Dean's Blog

If you were listening to the housing news last week, you probably heard a number of reports about lending changes that were announced by the Federal Housing Administration (FHA). While many of the news reports were confusing, the truth is pretty clear, and isn't as bad as some people may have heard.

Overall the measures are intended to help the FHA better manage its risks and strengthen its capital reserves, while still providing home loans to the nation. The good news, as FHA Commissioner David Stevens stated recently, is that "by continuing to provide affordable, responsible mortgage products, FHA will support the housing market's recovery" and "remain the largest source of home purchase financing for underserved communities."

What's Changing?

If you or someone you know is considering an FHA loan, some of these changes may affect you. Here's a clear, concise rundown of the major changes and what they mean:

1. Increased mortgage insurance: The mortgage insurance premium (referred to as private mortgage insurance by many people) will be increased from 1.75% to 2.25%. This change will add some cost to purchasing a home, but will not overburden consumers since the mortgage insurance is paid over the life of the loan, rather than upfront at closing.
2. New down payment and credit score requirements: According to the new policy, homebuyers who have a credit score of at least 580 may still be able to purchase a home with 3.5% down, but those with credit scores of less than 580 will be required to put down at least 10%. This change is designed to help the FHA balance its risk, while still providing affordable down payments for consumers with a history of good credit and responsibility. While 580 may be the minimum score allowed by FHA for a 3.5% down payment, lenders can always be more restrictive. Today, most lenders are requiring at least a 620 to 660 score for FHA financing.
3. Reduced seller concession: Basically, this change means that the person selling the home will now only be able to offer the homebuyer 3% to help defray closing costs, as opposed to 6% under the previous policy.

In addition to these changes, the new policies contain a series of new measures aimed at increasing lender enforcement.

These changes will become effective on April 5, 2010. The bottom line is that the changes will impact some homebuyers more than others. But in the end, the FHA is still committed to providing affordable home loans.

There's a good reason why buying a house now will cost you less than if you wait for later.

Some economists are calling for another 5% to 10% drop in housing prices, and this is causing many would-bebuyers of homes to hold off on their purchase. They're saying, "I don't want to buy now only to find out I could have got the house for less money later."

But there are several problems with that line of thinking:

1. Where is the bottom? - We won't know when house prices have bottomed until we have the data to show that home prices have moved up for several months in a row. By that time, the bottom is already gone. We may be there already. 
2. Seller motivation - When the market is distressed, you get a more motivated seller, which can result in a lower purchase price, financing incentives, both or even more. When the market is recovering and prices are moving up, sellers are less motivated and will not give as many concessions to buyers.
3. Interest rates - We've already discussed how the Federal Reserve is winding down its program to purchase Mortgage Backed Securities. When you remove that large purchaser of MBS, bond prices will fall and yields (interest rates) will go up. Data shows that this MBS purchase program has been keeping interest rates down below its normal market rate by about 1%.
4. The math - A buyer holding out for a 10% price drop could see those savings eaten up with just a 1% rise in interest rates.

A home buyer who buys today will find good prices, low interest rates, a potential tax credit and sellers who are motivated to negotiate.

Someone who waits for a "bottom" will actually miss it; they won't pay any less for the house than they would today, they'll pay more for their financing, they'll miss out on the tax credit, and they'll get less from the seller in their negotiations.

New tax assessments have been mailed, and people are worried about the value shown on the statement.

The questions I'm being asked right now are common for this time of year:

• Why is my house being assessed so high?
• Why is my house being assessed so low?

Many people are seeing their property values drop compared to their prior statement, but they're hearing in the news that home values are stabilizing.

Remember, county property assessments are based on data that can be up to 1.5 years old. So, the information they're seeing now may not represent today's true value. Also, realize that a tax assessment cannot be the final indicator of value for your home. It has often been common for homes to sell for more than its assessed value.

Last year, residents of Concrete received new assessments, and many saw an increase in values and higher property taxes. Those residents were confused why their assessed values went up when property values across the country were dropping.

Now, market values are stabilizing, but the assessments are reflecting last year's drop in value, which is causing some people to have the exact opposite concern - property owners are now concerned that their house is worth less. Of course, it's unlikely you'll find any property owner complaining to the assessor's office that their property is UNDER-valued and paying too little in taxes.

Take a look at the chart to see how the offset in timing can cause a disconnect in the understanding of market values as compared to assessed values.

For a more timely estimate on the value of your house, contact your local, professional Realtor^®.