The_state_of_the_housing_market_in_solid_lending_standards
00:00:00.000 | Hello everybody, it's Sam from Financial Samara and greetings from Lake Tahoe, California.
00:00:05.800 | We're on our last family vacation before preschool starts and we're happy and yet we're a little
00:00:11.360 | bit sad that our little boy is going to be away from us.
00:00:14.520 | I hope the transition goes smooth because I heard the transition of the first week is
00:00:18.060 | not so good.
00:00:20.280 | But anyway, in this podcast I want to focus on the housing market as well as talk about
00:00:25.520 | the average credit score to qualify for a mortgage.
00:00:28.520 | I am still in the middle of my mortgage refinance and it's been three months, three very long
00:00:35.280 | months.
00:00:36.280 | The good thing, you know, it was tough in the beginning and then there was like nothingness
00:00:40.400 | for several weeks in the middle.
00:00:42.840 | And at the end it's kind of like, well, the documents you sent in the first couple months
00:00:47.720 | have expired so please resend them again.
00:00:50.040 | And I was thinking to myself, man, this is just nuts.
00:00:54.400 | And I'll tell you more about my journey once it's over, but boy, it is not easy to refinance
00:00:59.760 | a mortgage nowadays and it's probably not easy to get a new mortgage nowadays for purchase.
00:01:06.440 | As mortgage rates have tumbled to multi-year lows, there's been a massive, massive surge
00:01:10.860 | in refinances and new mortgage applications.
00:01:14.120 | If you look at the data, I think for July it's up about 50% year over year in terms
00:01:18.840 | of mortgage applications and refinancing.
00:01:21.760 | So August is probably going to be probably higher given rates tumbled a little bit more.
00:01:28.240 | So the drop in mortgage rates is one of the key reasons why I don't think there will be
00:01:31.880 | a housing downturn as vicious as the one we saw between 2008 and 2010.
00:01:37.280 | Further, it takes about six months for the effects of a large mortgage rate change to
00:01:43.240 | show up in the housing data.
00:01:45.580 | So in other words, I think there's pent up demand building right now as buyers take a
00:01:50.400 | wait and see approach to the economy.
00:01:53.160 | Everybody's heard about the inverted yield curve and how there's trade wars and how,
00:01:57.640 | hey, there might be a recession in 2020 or 2021, so why buy ahead of that recession?
00:02:04.000 | Why not just wait?
00:02:05.760 | But the reality is life doesn't wait for the perfect time.
00:02:09.840 | Life just happens.
00:02:10.840 | If you have a child, you have two children, whatever it is, you're going to probably need
00:02:14.800 | more space and you're going to buy.
00:02:16.720 | And if you want to get a better indication of what the future of housing might look like,
00:02:21.520 | simply check out the performance of a home building ETF like XHB.
00:02:26.920 | At the time of this podcast, August 29th, 2019, XHB is up about 26%, which is about
00:02:36.000 | 10, 11% better than the S&P 500 year to date.
00:02:41.440 | So that should be an interesting sign and I think a good sign.
00:02:44.240 | So if you've been waiting to buy property, I think you have this window in the second
00:02:50.000 | half of 2019 to get a good deal because I am seeing more inventory on the market and
00:02:56.760 | I am seeing just more deals go through.
00:03:00.520 | Now if we're going to go into a multi-year down cycle, well, buying now, you're probably
00:03:05.860 | not going to make any money for two to four to five years.
00:03:09.600 | So therefore, if you're going to go buy property, you want to aggressively bargain right now
00:03:15.240 | and also make sure you hold on for at least five years, if not 10 years plus.
00:03:20.300 | In addition to lower interest rates, higher lending standards post-financial crisis is
00:03:24.640 | another reason why the next recession shouldn't be as bad as the last.
00:03:28.800 | Gone are the days of negative amortizing liar loans to people with terrible credit.
00:03:33.000 | It has become far more difficult to get a mortgage today and I'm living through it right
00:03:38.280 | now.
00:03:39.540 | So according to the latest quarterly report on household debt and credit by the New York
00:03:43.320 | Fed, nine out of 10 US mortgages go to borrowers with a score of 650 or better.
00:03:50.360 | Three quarters go to borrowers with scores of better than 700.
00:03:54.560 | Meanwhile, the average credit score for the 50th percentile is about 760.
00:04:00.920 | 760!
00:04:01.920 | I remember refinancing, actually no, I remember getting a new loan out in 2014 and the lender
00:04:08.300 | at the time was saying, "Hey, if you have over a 720 credit score, you should be able
00:04:14.240 | to get the best rate possible at the time."
00:04:17.720 | And now, based on my current experience, before even starting my mortgage refinance process,
00:04:23.720 | the lender asked me straight up, "Hey, Sam, do you have a credit score of higher than
00:04:28.280 | 800?
00:04:29.280 | Because that's the only way you're going to get the highest rate."
00:04:32.100 | So things have gotten much more difficult now.
00:04:36.140 | If you do qualify for a mortgage with less than a 760 credit score, your lender will
00:04:40.820 | likely be charging you about 0.125% to 0.75% more than if you had had a 76+ credit score.
00:04:50.720 | So stop thinking that a credit score above 670 is good, according to FICO.
00:04:56.880 | It's really not that good.
00:04:59.480 | Just like how it's not good the average American has only a median net worth of about $87,000.
00:05:04.680 | I mean, look, if you retire with $87,000, well, that's not going to happen.
00:05:11.240 | You're not going to retire with only $87,000 because you just can't live off that.
00:05:15.480 | Even with Social Security, it's going to be a really sparse existence.
00:05:19.200 | And it's just like the average American has never traveled abroad, doesn't speak a second
00:05:23.400 | language, is not in good shape, and will likely die younger than they're supposed to due to
00:05:28.160 | cardiovascular diseases and other things.
00:05:31.040 | So being average or the median in America is not a great position to be in.
00:05:36.020 | You want to be far, far above average.
00:05:39.660 | We're experiencing this winner-take-all reality right now, where the people who are far above
00:05:46.000 | average are gaining most of the economic benefits.
00:05:49.280 | And to illustrate this point, there's a great graph in the Post about mortgage originations
00:05:54.940 | by credit score.
00:05:56.420 | And you can clearly see folks with 760-plus credit scores have over half of all mortgage
00:06:04.040 | originations.
00:06:05.340 | And then if you look at the 720 to 759 category, that's about another 15% to 20%.
00:06:13.840 | So in other words, the people with over a 720 credit score account for about 70% to
00:06:21.680 | 75% of all mortgage originations.
00:06:24.220 | You need a minimum of 620 to qualify for a government-backed loan by Fannie Mae and Freddie
00:06:28.320 | Mac.
00:06:29.320 | However, the government, in all its wisdom, allows people to qualify for a Federal Housing
00:06:36.240 | Administration mortgage with a credit score as low as 500 if you can make a down payment
00:06:41.200 | of at least 10%.
00:06:43.360 | That is way too low in my opinion.
00:06:45.680 | When a downturn comes, borrowers who receive government-backed loans will likely suffer
00:06:50.520 | the highest default rates, partly because there's a history of poor credit, but also
00:06:56.600 | because the interest rate that they're getting is going to be much higher than everybody
00:07:01.920 | else.
00:07:02.920 | And what's going to happen is, just like in the past financial crisis, there's going
00:07:06.240 | to be a snowball effect, a negative effect, where the condo owner with poor credit score
00:07:12.040 | and just financial difficulties and living on the edge who got that loan is probably
00:07:16.520 | going to default first down the hall in your condo association.
00:07:21.240 | And then that's going to cause other people to be afraid and maybe sell their property
00:07:28.580 | or lower their asking price.
00:07:30.880 | And it just gets worse and worse and worse until somehow the bottom is hit and people
00:07:36.080 | realize, "Hey, the prices of these properties are very attractive according to the rent
00:07:41.080 | they generate."
00:07:43.240 | I think it's very important for all of us to realize that owning a home is not a right.
00:07:48.240 | Pre-2008, too many people who really couldn't afford to bought homes.
00:07:52.680 | While we can certainly blame lenders for lowering their credit standards and coming up with
00:07:57.160 | creative mortgages to entice unwary borrowers, we should also not shirk personal responsibility
00:08:04.040 | for our decisions.
00:08:05.280 | Nobody's pointing a gun to our head to buy an asset with debt and take on all that risk.
00:08:10.920 | We need to read the fine print.
00:08:12.880 | We need to look at our finances, do some various scenario analysis, and look at worst case
00:08:19.040 | scenarios to see if we can actually afford a property.
00:08:22.040 | And if we don't do that, bad things could happen.
00:08:25.560 | So the easiest way to save homebuyers from potential loss and save the economy from potential
00:08:30.240 | catastrophe again is to not take out a mortgage until you have a credit score of 720 or higher
00:08:36.760 | instead of the current 620 or higher.
00:08:39.120 | This way, if things go south, default rates won't increase as much as they would for borrowers
00:08:43.880 | with lower credit scores.
00:08:45.880 | Now 720, like I said, in the past, 2014 before then, 720 was pretty good.
00:08:52.880 | You're probably going to get a pretty good rate.
00:08:54.740 | But now, I'm telling you folks, it's 760 and probably 800 plus.
00:09:00.140 | But to get to 800 plus, it takes time.
00:09:04.160 | It's not just about payment history, which is 35% of your credit score, the amounts owed,
00:09:11.280 | 30%.
00:09:12.440 | But length of credit history is about 15% determining factor of your credit score.
00:09:18.240 | So it's pretty much impossible to get an 800 credit score in your 20s and in your early
00:09:23.640 | 30s.
00:09:24.640 | So what is a person supposed to do?
00:09:25.800 | Wait until their 40s and 50s to get an 800 plus?
00:09:28.600 | Probably not, right?
00:09:29.600 | Because life goes on.
00:09:31.440 | So I would say at least 720 credit score, if not 760 credit score, that is when you
00:09:36.980 | should consider, OK, you're financially ready to buy some property.
00:09:42.800 | Since 2012, if you look at the data, the housing market has had a tremendous bull run.
00:09:47.940 | Some areas of the country like San Francisco, Seattle, San Diego, Los Angeles, Las Vegas,
00:09:53.720 | I think even DC, Boston, we're talking 50% to 80% appreciation in property prices since
00:10:01.160 | 2012.
00:10:02.360 | That's a lot.
00:10:03.920 | That's a lot.
00:10:04.920 | So there should be no urgency to buy a home at near record high prices without the best
00:10:10.520 | mortgage terms.
00:10:12.200 | If you must buy now, you need to get the best terms possible.
00:10:15.600 | Otherwise, your risk is going up.
00:10:18.840 | If you lose your job, you change your mind, you get a divorce, whatever could happen,
00:10:24.960 | generally tends to happen if you're not prepared.
00:10:27.320 | And you could be in a world of financial hurt if you do not get the best terms possible.
00:10:32.880 | It's really an interesting time for the housing market right now because you see the S&P 500
00:10:38.520 | up 15% plus year to date.
00:10:40.480 | So that's great compared to history.
00:10:43.320 | You know, in 2018, not so great, down about 5.5%.
00:10:47.280 | But this year we've rebounded.
00:10:48.840 | And in 2020, we're going to have the election year where we're going to get promised all
00:10:51.760 | sorts of goodies.
00:10:53.520 | And I've got to believe that the government and the Fed is going to do everything possible
00:10:58.480 | to try to make sure there is no hard landing in the economy.
00:11:02.800 | Maybe the recession is short.
00:11:03.960 | There have been two to three month recessions.
00:11:06.360 | Yeah, maybe the stock market corrects 10%, 15%.
00:11:10.680 | But I believe that we are not going to experience the level of magnitude of suffering as we
00:11:16.320 | did during the previous financial crisis.
00:11:18.640 | So if you're looking for property buy right now, it is a, I think, magical window between
00:11:25.800 | now and the end of the year, maybe in January 2020, to look for deals.
00:11:31.800 | Because I am seeing inventory go up.
00:11:34.640 | You're seeing a lot of good bargains on the high end.
00:11:36.600 | And it's always on the high end, the luxury side, where people don't really need a 5,000,
00:11:41.920 | 6,000 square foot mansion or McMansion.
00:11:45.480 | You know, it's really, there's a lot of deals there to be found.
00:11:48.840 | Now the median price property in your area, it's obviously going to be a little bit more
00:11:53.240 | competitive.
00:11:54.320 | But even then, I still see opportunity.
00:11:58.520 | Thanks so much, everyone.
00:11:59.520 | It is back to the grind shortly.
00:12:02.080 | I do have some special news coming up in a following podcast in a post.
00:12:07.760 | So stay tuned.
00:12:08.760 | And if you enjoy the podcast, I'd love a review because it'll help me keep on going.
00:12:13.200 | I read everything.
00:12:14.200 | And it's just a wonderful, wonderful to hear from all of you guys, whether in the review
00:12:18.240 | section or in the comment section of Financial Samurai.