Price vs Rate---Focusing on the right aspect

Where will home prices go in the future? In most markets in the US it is unlikely we will see any more radical deterioration in home prices. Data suggests flat or slighlty rising home prices on a natioanal scope with some markets going up and fewer going down.

I would suggest that a more important question to be asked is: Where will rates go? And that's really easy to answer...up. Rate increases will have a bigger effect on a buyer's ability to afford a home ( or not ) than where prices will go. So as we talk to potential buyers about what the future holds I will almost always focus on rates.

Why? For one simple reason. In order to offset an increase of 1% in an interest rate on a 30 year term loan a borrower's loan amount would have to drop by approximately 10% to keep the same approximate principle and interest payment. For almost every borrower,  payment, not the price is the major determinant in what to pay for a home. When I talk to borrowers they don't ask me what they should pay for a home they ask what payment the payment will be. Are they shopping price or rate?

Tax Time Advice--Watch those deductions

Well not exactly tax advice but a caution on how taking deductions can limit your ability to borrow later on.

As most self employed folks know conventional lending can be a challenge. Taking all the deductions you are allowed tends to limit your borrowing ability. Even though someone can be bringing in literally hundereds of thaousands of dollars a year if they follow the rules they can avoid paying taxes on that income. The issue is that these deductions are a "hit" to the borrower's income in an underwriter's eye. The solution is to limit your use of deductions ( yes pay the damn taxes, it's a quality problem to have ) so as to not box yourself out of the ability to borrow down the road.


For those that are W2 employees there is a tax deduction trap that many don't know about, 2106 unreimbursed employee expenses. Any of these deductions are looked at just like an ongoing debt obligation like a car payment, student loan or credit card payment. These can be a killer for a potential borrwer because they don't expect it to be a hit to income. As an example, I had a borrower take 43,000 miles in unreimbursed expenses at .55 a mile. The effect on the tax return was no doubt a positive one, Uncle Sam gave the borrower back every dime that had been taken in withholding. But...the underwriter hit them for $1182 a month for the "ongoing" obligation basically wiping out 1/2 of the income to qualify for a loan. Yes the underwriter gave back .22 a mile in their analysis but it was too great an obstacle to overcome.

The tax time advice?  You should be talking to your mortgage professional about the implications of taking ALL of your allowed deductions BEFORE you file. Once the IRS has your information it is set in stone.

Rates are going up, who cares?

As anticipated the Fed announced this last week that the facility used to purchase mortgage backed securities will be wound down at the end of this month. This along with a couple of other "manipulators" has kept rates in the 5% range since late November 2008.



Advice to potential buyers and refinancers, get em while they are hot or expect rates in the high 5%'s or low 6%'s. Not that I would suggest a potential client buy a home or refinance just because of a particular rate. I am not a mouthpiece for the National Association of Realtors and I don't believe anytime is a good time to buy a home.



The conversation that every potential borrower should have with themselves is the one that cannot be based on any perceived sense of the state of the market. A borrower's metrics should be based on their personal situation:

Can my household budget handle the potential costs of maintaining a home beyond the mortgage payment? After all, not being a renter means you pay for the water heater that goes out on Christmas eve.

Am I buying the home to live in or as an investment? If you are going to live in it then I would challenge the theory that it is an investment that will offer you any rate of return over a short period of time that could be perceived as investment grade.

Does the use of the tax credit make sense to my situation? It may surprise some to learn that a few borrowers look at getting $8000 in exchange for a $200,000 mortgage as a bad idea. Can't say I have very many arguments against that.



Those of us older than 30 know that rates now are historically low. Even at 6% or 6.5% they would still be classified the same. I would expect if rates were to spike in the next few weeks the pool of potential borrowers will dry up. At least until they reset their expectations of where rates are. At which point, they will come back.