  So why does it seem that some sellers won’t even consider offers with VA home loans?

A second misconception is the home must be in pristine condition.  Yes, VA appraisers do impose minimum property requirements (MPRs) that require the home to meet guidelines for safety and livability.  However, contrary to popular beliefs, the requirements are usually very fixable. Most common are handrails, GFCI outlets near water sources, and smoke/CO2 detectors. 

It’s also not just sellers that seem to discriminate against VA loans, but also some realtors.  The reason for this can be boiled down to the fact that some realtors just simply do not understand VA loans. They often wrongly assume that deals with VA loan buyers are riskier, cost more, and are more challenging to close than other types of loans. This lack of understanding translates to the sellers often passing on these offers. (again, confused mind says no) My team and I do work with vets and I always give their offers a strong second look if they’re not the best. My partner and I just accepted one on one of our listings and it felt REALLY good. It’s the least we can do for these brave men and women. 

For any veterans out there, take heart as my team is “VA Certified” by our lenders to handle your transaction which means we all have taken courses to better understand the ins and outs. We also go the extra mile to ensure the listing agents (and their sellers) fully understand the way these loans work. It is inevitable that in the near future veterans will see a resurgence in their acceptance rate as sellers lose leverage and stop receiving multiple offers for their property. I personally look forward to the day when placing a vet becomes MUCH easier. 

How To Pay For Your Home Improvement Projects

From something minor like fresh paint, to something major like adding additional rooms, home improvement projects can make your home a better place to live as well as increase its value.  The cost of these projects can be daunting and they can add up fast.  Let’s take a look at several options for financing home improvement projects.

Cash/Savings
Depending on the cost of your project and how much you have available in savings, you might want to consider paying for it with cash.  The good: no payments to make, no interest, and many contractors offer discounts for those who pay cash.  The not-so-good: you may end up draining your emergency fund to cover your project, or you may not have enough saved to even cover your project entirely since there are often what I call “unforeseeables”.

Personal Loans
A personal loan is an unsecured installment loan where you receive a lump sum and immediately begin paying it back with interest in regular monthly payments.  The good: you don’t need equity in your home to get the loan, your home isn’t used as collateral so it isn’t at risk if you don’t repay the loan, and you can use the loan to pay for anything, not just home improvements.  The not-so good: personal loans usually have higher interest rates than home equity loans, repayment terms are fairly short which can make it hard to pay off a larger loan, and interest paid on a personal loan is not tax-deductible. These are sometimes called “hard money loans”.

Home Equity Line of Credit
Depending on how strong your credit is, you may qualify for a HELOC, which is essentially a form of revolving credit that is secured by the equity in your home.  You can usually borrow 60-85% of your home’s assessed value, minus the remaining balance of the mortgage.  This type of loan allows you to draw on your credit for an extended period of time, usually up to 10 or 20 years.  The good: instead of getting a lump sum that you have to start repaying immediately, you can borrow only what you need.  Interest paid on a HELOC may be tax deductible, and interest rates are generally lower here than on personal loans or credit cards.  The not-so-good: most HELOC interest rates are variable, which means your payments could increase.  You could potentially end up owing more than your home is worth if the value of your home decreases, and if you can’t repay the loan, you could lose your home.

Home Equity Loan
This is a second mortgage that uses your home’s equity as collateral.  You can usually borrow 75-85% of your equity, effectively repurposing your equity to put that money back into your home.  The good: interest rates are usually lower than HELOC, credit cards, and personal loans.  Interest rates are fixed, making it easier to budget for the payments.  Interest paid may be tax deductible, and long repayment periods can make it easier to pay back larger loan amounts.  The not-so-good: since you are reducing your home’s equity, it will take longer to pay your mortgage off, and if you can’t repay the loan, you could lose your home.

Credit Card
This should probably be your last option unless the project is very small.  The good: credit cards are readily accessible to most, and depending on the type of credit card, you may earn rewards for credit card purchases.  The not-so-good: you may not have a high enough credit limit to completely finance your project.  A large charge could potentially hurt your credit score by increasing your credit utilization ratio, and credit card interest rates tend to be quite high. I do not really recommend this route in any situation, but if you MUST have it

Before taking on any debt to finance home improvement projects, make sure to consider all your options and find the one that is best for you.  If you decide to go the cash route, keep in mind that putting all your money into redoing your home can leave you house-proud but cash-poor, which could have long term consequences on your credit and personal finances.  If you decide to apply for a loan, check your credit report and see where you stand to better understand the type of credit you’re likely to qualify for.