"It was the best of times, it was worst of times,” wrote Charles Dickens in “A Tale of Two Cities.” It’s also an accurate description of the two housing markets right now. Buyers and sellers are entering the market and experiencing very different stories.
Times have been better — much better — for home sellers, considering the current slow market and low housing values. Factors such as high unemployment, the large inventory of houses for sale, and tighter qualification standards for mortgages have translated into a sluggish residential real estate market for several years. And though it’s likely to stay a buyers’ market for quite some time, as the economy improves, the market will accelerate.
That means for buyers, now is as good a time as any — especially for first-time homeowners. There are lots of houses for sale, and interest rates haven’t been this low in decades.
A decade from now, people are going to look back and realize that buying a home for late-1990s prices and paying for it with a mortgage locked at 4 percent was a once-in-a-lifetime opportunity.
“It’s a good time to lock into the home buying market,” says Madhu Kotta, senior vice president of investments and treasurer at Roma Bank. Since prices in central New Jersey have been stable compared to areas of the country that have been harder hit by the recession, people considering buying a home probably should not wait around for prices to get even lower.
“This region has not been affected like others. The price decline here wasn’t as bad as it was in areas like the south and southwest,” Kotta says. “I don’t anticipate any major correction in this area. I don’t foresee a slide or major change in housing prices.”
“One of the good things about central New Jersey is that it’s between New York and Philadelphia. That makes it a desirable place to live for people who work in those places,” Kotta says.
The fact that the area is a major employment center for biotech companies is also beneficial because it has kept the demand for housing higher here than in other areas.
As for mortgage rates, Kotta says that they are likely to remain in their current range. “They are going to be lower for quite some time. At least two years. I think they’ll stay between 4 and 4.5 percent until there’s a pick up in the economy.”
Roma Bank vice president of residential lending John Weber, who has been in the industry for 25 years — the last 10 at Roma Bank — says he has never seen lower mortgage interest rates. Currently, Roma is at 4 percent interest on a 30-year fixed-rate residential mortgage.
“Rates have been low for quite some time now,” says Weber. “We were starting at 6.5 percent or so in the late 1990s and early 2000s, and they came down between 2002 to 2006 when housing values were doubling in value. They’ve been in the fours and held there for the last two years.”
Weber says he expects the interest rates to remain at the current level until at least the end of this year. “There’s a lot of foreclosures and a lot of short sales. Until the inventory is cleared up, the rates are going to stay the same.”
He adds that for the market to get moving again, unemployment needs to decrease, and the excess housing inventory needs to stop depressing home values. “People will then go out and buy homes.”
Kotta agrees that unemployment and housing inventory are major factors for the sluggish housing market. He says the unemployment rate is actually higher than reported by the U.S. Department of Labor if you add together the official unemployment figures with those who have come off the rolls and are no longer being counted. “That level of unemployment takes a good chunk of people out of the market.”
Meanwhile, many of those who are employed aren’t inclined to make any kind of major financial move right now. “People with jobs are extremely nervous,” Kotta says. “There’s a lot of mixed data about where the market is going. For most individuals buying a house is a big investment. They’re worried that their employment is not going to be there.”
Also, the state of the market is such that renting a property can be cheaper than buying, Kotta says. “There’s a waiting game going on. People are waiting to see what happens when prices fall. Once they do, they will get into the market.”
According to Weber, if unemployment drops to 5 or 6 percent, “We are going to start seeing more demand for houses and interest rates will go up a little bit.”
The market is improving, Weber adds. “In the last few weeks we have done more volume and seen more purchases. We are also ahead of the numbers we were seeing at this time last year.”
In the interim, many homeowners are looking to lower payments or make improvements on their current homes instead of going out and buying a new one. “We’re seeing a lot of activity,” says Weber. “The majority of it is refinancing and buyers taking out home improvement loans or fixed lines of credit.”
For those who are ready to jump into the market, obtaining a low-rate mortgage shouldn’t be a problem as long as they have good credit. But people with blemishes on their credit may have a more difficult time than they would have had before the housing bubble burst. It is still possible for someone with minor credit problems to get a loan, but they will be paying a much higher interest rate.
“Underwriting standards have improved since 2008 and before,” says Kotta. “Banks are looking more closely at a buyer’s data, background, and how long they’ve been in their present job. They don’t want to take chances with a default.”
“If the person has any kind of credit difficulties in the past, it may be difficult for them to obtain a loan,” Kotta says.
One of the most common options for first-time home buyers and those with bad credit is a Federal Housing Administration (FHA) loan. Under the program, which originated as a result of the Great Depression in 1934, the FHA insures the loan, allowing approved lenders to offer mortgages to those who might not otherwise qualify for a conventional loan.
Under an FHA-insured loan, a buyer’s downpayment can be as low as 3.5 percent of the purchase price, and most of the closing costs and fees can be included in the loan. An FHA loan also offers a lower interest rates — often under 4 percent.
But not all lenders offer FHA loans, and they do come with restrictions. For example, there’s a maximum limit that a buyer can borrow, based on geographical location — the maximum amount someone buying a single-family home in Mercer County can borrow is currently $440,000.
FHA also places significant restrictions on loans for condominium units. In order to obtain a loan for a condo, the building’s homeowner’s association must obtain an approval, which lasts two years, from the agency.
Criteria for FHA approval can be difficult. The agency requires that a building be 50 percent owner occupied, no more than 10 percent of the units be owned by one investor or entity, no more than 15 percent of the units be 30 days past due on their monthly fees, and that at least 10 percent of the association budget be set aside for capital expenditures and deferred maintenance.
Another financing option is Fannie Mae’s HomePath Mortgage, which allows a borrower to purchase a Fannie Mae-owned property with a low down payment (at least 3 percent), flexible mortgage terms, and no lender-requested appraisal. Interest rates can be slightly higher than FHA or conventional loans, but mortgage insurance is not required.
Anyone looking for information on HomePath loans, to look for homes, or to find Homepath Mortgage lenders, should go to www.homepath.com.
First-time home buyers can also look into programs offered by the state Housing and Mortgage Finance Agency. Buyers who meet the first-time buyer program’s income requirements can obtain a 30-year mortgage for 3.75 percent with zero points.
Downpayments of as little as 3.5 percent are required and must come from the borrower’s own assets. Certain closing costs can be gifted by family members, non-profit organizations, or government agencies.
The maximum income limit in Mercer County is $95,700 for a one or two-person household, and $110,055 for a household of three people or more. In Middlesex and Somerset the limits are $105,000 for a one or two-person household, and $120,750 for three or more.
The NJHMA’s Smart Start is another program available to those participating in the agency’s first time homebuyer program that are buying a property in a state-designated smart growth area.
The program offers a second mortgage on the property — up to 4 percent of the first mortgage — to be used for downpayment and closing costs.
For more information on the first time buyer program, Smart Start, and other programs offered by the NJHMFA, go to www.state.nj.us/dca/hmfa or call 1-800-NJHouse.
The experts agree that if someone is inclined to buy, they should make a move now.
“There are some unique things happening that people should be aware of and take advantage of,” says Bob Walters, Quicken Loans chief economist, in an interview this month.
“One is mortgage interest rates are at 50-year lows. In the modern era, mortgage interest rates have never been lower than where they are right now. Secondly, home prices, as people well know, have dropped dramatically in many areas, and that affords people who are buying those homes to get a deal they might not have been able to get in the past.”
“When you take low home prices and record low interest rates,” adds Walters, “you really find a climate where home affordability is at its highest level that it’s been in years.”