What Mortgage Changes Mean for Military Families

What Mortgage Industry Changes Mean for Military Families:

Will You Lose Money if You Don’t Buy or Sell Now?

by Karina Gafford

2090978909_a0c8b18c14_zIn early 2015, the Federal Reserve suggested that they will increase interest rates later this year, offering a boon to thrifty savers, but not for borrowers. Interest rates have not risen in years, but given that both the DOW and the housing market have risen to pre-recession valuations, no one was too surprised by the update to the interest rate status quo. The question this raises for military families going through a PCS this year, though, is whether or not they need to sell before the mortgage interest rates increase.

The question, however, is a little more complex, because looking only at the mortgage interest rates is simply analyzing the complex real estate market in a vacuum. It’s critical to take a holistic assessment of as much of the economic situation both nationally and locally as possible. Local markets are always of much higher importance when determining a home purchase, but that doesn’t mean that you can ignore the impact of the national situation. The "Great Recession" is a perfect case-in-point, as so few local markets remained unaffected by the national conditions.

So, if you’re planning to PCS this year, then note that it still looks like a seller’s market for two major reasons. However, read on because even though it may look like a seller’s market, it may not be a seller’s market for your particular situation.

Reasons why it still looks like a seller’s market:

  1. Cash buyers are still rampant.
  2. Housing inventory is low.

Cash buyers exist in tough markets where home buyers want to appeal to sellers with a quick close option. Last year, we looked at the role of cash investors in the housing market and we saw that cash purchases amounted to approximately 33 percent of all home purchases in 2013, according to the Realtors Confidence Index Report. That’s a scary thought for most military families who purchase homes using VA Home Loans. When you’re saddled with the appraisal requirements of a VA loan while trying to compete for your dream home with a cash buyer, unless the seller really warms to your family or takes pity on you, you are out of luck, my friend. There are ways to compete with a cash buyer, which we discuss in Know Thy Enemy: The Role of Cash Investors in the Competition for Home Buying, such as offering more money and including a financial disclosure from your lender to ease the seller’s comfort level.

Cash buyers are slowly waning, though. In the third quarter of 2013, cash buyers amounted to just over 28 percent of all home buyers; in the fourth quarter, they amounted to roughly 30 percent, showing that the glut of investment seems to have waned. Not only are cash buyers down, but the ones who bought the previous year have been dipping into their home equity. According to RealtyTrac, cash buyers typically purchased at 93 percent of the full market value, but a full 8 percent of all of those buyers have since taken home equity loans, suggesting that they may not have been as cash flush when they made their initial purchase. Those who dip into home equity to repay the loans may unfortunately find that they have homes they cannot afford.

What does that mean for military families?

Well, you’d have to look at the particular locations where cash buying is down. In military-heavy California, for example, almost one-fifth of all cash buyers from 2013 have dipped into their home equity loans. Over 11 percent of cash buyers in Atlanta have dipped into their home equity already, and almost 10 percent in Oklahoma City have, too. Given how quickly the home buyers dipped into their equity suggests that they were:

  1. Cash strapped to repay a third-party loan.
  2. Using all of their cash reserves to procure the home in a seller’s market and needed access to quick capital for other
  3. purposes.
  4. Leveraging this house to buy another for cash.

The first two options present good news to military families who hope to squeeze in their own good deals in this markets with VA and FHA loans. It’d be bad news for military family home sellers if those dipping into their home equity remained so cash strapped that they eventually wound up in a foreclosure situation, dropping the value of surrounding properties alongside their own. The latter situation—leveraging the house, however, suggests that some stiff competition may still exist from cash buyers.

If you’re a buyer, then you’ll find your best luck in a market where the housing inventory is high. That isn’t the case in most markets right now, though. While a construction boom exists in some parts of the country, such as near The Pentagon and Joint Base San Antonio, the National Association of Realtors reports that overall, a lag in construction exists. In such a scenario, the NAR explains, home sellers can choose to keep their homes off the market because they worry that they may not be able to find another home.

Military families don’t have that concern; they have to find another home when it’s PCS time! The question for military families then is whether this situation translates to whether or not it’s a good time to sell.

While holding real estate for a long period as a rental is generally a good investment—provided that it isn’t costing you money, of course—if you’re eager to sell, then now may be the time.

Not only will the low supply of inventory on the market benefit you, but you also want to take advantage of the cash buyers on the market while they’re still out there. The seller’s market may also not last for too much longer because, while mortgage rates are low right now, they are set to hike soon!

The combination of these factors affect affordability and decision making. When mortgage interests rise, prospective home buyers can afford less home and, potentially, may be less likely to afford to purchase in the neighborhood of their choosing. We’re now accustomed to seeing almost ridiculously low interest rates of 3 and 4 percent, which has affected our understanding of affordability. Less than 10 years ago, mortgage rates of 6 and even 7 percent dominated the lending market, and prior to that rates were even higher. When facing mortgage rates similar to those, prospective buyers may reconsider whether buying a home is in their interest.

Then again, even when mortgage interest rates were as high as 18 percent and then some in the 1980s, buyers still purchased homes, which is good news to home sellers. Of course, the valuation of property to real income was quite different. A starter home didn’t cost 5 to 10 years’ worth of salary, so the interest rate didn’t matter quite as much.

So, as you can see, the answer to the question of will you lose money if you don’t buy or sell now remains complicated. I wish I had a magic ball that could answer that question for you, but with any investment comes risk. The best advice I can give you in this situation is to pay attention to your local market conditions while keeping cognizant of the mortgage rate trends. Despite media hype, we shouldn’t expect another widespread economic downturn that will negatively affect the housing market to anywhere near the extent of the crash in 2008. Unemployment rates have reduced and leveled out, the number of foreclosures hitting the market has dropped, and banks have maintained stringent lending conditions for many years now, which should have helped to keep much of the speculative aspects of the market at bay. Hopefully that information helps you somewhat with the big decision facing you this summer.

If you’re in a buying/ selling situation this year, what concerns your military family the most, or what decision did your family make? Do you have advice to share with our readers?

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