TheMReport — News and strategies for the evolving mortgage marketplace.
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FEATURE TH E M R EP O RT | 23 T he mortgage industry has always touted the long-term financial benefits of home ownership for consumers, including tax deductions, increased access to credit and banking products, and, more qualitatively, the pride of owning one's own property. Historically, the pitch to consumers has centered on the premise that it is wiser to pay toward your own mortgage instead of someone else's. Why fund someone else's financial future when you could fund your own? More than that, by paying down their mortgages, homeowners can build equity and grow their investments over time. But does the traditional math still add up when it comes to renting versus buying? Today's market still enjoys historically low rates, but the industry is now seeing prices steadily rising and the supply of starter homes gradually shrinking. For post-Recession buyers, this is great news, as their investments are returning additional value. For those still on the fence about whether to continue renting or take the step and buy, however, they need to work with lenders who can properly guide them towards making smarter financial decisions that fit with their long- term goals. Same Equation, New Considerations I n some markets, we are already seeing a decreasing supply of starter homes dramatically driving up rent prices, and this trend is expected to continue over the next couple years. Builders are struggling to keep up with current demand, and due to the impact of recent natural disasters, construction workers and building managers alike are spread thin across the country. While the number of new building permit applications does indicate an increase in supply next year, it is unlikely that it will be able to adequately keep up with demand. That will put increasing pressure on landlords to raise rent prices as potential homebuyers are priced out of the market. At the same time, the bulk of potential borrowers today are millennials. One of the young - est generations impacted by the Great Recession and the 2008 housing crisis, its members are, on average, already highly lever - aged due to student loan debt and are typically already in their second or third job coming out of college. With the bulk of their money going towards student loan payments and rent, they are less likely to have the ability to save for a down payment on a starter home. This same group has also focused on moving to areas with lower costs of living (though this is quickly changing as cities like Atlanta, Denver, and Seattle are all expected to see a sharp cost of living increase in 2018), which could hinder their efforts to land more high-paying jobs. Likewise, those who have moved back in with their families are actually more likely to save for a down payment, but they may not be in a career or job with a wage that facilitates a dramatic increase in savings. Couple this with wages that have not kept up with the rate of inflation over the previous decades and the difficulties young borrowers face when entering the housing market today become clear. Much of the traditional advice that lenders offer renters looking to buy a home still applies today. Do they plan to move within the next three to five years? Do they have the savings to cover a down payment and credit to qualify for a mortgage? Most importantly, how do home and rent prices compare within that specific market? If the borrower is facing sky-high rent prices that are increasing each year, a mortgage often makes more financial sense, but if they live in an area with a high cost of living, qualifying for the mortgage could be out of reach. These questions are all vital to a borrower's mortgage decision, but in today's industry, lenders must look beyond simply converting borrowers into renters. Instead, they must focus on helping consumers make more informed, financially sound decisions with a smarter mortgage as the catalyst to a lifetime of financial responsibility. Approaching consumers as a mortgage mentor creates a meaningful borrower-lender relationship that will drive repeat and referral business even if the borrower does not initially buy. Timing Is Everything A nother area of focus to better communicate to borrowers is the long-term costs of waiting. Given their economic experiences to date, many homebuyers are simply more selective in their timing for when they buy a home, which, in this market, tends to equate with a rise in prices as the homebuyer conducts their search. The simple truth of the matter is that waiting to purchase a home can have a major impact on any individual's or family's long-term ability to finance a home—something that lenders can help them better comprehend. For example, according to the Mortgage Bankers Association (MBA), at the end of Q 3 2017, a median-priced home would cost a family around $260,000, a 7.1 percent increase from the previous quarter. Factor in a 4 percent interest rate with a 20 percent down payment on a 30-year conventional loan and a family would likely have a monthly mortgage payment of $993, or pay $357,480 over the full course of their loan (not including mortgage insurance, taxes or other fees). If that family waits one year to purchase the same median-priced home, the MBA predicts that the median price of their new home will rise 4.5 percent. So, assuming interest rates also rise a nominal quarter of a percentile, then that family with a 20 percent down payment on 30-year conventional loan would probably have a monthly payment of $1,066, or pay $383,760. That's an additional $26,000, all because the family waited one additional year. Not only does the cost of wait- ing put the borrower in a tougher financial position when making a down payment, it also prolongs their journey towards achieving other life goals, whether that's starting a family, achieving debt- free homeownership, or saving for retirement. Some may view $26,000 as a drop in the bucket, but in a nation where more than 30 percent of Americans have no cash reserves and are living pay - check-to-paycheck, that represents real money for almost everyone, especially first-time homebuyers at or near the front end of their earning years. Today's market presents a unique opportunity for lenders to move beyond their sales role to position themselves as trusted financial advisors to the borrowers that they serve. Regardless of overall costs, if a home purchase does not support a borrower's long-term financial goals, then now may not be the best time to buy. And for those borrowers, there is a need to work with a mortgage professional who can mentor them through the process and help them establish a smarter mortgage plan. If done properly, this will set the lender up as a lifelong resource for the borrower who will return time and again. JIM MCQUAIG is manager of Churchill Mortgage's Herndon, Virginia branch. A full-service and financially sound leader in the mortgage industry, the company provides conventional, FHA, VA, and USDA residential mortgages across 44 states.