Hello everybody, it's Sam from Financial Samara and greetings from Lake Tahoe, California. We're on our last family vacation before preschool starts and we're happy and yet we're a little bit sad that our little boy is going to be away from us. I hope the transition goes smooth because I heard the transition of the first week is not so good.

But anyway, in this podcast I want to focus on the housing market as well as talk about the average credit score to qualify for a mortgage. I am still in the middle of my mortgage refinance and it's been three months, three very long months. The good thing, you know, it was tough in the beginning and then there was like nothingness for several weeks in the middle.

And at the end it's kind of like, well, the documents you sent in the first couple months have expired so please resend them again. And I was thinking to myself, man, this is just nuts. And I'll tell you more about my journey once it's over, but boy, it is not easy to refinance a mortgage nowadays and it's probably not easy to get a new mortgage nowadays for purchase.

As mortgage rates have tumbled to multi-year lows, there's been a massive, massive surge in refinances and new mortgage applications. If you look at the data, I think for July it's up about 50% year over year in terms of mortgage applications and refinancing. So August is probably going to be probably higher given rates tumbled a little bit more.

So the drop in mortgage rates is one of the key reasons why I don't think there will be a housing downturn as vicious as the one we saw between 2008 and 2010. Further, it takes about six months for the effects of a large mortgage rate change to show up in the housing data.

So in other words, I think there's pent up demand building right now as buyers take a wait and see approach to the economy. Everybody's heard about the inverted yield curve and how there's trade wars and how, hey, there might be a recession in 2020 or 2021, so why buy ahead of that recession?

Why not just wait? But the reality is life doesn't wait for the perfect time. Life just happens. If you have a child, you have two children, whatever it is, you're going to probably need more space and you're going to buy. And if you want to get a better indication of what the future of housing might look like, simply check out the performance of a home building ETF like XHB.

At the time of this podcast, August 29th, 2019, XHB is up about 26%, which is about 10, 11% better than the S&P 500 year to date. So that should be an interesting sign and I think a good sign. So if you've been waiting to buy property, I think you have this window in the second half of 2019 to get a good deal because I am seeing more inventory on the market and I am seeing just more deals go through.

Now if we're going to go into a multi-year down cycle, well, buying now, you're probably not going to make any money for two to four to five years. So therefore, if you're going to go buy property, you want to aggressively bargain right now and also make sure you hold on for at least five years, if not 10 years plus.

In addition to lower interest rates, higher lending standards post-financial crisis is another reason why the next recession shouldn't be as bad as the last. Gone are the days of negative amortizing liar loans to people with terrible credit. It has become far more difficult to get a mortgage today and I'm living through it right now.

So according to the latest quarterly report on household debt and credit by the New York Fed, nine out of 10 US mortgages go to borrowers with a score of 650 or better. Three quarters go to borrowers with scores of better than 700. Meanwhile, the average credit score for the 50th percentile is about 760.

760! I remember refinancing, actually no, I remember getting a new loan out in 2014 and the lender at the time was saying, "Hey, if you have over a 720 credit score, you should be able to get the best rate possible at the time." And now, based on my current experience, before even starting my mortgage refinance process, the lender asked me straight up, "Hey, Sam, do you have a credit score of higher than 800?

Because that's the only way you're going to get the highest rate." So things have gotten much more difficult now. If you do qualify for a mortgage with less than a 760 credit score, your lender will likely be charging you about 0.125% to 0.75% more than if you had had a 76+ credit score.

So stop thinking that a credit score above 670 is good, according to FICO. It's really not that good. Just like how it's not good the average American has only a median net worth of about $87,000. I mean, look, if you retire with $87,000, well, that's not going to happen.

You're not going to retire with only $87,000 because you just can't live off that. Even with Social Security, it's going to be a really sparse existence. And it's just like the average American has never traveled abroad, doesn't speak a second language, is not in good shape, and will likely die younger than they're supposed to due to cardiovascular diseases and other things.

So being average or the median in America is not a great position to be in. You want to be far, far above average. We're experiencing this winner-take-all reality right now, where the people who are far above average are gaining most of the economic benefits. And to illustrate this point, there's a great graph in the Post about mortgage originations by credit score.

And you can clearly see folks with 760-plus credit scores have over half of all mortgage originations. And then if you look at the 720 to 759 category, that's about another 15% to 20%. So in other words, the people with over a 720 credit score account for about 70% to 75% of all mortgage originations.

You need a minimum of 620 to qualify for a government-backed loan by Fannie Mae and Freddie Mac. However, the government, in all its wisdom, allows people to qualify for a Federal Housing Administration mortgage with a credit score as low as 500 if you can make a down payment of at least 10%.

That is way too low in my opinion. When a downturn comes, borrowers who receive government-backed loans will likely suffer the highest default rates, partly because there's a history of poor credit, but also because the interest rate that they're getting is going to be much higher than everybody else. And what's going to happen is, just like in the past financial crisis, there's going to be a snowball effect, a negative effect, where the condo owner with poor credit score and just financial difficulties and living on the edge who got that loan is probably going to default first down the hall in your condo association.

And then that's going to cause other people to be afraid and maybe sell their property or lower their asking price. And it just gets worse and worse and worse until somehow the bottom is hit and people realize, "Hey, the prices of these properties are very attractive according to the rent they generate." I think it's very important for all of us to realize that owning a home is not a right.

Pre-2008, too many people who really couldn't afford to bought homes. While we can certainly blame lenders for lowering their credit standards and coming up with creative mortgages to entice unwary borrowers, we should also not shirk personal responsibility for our decisions. Nobody's pointing a gun to our head to buy an asset with debt and take on all that risk.

We need to read the fine print. We need to look at our finances, do some various scenario analysis, and look at worst case scenarios to see if we can actually afford a property. And if we don't do that, bad things could happen. So the easiest way to save homebuyers from potential loss and save the economy from potential catastrophe again is to not take out a mortgage until you have a credit score of 720 or higher instead of the current 620 or higher.

This way, if things go south, default rates won't increase as much as they would for borrowers with lower credit scores. Now 720, like I said, in the past, 2014 before then, 720 was pretty good. You're probably going to get a pretty good rate. But now, I'm telling you folks, it's 760 and probably 800 plus.

But to get to 800 plus, it takes time. It's not just about payment history, which is 35% of your credit score, the amounts owed, 30%. But length of credit history is about 15% determining factor of your credit score. So it's pretty much impossible to get an 800 credit score in your 20s and in your early 30s.

So what is a person supposed to do? Wait until their 40s and 50s to get an 800 plus? Probably not, right? Because life goes on. So I would say at least 720 credit score, if not 760 credit score, that is when you should consider, OK, you're financially ready to buy some property.

Since 2012, if you look at the data, the housing market has had a tremendous bull run. Some areas of the country like San Francisco, Seattle, San Diego, Los Angeles, Las Vegas, I think even DC, Boston, we're talking 50% to 80% appreciation in property prices since 2012. That's a lot.

That's a lot. So there should be no urgency to buy a home at near record high prices without the best mortgage terms. If you must buy now, you need to get the best terms possible. Otherwise, your risk is going up. If you lose your job, you change your mind, you get a divorce, whatever could happen, generally tends to happen if you're not prepared.

And you could be in a world of financial hurt if you do not get the best terms possible. It's really an interesting time for the housing market right now because you see the S&P 500 up 15% plus year to date. So that's great compared to history. You know, in 2018, not so great, down about 5.5%.

But this year we've rebounded. And in 2020, we're going to have the election year where we're going to get promised all sorts of goodies. And I've got to believe that the government and the Fed is going to do everything possible to try to make sure there is no hard landing in the economy.

Maybe the recession is short. There have been two to three month recessions. Yeah, maybe the stock market corrects 10%, 15%. But I believe that we are not going to experience the level of magnitude of suffering as we did during the previous financial crisis. So if you're looking for property buy right now, it is a, I think, magical window between now and the end of the year, maybe in January 2020, to look for deals.

Because I am seeing inventory go up. You're seeing a lot of good bargains on the high end. And it's always on the high end, the luxury side, where people don't really need a 5,000, 6,000 square foot mansion or McMansion. You know, it's really, there's a lot of deals there to be found.

Now the median price property in your area, it's obviously going to be a little bit more competitive. But even then, I still see opportunity. Thanks so much, everyone. It is back to the grind shortly. I do have some special news coming up in a following podcast in a post.

So stay tuned. And if you enjoy the podcast, I'd love a review because it'll help me keep on going. I read everything. And it's just a wonderful, wonderful to hear from all of you guys, whether in the review section or in the comment section of Financial Samurai.