What do rising interest rates mean for first-time homebuyers?
In mid-December 2015, as predicted, the Federal Reserve raised its key interest rate by 25 basis points and mortgage loan interest rates are expected to rise slowly throughout 2016.
There is no question that first-time buyers will be the group most affected by increased mortgage interest rates. Here are insights you can use if you’re a first-time homebuyer in Minnesota or western Wisconsin.
How affordability works
As interest rates increase, the buying power of a borrower is lessened. Let’s say a homebuyer has $1,200 to spend on their monthly mortgage payment. If rates are 4 percent and the borrower secures a 30-year fixed conforming loan, their loan could total around $250,000. The monthly mortgage payment in these conditions would be $1,194.
Now let’s say rates rise 1 percentage point to 5 percent. With all the mortgage terms remaining equal, the borrower would pay $1,208 monthly for a loan totaling $225,000. That’s a difference of $25,000, or 10 percent, in buying power.
This matches the sentiments of lending experts who agree that if current rates increased 1 percentage point, buyers would lose 10 percent of their purchasing power.
Why first-time buyers will be affected most
Many first-time buyers do not have a large down payment, and government and private lenders have changed their standards in order to accommodate these high earners with minimal savings. FHA loans can now be secured for as little as 3.5 percent down, and some conventional (private) loans have a minimum of 3 percent down.
While these new minimums have prompted many first-time buyers to enter the market, it also means these buyers are relying heavily on financing. In fact, first-time buyers financed nearly 94 percent of their home purchase in 2015 – meaning that on average, these buyers had saved an average of 6 percent for their down payment.
If rates were to rise 1 percentage point, most first-time buyers would not be able to increase their down payment to make up the 10 percent difference in affordability. If rates increase, their only choice will be to lower their home buying budget.
The silver lining
It’s easy to be frustrated by the predictions of rising rates, but the reality is that our local market is still a great place to buy. Keep in mind that:
- Buyers are still in control of their purchasing power. Here are a few ways to ensure you get the best rate as a first-time buyer.
- Once you put your mind to it, saving a down payment can be achieved relatively quickly by many. According to the NAR, 63 percent of first-time buyers say it took them less than 18 months to save a down payment.
- While personal savings is still the most common way to finance a down payment, many first-time homebuyers are taking advantage of gift loans from friends or relatives.
- First-time buyers can also apply for down payment assistance on many homes in our area, which can offset the stress of a rate increase.
- Even if mortgage interest rates increase to 5 percent, that is still very low compared to historic highs of 16.63 percent in 1981.
Getting ready to buy
Prepping to buy your first home is an exciting time and getting pre-approved is the best step you can take to start the process. A pre-approval will tell you the loan amount you will qualify for, allowing you to set a responsible budget (and expectations) as you begin looking at properties online and in person.
Don’t forget to look at #BuyerInsights on Twitter, Facebook, Instagram and YouTube for more insights you can use to navigate the first-time home buying process.
The “dos and don’ts” of writing a love letter to a home seller
In the last few years, it’s become more common for buyers to write a compelling letter to a home seller considering their offer. Writing a “love letter” to a home seller sounds easy enough, but it’s important that buyers don’t give away too much or come on too strong. Below are insights you can use as you craft a perfect letter to a home seller in today’s market.
DO present a confident case. The easiest way to write a love letter to a seller is to replicate the template you might use with a professional cover letter. Keep it to three paragraphs, and follow this format: one paragraph about yourself, one paragraph about why the house is perfect for you and your family and a strong closing statement.
DON’T be cocky. While you may end a professional cover letter with a strong sign-off about finalizing the process soon, you won’t want to be presumptuous in this letter. End with a strong but humble appeal for the seller to consider you as they review any competing offers.
DO tap into their emotions. Part of being a homeowner is making lasting memories in a place you call your own, so it’s okay to share a few emotional reasons you like the seller’s home. For example, if buying their home will allow your kids to attend the same school you did 20 years ago, that’s a great anecdote to share.
DON’T go overboard. It’s important not to seem too attached to the house, as sellers may use this as leverage to get a higher offer or to play hardball after a flawed inspection. For example, a homeowner may refuse to fix a failing furnace or a sagging roof if they know you’ve already picked out the paint colors for your nursery. Your agent will help you craft a letter that strikes the right balance between excitement and desperation.
DO talk about your future in the home. Be sure to mention future plans, like how you look forward to teaching your kids to shoot hoops in the driveway or starting each Sunday morning with a lap around nearby Lake Nokomis. Your goal is to appeal to the homeowner, who has likely enjoyed their home and its surrounding amenities for years.
DON’T talk about future renovation plans. Most sellers inherently understand that you won’t use the home in the exact way they did, but others may be sensitive about proposed changes. Be sure not to mention that you’ll be knocking down walls to get the open floor plan you’ve always wanted, or that you plan to turn the downstairs family room into an epic mancave with a year-round kegerator.
DO play up your commonalities. If you noticed you have something in common with the seller as you toured their home, your letter is the best time to mention a shared interest.
DO use the letter to bolster a strong offer. Your letter should be the final addition to an already solid offer. Together, we can determine how much you should bid, or if there are other ways to boost your offer in addition to the letter. Here are eight ways for buyers to make their best offer.
DON’T use the letter to take the place of a strong offer. Seller letters became popular after buyers were competing over a shortage of homes for sale – a phenomenon still occurring in most markets across Minnesota and western Wisconsin. Don’t make the mistake of entering a low bid on a home that has multiple offers. Even the most perfect letter won’t make up for thousands of dollars lost at the closing table.
One final “DO”
Most importantly, DO write a love letter to the home seller. A recent survey showed that 43 percent of winning offers are accompanied with a seller cover letter, meaning that they have become an expectation instead of a “nice-to-have” for many sellers. Together, we can write a letter that strikes the right chord between eager and overzealous, and that puts you in a great position for negotiating even as you march toward the closing table. Good luck!
Four homebuyer trends that may surprise you
While plenty of home buying myths – like the need for a 20 percent down payment – persist, it’s clear that today’s buyers are blazing their own paths to the closing table. Below, we share four surprising trends identified by the National Association of REALTORS® (NAR) in their 2015 Profile of Buyers and Sellers.
1. Veterans are buying homes in droves
In one of the more interesting stats from NAR’s profile, 18 percent of 2015 homebuyers were military veterans. Stats experts report that only 7.3 percent of American citizens have served in the military at some point in their lives, so it’s clear that veterans are buying homes at a much higher rate than the general population.
There are a few reasons for this. First, veterans tend to be older – the median age of veterans is 65 – and the older you are, the most likely you are to own a home. It’s also likely that aging veterans are downsizing and moving into homes that will better suit them after retirement.
Additionally, veterans are eligible for Veterans Administration (VA) loans, which allow them to purchase a home without a down payment, and other programs that help with financial burdens like closing costs. It’s estimated that 10 percent of veterans have VA-backed loans on their home, which would help to increase their homeownership rate.
2. Buyers are moving across the highway – but not much farther
If you’ve thought about moving to your dream house just two suburbs away, you’re not alone. The NAR shows that repeat buyers in the Midwest move only 10 miles between purchased homes on average. And this isn’t a case of the Midwest operating differently than the rest of the country; nationwide, buyers tend to move within 14 miles of their previous residence.
Why the short-distance moves? Frankly, they match the small reasons that cause people to select a certain home. Across the country and in our local market, these are the top three reasons buyers cite for choosing their new residence, according to the NAR:
- Quality of the neighborhood (59% )
- Convenience to job (44%)
- Overall home affordability (38%)
When you think of our metro area, it’s easy to imagine a buyer moving from Richfield to Wayzata if they work in the western suburbs or from Savage to Chaska if they desire a more walkable community.
3. First-time homebuyers are six times more likely to be non-white
The NAR reports that 94 percent of last year’s repeat buyers were Caucasian, but this number does not carry into the first-time buyer demographic. Among first-time buyers, 25 percent identified themselves as non-white, showing that as our country becomes more diverse, so too do the players in the housing market.
This is welcome news for our local market. Reports this fall showed that black Minnesotans faced a staggering income gap, and we discussed how that could impact their ability to buy a home. We’ll be eager to see if Minnesota is able to hold its ranking as the market with the highest rate of homeownership, and if our local market reports gains in homeownership across every demographic.
4. Half of first-time buyers take less than a year to save for a down payment
Perhaps the most interesting stats coming out of the NAR’s report are related to first-time buyers navigating through the down payment process. The NAR reports that last year 51 percent of first-time buyers took less than one year to save for a down payment, and 33 percent said it took them less than six months.
A few things can explain this trend. On average, first-time buyers in 2015 financed 94 percent of their purchase with a mortgage – this means that on average, this group only put 6 percent down at closing. It’s clear by these numbers that first-time buyers are taking advantage of new loan options that allow them to put as little as 3 percent down.
Some first-time buyers are also taking advantage of gift funds, which allows them to finance less of the purchase without having to save over a longer period of time. 27 percent of first-time buyers reported that they took advantage of gift funds from a family member or friend to help with their down payment.
The market is changing – and so are the buyers
It’s clear that as the market changes, so, too, do the homebuyers entering it. If you’ve been thinking that you aren’t a good fit to buy a home in 2016, you may be missing out on a great opportunity. Together, we can help you examine your finances, location desires and more to see if now is a good time for you to buy. Reach out todayReach out today to get started.
Downsizing in style: Why baby boomers are moving into senior housing even before they retire
There are more than 78 million baby boomers in the United States, and more than 10,000 of them turn 65 every day. And while many are content to “age in place,” millions of boomers are moving to senior housing early. In fact, 16 percent of buyers aged 59-67 moved into senior-related housing in 2014, according to the National Association of REALTORS® (NAR). That number, of course, is expected to grow over the next few decades.
If you’re thinking of downsizing and exploring your senior housing options, here are insights you can use as you make your move.
Boomers are choosing senior housing long before they retire
Baby boomers have always been leaders of the counter-culture, and they will continue to march to the beat of their own drums as they age. In the past, we’ve referred to senior housing as “retirement communities” but in the case of boomers, they are often moving to these communities long before they retire.
Recent stats from the Insured Retirement Institute may explain why:
- Only 27 percent of baby boomers (currently aged 52-70) are confident they have enough money saved for retirement
- 28 percent of baby boomers say they will retire after age 70
It makes sense that boomers, who may be living in homes much too large for their current needs, may want to downsize early so they can be in a better position for retirement over the long-term.
The most popular option: Senior-related housing in the suburbs
According to the NAR, more than 57 percent of purchased senior housing in 2015 was in the suburbs and nearly two-thirds of these purchases were detached single-family homes.
In most cases, single-family homes that meet senior housing criteria can simply be homes that better fit the lifestyle of a person as they age over time. In some cases, they may be within subdivisions or other communities that cater specifically to aging populations.
Here are some common features of senior-related housing:
- One-level design, with minimal steps from garage and all entries
- Large hallways, kitchens and bathrooms to accommodate wheelchairs or walkers
- Wheelchair ramp accessibility
- Easy-to-open windows
While boomers may not need these features now, they know that in the future their mobility may change – and having laundry on the main floor will be an important factor in maintaining their independence.
The rise of “resort-style” senior housing
While single-family homes with senior living features are the most common option for downsizing boomers, nearly 20 percent chose to purchase townhomes, duplexes or condos last year, according to the NAR.
These homes likely have similar features to their single-family home counterparts, such as one-story living and larger hallways. However, one growing trend is the idea of “resort-style living,” which offers boomers a greater sense of community (and a lot more planned activities) than if they lived in a traditional neighborhood.
Here are some common features of “resort-style” senior living:
- 24-hour concierge services
- Restaurant-quality dining
- Salons and fitness facilities
- Outdoor walkways and ponds
- Pet accommodations
- Daily group activities and outings
Some have likened these new active senior communities to life on a cruise ship but they also resemble a posh college dorm. With a la carte services, these communities can also help boomers stay on a budget that expands as they need more assistance. For example, a first-year resident may cook all her own meals and enjoy free brisk walks along community trails, while an older resident may purchase all her meals in the dining hall and have in-home care attendants check on her twice daily.
This kind of flexibility is likely appealing to boomers, many of whom have seen how the needs of their parents changed as they aged. By selecting one community that can accommodate them in varying stages, boomers can retain a vibrant and busy life on their own terms – a quality that has defined this generation for decades.
Looking to downsize or explore your options?
There are a plethora of options when it comes to senior housing, and many new communities and developments are reframing what retirement looks like. Reach out today Reach out today to be put in touch with an expert who can help you assess your finances and select the best housing option for you over the next few decades.