There is every indication that the real estate market will heat up in 2014, which is good news for home sellers. The not-so-great news is that interest rates are also expected to rise this year, which could make it much more difficult for borrowers to get a mortgage. When buyers cannot find adequate financing to complete a purchase, that subsequently makes life more problematic for sellers.
Those factors taken together usually put a cap or restriction on home values – since sellers can’t ask more for their homes unless buyers have the money to purchase them. One interesting development, however, may be pleasing to both buyers and sellers; major nationwide lenders are in a cooperative mood and at least one is planning to lower its credit standards and make it easier for borrowers with dinged-up credit to buy a home.
New Homes Sales are Strong
As reported in USA Today, sales of new homes across the USA rose by nearly 10% between December and January. New home sales actually jumped by a whopping 74% in the Northeast, despite historically horrible weather that is not at all conducive to home construction. Sales in the South and West were also strong, registering double-digit gains.
The healthy numbers caught many analysts completely by surprise, primarily because of a challenging combination of interest rates on home loans moving higher and winter storms bringing building projects to a standstill. One month’s data can never be a reliable gauge of where the housing market is headed, but the stats are nevertheless encouraging. They also come at a perfect time to jumpstart a sluggish real estate economy as consumers head into springtime, which is always the busiest season for residential sales across the country. If home sales continue to be robust that will give builders and homeowners the confidence to raise their asking prices.
Mortgages Are Getting More Expensive
Meanwhile, interest rates will continue to inch gradually higher. One reason is that the Federal Reserve has already begun to scale back the emergency intervention measures it put into place to artificially boost the housing market and help us avoid a deeper recession. There’s plenty of pressure on mortgage rates to climb since they have been depressed and at or near their all-time lows for years. That situation puts many would-be buyers in a dilemma, because as rates go up it becomes harder to qualify for a bigger mortgage. Even a slight rise in your monthly rate can elevate the price of your mortgage payments and put a more expensive home out of reach. Say, for example, that a home priced at $200,000 last year is able to command a 2014 price that is just 5% higher. That adds $10,000 to the cost.
The Problem for Buyers
Perhaps a first-time home buyer has been saving for years in order to scrape up a 20% down payment – which is the minimum amount that most lenders require these days. They may suddenly find that the $40,000 they accumulated is not nearly enough because now they need $50,000. By the time they save up an additional $10,000 the economy may have improved even more. It is not unrealistic, for example, to think that home prices might rise 10% over the next 18 months. Those buyers looking at homes in the $200,000 range will then be faced with prices on the same properties that have gone up to $220,000.
Let’s say last fall you were shopping around for a home that was worth $200,000, one that had many sweet features not found in homes priced closer to $175,000. After a price hike of 10% or so you will probably be forced to readjust your sights and settle for a home that is considerably less attractive. Unless you can raise the extra cash, in other words, you might find yourself touring those less desirable homes in the $170,000 to $180,000 price range because that is all you are allowed to borrow.
Wells Fargo Becomes More Lenient
There is a silver lining through all of this info, though. Wells Fargo has decided to lower the bar and make it easier to qualify for some popular government-backed mortgages like FHA and VA loans. Their thinking is that there are plenty of Americans who are responsible about repaying their debts, but their credit was damaged due to the historically severe recession and high levels of unemployment. In order to attract their business, Wells Fargo is going to take all of those extreme circumstances – most of which are not the fault of the average consumer – into consideration.
Lower Qualifying Scores
Wells Fargo was requiring a credit score of at least 640 in order to qualify for one of its low-cost FHA or VA loans. Those are great loan products because you can buy a home with that kind of mortgage with a down payment as small as 3.5%. That’s an out-of-pocket cash savings of as much as 16.5% – or the difference between a $40,000 down payment on a $200,000 home and a cheaper down payment of just $7,000 -imagine how much difference that can make for an eligible buyer. The obstacle for many people, of course, has been that they don’t have a credit score of 640 or better. Now Wells Fargo – which is one of the largest in the nation – is accepting scores of just 600 for those same loans.
A Wells Fargo competitor, Bank of America, has also indicated that it will accept scores in the low 600’s for some of its loans, based on the borrower’s ability to repay a mortgage. Other lenders may follow suit because they are now strategizing new ways to make up for revenues they are losing because homeowners are not refinancing as much as they used to. The loss of refinance profits is hurting the bottom line of lenders, but if it inspires banks to lend more freely and easily, that could be a wonderful opportunity for home buyers in 2014.