5 Reasons to Buy Now

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David H. Stevens, CMB
President and CEO at Mortgage Bankers Association
May 31, 2016

So let’s get this on the table to start with: I am not a perfectly objective person here. I run the Mortgage Bankers Association (MBA) in Washington and have worked in either the private sector or government sector in mortgage finance and mortgage policy since 1983.

With that disclaimer stated, let me tell you why I am totally bullish on housing as one the most desirable opportunities today. To keep it simple – I will focus on only the top reasons for consideration:

  1. Demographics: Household formation data is based on demographic fact, with the only variance to forecast dependent on immigration and at what age a young person moves into her own home and whether rented or owned. Research from the Harvard Joint Center for Housing Studies is clear on the point that the US will create approximately 1.3 million new households per year for the next decade. MBA’s own research is even more bullish. Compare this to the worst four years of the recession when this nation formed approximately 600,000 new households per year. The millennial generation will be driving the entry level housing demand, while retiring baby boomers will be downsizing into smaller retirement housing stock. But the core point here is this; the millennial generation is the single largest generation in the history of this nation, larger than the baby boom, and the oldest of the millennials are just now buying their first homes. This generation also is the single largest cohort of the labor force according to Pew research. This group of young people is huge, over 80 million strong, and will drive housing demand for the next decade at levels not seen since baby boomers first began to drive the last wave of housing demand in the 1980s.
  2. Housing Stock: There are a number of variables affecting the lack of entry level, affordable housing stock, but the fact is that the lack of affordable and available housing amidst the demographics of demand produces the truth behind the core economic theory of supply and demand. Coming out of the recession and housing crisis, the nation’s homeownership rate is down six points from its peak, creating almost six million more households that are now renting. This supply and demand imbalance has driven vacancy rates down and rents up. One study done in 2016 lays these points out well and there are a variety of other studies that discuss this as well. With the demand side clearly here for the next decade-plus, real estate prices are unlikely to decline and in that context may present attractive opportunities for sustainable homeownership.
  3. Entry level opportunities: I have often addressed one of the core values of homeownership when done prudently, from both the borrower’s and lender’s perspective. Traditionally, responsible homeownership has been a proven means in this country for families to build wealth. Today, while mortgage credit remains tight by historical standards, we slowly are starting to see some return to normalcy, particularly at the entry level. Recent announcements, from both private companies and government agencies, indicate that opportunities for entry-level buyers, particularly those who can’t make a 20 percent down payment, may be looking up. Rest assured, this is not the teaser-rate, no down, no doc, sub-prime lending that got us in so much trouble a decade ago. Those loans are gone forever. These are thirty-year fixed-rate, fully documented, fully underwritten mortgages that worked for decades. Of course, home prices can decline and the owner has that downside risk. But for me, I am bullish on home prices for the reasons above.
  4. Interest Rates: The mortgage interest rate on my first home was 12.5 percent, so trust me when I say that today’s 3.5 – 4 percent mortgage interest rates are truly remarkable. Let’s put it this way, the cost of a home is not just the price the borrower pays and the home’s maintenance over time. It also includes a much higher cost for most buyers: the mortgage interest a homebuyer will pay over the term of the loan. The difference in interest expense between a 3.5 percent rate and a 5 percent rate on a $200,000 mortgage is about $60,000 over 30 years. Buying a home at these rates, at the beginning of what will be a prolonged demand cycle, is an opportunity that should not be discounted.
  5. Tax Benefits: The mortgage interest deduction is a mechanism that allows borrowers to deduct the mortgage interest paid on their primary residence (with a variety of limits that you should consult a tax professional about) from their federal taxes. It is particularly effective for younger borrowers and those who are just getting into their homes, because the way mortgages are written, a larger part of what you pay in the early years of your mortgage is interest, thus allowing a greater deduction for those who most likely need it most.

Now, I believe strongly that owning is not for everyone. Renting is a great way to get started supporting your own household. It can also be the right solution for those who have concerns about downside risk, those may want to be able to move more frequently, or based on lifestyle need a rental property, or perhaps cannot sustainably afford to own, or any number of other reasons should not buy a home.

Everyone needs to consider their own situations, goals and priorities, especially on an item – housing – that makes up such a large chunk of our monthly expenses. But my point here is to explain why I think that we are likely on the front steps of a long upward staircase that will make owning a home a great opportunity for those who are prepared, both financially and lifestyle-wise, to step into homeownership.

For a free consultation and pre-approval, contact The Frazier Team at 954-336-7611.

 

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