Housing Market Tag

One of the greatest injustices of the mortgage industry is the high commission some loan officers receive for originating a home loan. In many cases, it equates to 1.5% (or more) of the total amount of the mortgage. That’s a $4,500 paycheck for closing a $300,000 loan! And where does the money for those high commissions come from? Through an increase in your interest rate. This is wrong and unjustified, in my opinion.

My personal mission for City Creek Mortgage is to eliminate the over-compensated loan officer by educating consumers about why most companies charge such high interest rates. A loan officer on salary or a lower commission rate can save the consumer money—in most cases, a lot of money.

I’m NOT saying loan officers shouldn’t have the opportunity to make a great income. I believe that the ethical model is to earn a little off a lot of loan closings vs. a lot off a few. A higher-volume team with salary-based loan officers can provide a great living for employees as well as lower interest rates for borrowers.

If you’re shopping for a home mortgage, don’t be afraid to ask your loan officer about their personal commission rate. If they stumble over their answer, be careful. Look for a salaried loan officer and I bet you’ll find a better deal.

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 the Tax Reform bill now signed into law, many homeowners will find that this important piece of legislation restricts
some of the benefits they have enjoyed from owning a home. Although the impact will mainly hit the higher end of the
housing market, there are some potential tax deductions that could impact the way they structure their mortgages.
Let’s look at what the changes could mean for current and future homeowners:
Lower Mortgage Interest Deduction
In the past, homeowners have been able to deduct interest on up to $1,000,000 of mortgage obligation.
For homes purchased now and in the future, this limit will be reduced to $750,000. For those who already
owned their homes at the time of the Tax Reform bill passing, they will be grandfathered into the prior
amount allowed.
Impact: Since this portion of the bill only impacts high valued homes, we anticipate this will have little impact on the
overall housing market. People looking at mortgage balances of over $750,000 will likely still purchase homes,
even if they lose the deduction on up to $250,000 of the mortgage balance.
Loss of Tax Benefit for Home Equity Loans
With property values moving higher, there has been a rush of people taking out home equity loans to make
use of their increased available equity. Under old tax rules, a homeowner was able to deduct interest on
up to $100,000 of the balance of an equity loan. This tax loophole has been eliminated.
Impact: We all remember back in 2008 and earlier when homeowners were taking out home equity loans to
purchase boats, make improvements, take vacations or just spoil themselves at the mall. This created major
improvements to the amount of money flowing through the U.S. economy. With values reaching new highs, this
trend has started once again.With the tax advantage no longer available, it will likely deter some people from
taking out home equity loans. Therefore, we could see a negative economic impact. People with home equity
loans will likely consider rolling them into a primary mortgage, which may create more tax advantage and
interest rate stability long term.
Limit on Property Tax Deduction
One reason that has prevented some homeowners from protesting their property taxes is that they have
received 100% of the property tax payments as a write-off from their taxable income. Under the new
law, the property tax and state income tax write-offs have been limited to a combined $10,000 reduction
from taxable income.
Impact: In Utah, the state income tax rate is 5%. This is a flat tax, so there are no itemizing deductions on
a Utah state tax return. If a homeowner has property tax of $2,500, they would be allowed to have $150,000
in gross income and still receive the full tax savings of owning a home. Therefore, the impact will mainly be
for higher income earners.
Given that the average Utah state income tax collection is less than $1,000 per year, most residents will not
be impacted.