Debt Tag

As a bit of a contrarian, whenever things start to look too good, I begin to question the future. And given the strength of the market since the housing meltdown reversed, now is a prudent time to begin closely watching home value appreciation for any signs of a bubble.

I’m not saying I believe a correction in home values is imminent in the near term. It will happen at some point, but no one can say when with any certainty. But any time you see unsustainable growth in the housing market, you are witnessing a bubble, and as I’ve heard it said, “Whatever can’t continue must end.” I would rather consider the prospects of a housing bubble forming within the next two to four years than ignore the potential impact entirely. But I’ll let you gauge the risk yourself.

As part of the last housing crisis, indicators of our downfall began in 2005. However, consumers continued to purchase homes at a rapid pace until 2007—and even into 2008—before it was abundantly clear that we had a big problem. Had people known what to look for in 2005, many could have avoided a disaster.

I monitor five key points relative to the ongoing strength of the housing market:

  1. The median home price in relation to consumer confidence.
    • In 2006, consumer confidence hit an all-time high, and we’re at a similar point right now. Historically, when consumers feel confident, housing prices increase. However, as the recent trend in consumer confidence has not led to a relative increase in home values, we can anticipate either a drop in consumer confidence or an increase in housing prices.
  2. The number of people purchasing homes with cash.
    • When the market is hot, more people pay cash for their homes. We’ve recently seen a drop in the number of cash buyers, indicating a potential slowing in the housing market.
  3. The housing affordability index.
    • With both mortgage interest rates and home values on the rise, the housing affordability index has taken a sharp dive to a level unseen since 2009. Homes have become less affordable.
  4. The percentage of homes that increase in value month over month.
    • Although residential housing values have increased, there are many areas where prices are flat or even declining. The peak of a housing cycle is generally reached once the percentage of homes rising in value ceases to increase. The peak in our current cycle was reached in February 2017, and although this indicator could turn positive once more, it is reflective of the situation in 2005–2006.
  5. The percentage of household income that goes toward housing expenses.
    • Growth is no longer sustainable once the average percentage of household income spent on mortgage or rent payments exceeds 25%. Currently, in 20% of the major housing markets, payments average more than 25%. This is the highest percentage we have seen in a long time.

I’m not predicting a housing crash. I believe now is still a great time to buy a home, especially if you plan to live in it for a while. The relative price difference of owning versus renting overwhelmingly supports buying a home. Markets will always go through cycles. My intention is to educate and point out some of the indicators of a bubble. Maybe my thoughts will help deter buyers whose sole objective is to own a home for its appreciation value; at some point, this kind of short-term investment will no longer be an attractive option. However, the long-term reasons to buy remain firmly in place, especially with the average 4.5% growth rate on real estate. When you do the math, owning a home is a no-brainer.

With home values climbing to record highs, many have rushed to their bank to take out a line of credit against their homes. For some it has been to make home improvements or consolidate debts. For others it was to take a vacation or purchase a car.
Recent changes have made home equity loans less favorable. For one, home equity loans no longer provide a tax deduction. Secondly, most have variable rates that are moving higher with each rate hike the Federal Reserve makes. Given new tax laws and the outlook for continued Fed rate hikes, the cost of borrowing against a home equity line of credit is increasing.
In most cases, I’m not a fan of home equity lines. If they help solve critical financial issues, they are wonderful. However, most are used to spend money that a family would otherwise not need to spend.
If you have a small balance on a line of credit, focus on paying it off as quickly as possible. Make minimum payments on your primary mortgage until the balance of the credit line is paid. Then take the amount your budget is used to paying and apply that as a principal reduction to your mortgage. That will help you pay off your home faster.
If you have a large home equity line balance, consider at what point it makes sense to consolidate that into your primary mortgage. The blended rate of a home equity loan and your current mortgage is often higher than the current rates to refinance. If you need help determining what is best, we are here for you.

When structured properly, a home mortgage can be a tool to help you build net worth. However, when not properly managed, a mortgage can cause excess burden and be a financial and emotional drain. In the current environment of distressed home values and inevitable interest rate increases, now is the time to ensure that you have a mortgage strategy that is in line with your long-term goals. When advising my clients on their next mortgage, we consider much more than just their loan.

Secondary Home
I ensure they avoid making the following 5 most costly mortgage mistakes:

  1. Listing your home without first being approved for your next home purchase.
    I often hear of horror stories where a homeowner sells their current home and later realizes that they are not in position to financially qualify for their next home. As a result, they are forced to either rent or purchase a house that is less than they had hoped for.
  2. Borrowing more than you can afford or accepting a short amortization with a payment that is not sustainable within your budget.
    Many homeowners have unmanageable mortgage payments. The inevitable result of an over-extended budget is an eventual inability to keep up with the required obligation. Emotions play a large role in how much home to buy, and when to have the mortgage paid off. Making wise and well thought-out mortgage decisions is crucial for long-term mental and financial health.
  3. Not addressing credit challenges in time to help improve your score.
    The interest rate you will qualify for is dependent upon your credit score, more so in today’s market than ever before. Having a credit review in time to correct errors can save you thousands of dollars in interest over the life of a mortgage.
  4. Putting down your entire savings and not maintaining an adequate cash reserve.
    Maintaining a cash reserve is the most important step in achieving financial peace. Without a cash reserve, families live paycheck to paycheck and in a constant state of stress. By not putting down every dollar you have, you can prevent the anxiety of day to day cash flow challenges.
  5. Not considering consumer debts or other investment opportunities when determining how much to put down on your home.
    Managing daily cash flow and minimizing interest expenses is an important consideration for longterm net worth growth. Sometimes, getting on the right path requires a one-time decision to clean up consumer debts to free up cash flow to help increase long term investment opportunities.

By avoiding these common mistakes you can help ensure you are making wise decisions regarding your mortgage that will be most beneficial to you in the long term. Please contact me to discuss how these and other potential pitfalls can be avoided. By having these discussions early in your home buying process, you will be better prepared when the time comes to close on your next home.

 

 

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You can hardly go out to dinner these days without overhearing someone talk about crypto currencies.
It reminds me of 2007 when 20-year-old waiters at restaurants would brag about how many rental
proper ties they owned. It seemed that everyone was jumping in.
Although I am in no way saying crypto currencies are set to mirror the housing market crash, I know
there are a lot of inexperienced emotional investors in Bitcoin that contribute to making it a risky
investment. For strong investors with the stomach to handle the ups and downs, this could prove to
be a winning play.
There is really no way to accurately predict the longevity of Bitcoin. Many speculate it will be a
currency replacement for struggling economies in the world. With the global reach of Bitcoin, that
may be the case. On the other hand, it could become the target of government regulator s who fear
losing power and cause Bitcoin to lose a large portion of its value.
Overall, I believe Bitcoin investments come with a high level of risk. Someone making such an investment
should be prepared to lose it all. If an investment made reflects 3% of an investors liquid asset, it’s a
fun, high-risk opportunity. However, I don’t suggest mortgaging your home to buy Bitcoin.

Bitcoin-Price-Recovers

Before and during the loan process many people make mistakes that may cost them their approval and the home of their dreams.

To avoid this potential disappointment always follow these guidelines…

  • Don’t change your job
  • Don’t quit your job
  • Don’t become self-employed
  • Don’t move your bank accounts.
  • Don’t buy anything you have to finance (cars, trucks, furniture, etc).
  • Don’t buy furniture on credit.
  • Don’t open any new consumer credit accounts.
  • Don’t be late on any of your credit liabilities or charge excessively.
  • Don’t make large deposits into your bank accounts that you don’t want to explain or document.
  • Don’t co-sign on a loan for anyone.
  • Don’t fail to disclose any debts, obligations, or pertinent information.
  • Don’t spend savings budgeted for your down payment or cash needed at closing.
  • Don’t forget to disclose child support or alimony.

 

Remember, your loan is not final until it has FUNDED & RECORDED.

To be safe follow all of these rules until after that point to ensure you get the home of your dreams!

If you have any questions about how to avoid these pitfalls, please don’t hesitate to give me a call at
801-501-7950 or email me at mike@citycreekmortgage.com.