With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
Building Materials and Other Costs of Home Building Rise
Steve starts off today's segment with Terry Story by talking about reports which implore new home buyers to “Act Now before prices go up!” Terry says she just heard about these warnings recently and discovered that they are related to a 25% increase in the cost of building materials over the past year. It turns out that lumber is in short supply due to a breakdown in a trade agreement between the US and Canada. But that's not the only factor driving new home building costs up. There has also been a tightening in the labor market, which is pushing wages up for construction and trades workers. Moreover, developed lots are disappearing and the cost of land is going up in many locales. All of these forces are conspiring to make new home building significantly pricier.
Mortgage Rates Rising or Holding Steady?
Many potential home buyers are also anxious about mortgage rates, wondering whether their rise will perhaps put their dreams of home ownership out of reach. But Steve and Terry have good news on this front: they believe mortgage rates probably will not go up very much in the next couple years. Steve points out that it's difficult to predict where interest rates are going. The Federal Reserve manipulates the overnight Fed Funds rate to steer inflation, credit markets, and the economy, and in the last decade, they have been attempting to prop up markets and the economy by maintaining extremely low rates. The Fed Funds rate has risen by 0.25 points three times in the past year and a half, and the Fed itself has indicated it will hike target rates two more times by the same amount this year.
Mortgages are actually tied to the 10-year Treasury note, which fluctuates based on a number of factors, most importantly inflation expectations. Buyers will want a higher yield if they anticipate inflation, which eats away at that yield. Ten-year Treasury yields have not moved up despite the increase in the Fed Funds rate, thus neither have mortgage rates. Steve argues that, as a potential home buyer, instead of following the Fed Funds rate, what you want to watch out for as the economy heats up are signs of inflation in other areas besides housing prices. That will signal impending rises in 10-year note yields and mortgage rates. It helps put things into perspective to remember that it wasn't so long ago—in the 1990s—that mortgage rates were around 7%, and this was considered affordable, which it was, at least in comparison to the double-digit rates in the 1980s. Rates today have a very long way to go before brushing up against 7%, which would require far higher inflation than we've seen in decades.
Thin Credit? Get Back On the Grid!
People who pay for everything with cash are at a major disadvantage when it comes to getting a bank mortgage. Banks make loans based on borrowers' credit history, which helps determine lending rates and other parameters of those loans. Those folks who refuse to use credit cards or other forms of borrowed (and re-paid) money are essentially invisible—“off the grid” as Steve puts it—and therefore are unknown risks to lenders. Most banks will simply balk at offering mortgages to thin-credit individuals. The irony is that many thin-credit individuals are probably in healthy financial shape and may be more responsible than others when it comes to managing their money.
Breaking out from thin-credit status to become someone whom lenders would be willing to work with is not terribly complicated. Opening credit cards and establishing a track record of both using and paying them down can provide a fairly quick fix. But even folks who can't abide the idea of credit cards have options: paying and documenting rent and other bills and ...