Home prices won’t climb as fast this fall as they had been rising. But sellers need not worry: This is still their market.
Still, this fall brings good news for homebuyers: They have been granted some extra time to grab low mortgage rates. Lenders now regard buyers as their golden customers. Even people who lost their homes to foreclosure or short sale may get a second chance to get a mortgage to buy a house again.
If you are still paying a higher interest rate on your mortgage, this is really your last chance to refinance.
For homeowners who have already refinanced but are thinking of cashing out some of that equity, think twice. But if you really want to cash out, home equity loans are making a comeback.
Here are five housing trends you should expect to see this fall.
After a strong summer homebuying season, the housing market is likely to cool off in coming months.
That doesn’t mean buyers will no longer face competition when bidding on homes, or that prices will drop. But the end of warm weather, coupled with higher mortgage rates, will probably slow the housing frenzy, says Robert Dorsey, chief data analytics officer for FNC, a real estate valuation company.
“Price increases, which had been really robust, seem to be slowing down a little,” Dorsey says. “As we go into the fall and winter, there is a seasonal decrease in home sales. The economy has been stagnant and interest rates are increasing. I think there will be reduction in price increases and demand.”
This is good news for homebuyers. While the inventory of homes for sale remains tight, potential homebuyers will get a bit of extra time to find the home they want without the pressure of watching home prices shoot up.
Should you wait and see if prices eventually drop? No, Dorsey says.
“We may have a period of flat prices, but they will likely continue to go up,” he says. “I don’t think home prices in general are going to go down. Plus, you will likely get a lower interest rate today than in six months.”
As mortgage rates rise, lenders will no longer see homeowners lining up to refinance their mortgages. Their golden customers now are homebuyers, and they will do whatever it takes to attract as much business from homebuyers as possible.
Expect underwriting standards to loosen up in coming months as lenders turn their attention to buyers, says Anthony Sanders, professor of real estate and finance at George Mason University. Lenders also are likely to offer incentives and reduce loan fees to entice more buyers, Sanders adds.
“I think banks have gotten crushed because of the decline in refinancing,” Sanders says. “Now that the cash cow has been milked, they have to build up their pipelines for purchases.”
The average credit score for loans that closed in August has dropped to 734, according to data compiled by Ellie Mae, a mortgage technology firm. That’s the lowest average score since the company started tracking the data in August 2011. About 31 percent of the mortgages closed had a score below 700. A year ago, only 15 percent of the loans fell below that threshold.
But it remains to be seen how much the standards will be loosened, given the new mortgage regulations that go into effect next year.
A lot of people lost their homes to foreclosure or short sale in the last few years. If these people can show that a job loss, or reduction in income, was responsible for losing the home, they can apply sooner for an FHA-insured mortgage.
The FHA previously required a three-year wait after the foreclosure to apply for a new loan. The FHA now makes exceptions, shortening the wait time to one year for borrowers who lost their jobs or income, and whose credit was tainted as a result.
“It’s not one of those programs where everyone qualifies, but it’s a really good program for people who lost their jobs because of the economy,” says Scott Schang, manager for Broadview Mortgage Katella in Orange, Calif.
To qualify for the program, borrowers must present documentation showing they lost at least 20 percent of their income for six months and that they were able to get back on their feet and pay their bills on time for at least one year, he says.
“You absolutely have to have all your documentation, including unemployment benefit documents (and) bank statements showing the income loss,” he says.
There’s no shortage of buyers interested in the program, but they should make sure they really are financially prepared to own a home again before applying for the loan, says Ed Conarchy, mortgage planner for Cherry Creek Mortgage in Gurnee, Ill.
“Just because you can do something, it doesn’t mean you should,” he says.
After increasing by more than a percentage point over the summer, mortgage rates are likely to take a break this fall, as long as the Federal Reserve continues to cooperate with borrowers.
“This fall, I would see rates remaining fairly stable,” says Cameron Findlay, chief economist for Discover Home Loans in Orange County, Calif. “I don’t expect them to bounce out of the range of 4.3 (percent) to 4.8 (percent).”
But that could quickly change if the Federal Reserve cuts back on the $85 billion per month bond-purchasing stimulus program that has helped keep rates low for so long, Findlay says.
Mortgage rates spiked in May when the Fed said it planned on reducing the amount of purchases by the end of the year. Investors expected the Fed to trim the program after a September meeting, which would have caused rates to climb. But the Fed stuck with the stimulus program, giving borrowers some extra time.
Eventually, the Fed will slow the pace of purchases and rates will jump. This fall could be the last chance for buyers and refinancers to grab a low rate.
Many homeowners have regained equity as home prices increased steadily this year. As these homeowners realize their gains, they may be tempted to cash out some of that equity to remodel their homes, pay for the kids’ college or pay off credit cards.
In the second quarter of this year alone, 2.5 million homes with a mortgage returned to positive equity, shows a recent report by CoreLogic.
Those who have enough equity have two common options to extract it: a cash-out refinance or a home equity loan. Since mortgage rates jumped over the summer, home equity loans have started to look more attractive to borrowers who don’t want to refinance with today’s rates.
Lenders also have been more willing to make home equity loans, now that prices are rising again.
One lender betting on the return of home equity loans is Discover Financial Services. The lender recently started offering home equity loans from $25,000 to $100,000 with rates fixed for up to 15 years.
Could we be heading back to the days when homeowners used their properties as cash machines?
Findlay says it’s unlikely, at least for now.
“This generation of consumers has learned that home prices can go up and they can go down,” he says.