Jobs and the Fed
Last week’s meeting of the Federal Reserve Board’s Open Market Committee was not so much about what they would do when they met. It was more about what they would say about the future. The two topics of interest were future interest rate hikes and selling off their stockpile of assets, which is comprised of bonds and home loans. Obviously, both of these topics might affect the direction of rates and are subject to change based upon the direction of the economy and any intervening factors.
The Fed does not meet again until September and that leaves more time to access the state of the economy. This week we have the first major data release since the meeting. The July jobs numbers are all important with regard to their decision-making process and we will also have the August jobs numbers released before they meet again. The preliminary growth estimate for the second quarter was released last Friday and these numbers will be revised at the end of this month.
Of course, we can’t predict what intervening factors might arise. In the past, we have had major world-wide economic, political and weather events which have affected the markets. And we certainly are not trying to predict the occurrence of a particular event. Whatever the Fed said, we are just pointing out that their statements are subject to change as the summer comes to a close in the next several weeks.
So, what does it take to get approved for a loan to buy a house this summer, whether you’re a first-timer or planning to move up or downsize? Maybe not all that you think. For most people, the key requirement is that you’ve got the right package of stuff — credit score, down payment, financial reserves, debt-to-income ratio — to get an acceptable grade from the automated underwriting systems, or “black boxes,” installed at the dominant investors in the market, Fannie Mae and Freddie Mac. Debt-to-income (DTI) ratios are a major factor hard-wired into the black boxes that refer to the ratio between your monthly credit-related expenses — including housing payments, credit cards, student loans and the like — and your monthly gross income. In an important policy change taking effect this summer, Fannie eased its reserve and down payment requirements for DTI’s in excess of 45 percent up to a maximum of 50 percent. Note that FHA uses its own proprietary underwriting system, which often yields more-generous decisions on approvals than Fannie’s or Freddie’s. Regarding credit, in June of this year the average FICO score for home-purchase loans at Fannie and Freddie was 754. That’s a big reach for millions of would-be buyers. But that’s not the whole picture. According to data compiled by Ellie Mae, a software and analytics firm that tracks loan characteristics, substantial percentages of applications are receiving approvals from Fannie and Freddie with lower FICO scores than you might imagine. Nearly 13 percent of their approved loans in June had scores between 650 and 699. FHA’s average score for home-purchase loans was 683, but many were much lower than this average. Down-payment requirements also are super-low at the moment. Fannie and Freddie both have programs that permit just 3 percent down with many state and local housing agencies providing grants and/or loans designed to ease the cash required even more. The bottom line? Get rid of preconceived notions you may have about how tough it is to get approved. Standards are more flexible and not as tough as you probably thought. Sources: Ken Harney, The Nation’s Housing, Fannie Mae and additional industry publications
About 23 percent of residential homes built for one to four families are now owned by investors, according to a study recently released by REAL Trends, Inc., and NEXZUS Publishing Group. The vast majority of those homes are not owned by institutional investors but rather individual investors or small investment groups. The Iceberg Report outlines the size of the single-family residential market, as well as uncovers trends in terms of demographics, attitudes, and behaviors of owners of single-family investment homes. It specifically looks at investor-owned houses and mobile homes, which total between 23 million and 24 million nationwide. The study found that institutional owners actually own fewer than 400,000 single-family residential homes, while nearly 8 million non-institutional investors own the rest. Most use a property management firm once they’ve accumulated more than four units. Additionally, the majority of single-family home investors use a real estate professional to help buy and sell properties. “The Iceberg Report confirms what we suspected,” says Steve Murray, president of REAL Trends. “More successful investors rely on professional real estate agents and leading property managers to help them find, manage, and profit from an increasingly mainstream asset: the standalone single-family residential house.” Source: RealTrendsA new consumer spending analysis from the National Association of Home Builders (NAHB) highlights another reason why home building helps drive a healthy economy: In their first year of ownership, new home buyers spend about $10,601 on appliances, furnishings and home improvement projects – 2.6 times as much as other home owners in a typical year. NAHB economists studied the U.S. Bureau of Labor Statistics Consumer Expenditure Survey to help quantify the wave of activity – and cash – spent to install new refrigerators, buy couches and make other improvements as new owners personalize their homes. “While construction jobs are the most obvious impact of new homes on the economy, it’s important to realize that it doesn’t stop there,” said NAHB Chairman Granger MacDonald, a home builder and developer in Kerrville, Texas. “It’s the architects, the heating technicians, the lumber suppliers. And it’s the mom-and-pop owners at the local furniture or appliance store who are helping these buyers make their house a home,” he said. During the first two years after closing on the house, a typical buyer of a newly built single-family home tends to spend on average $4,500 more than a similar non-moving home owner. Source: NAHB