This Blog Is 10 Years Old Today: What’s Different Today in the Mortgage Industry?

July 28, 2016 2 Comments »
This Blog Is 10 Years Old Today: What’s Different Today in the Mortgage Industry?

A week or so ago, I was scanning through my archived posts and it occurred to me that my blog’s 10-year anniversary was just days away.

I found the first post I wrote and laughed a bit as I read it, thinking how naïve and young I was at the time. I was in my mid-20s, working for a wholesale mortgage lender and pondering a home purchase.

But property values were sky-high at the time and I was aware of that. I couldn’t wrap my head around buying a place at those prices. And in hindsight, I’m glad I didn’t.

I know a lot of people who did buy back then, and many no longer own their homes, while some actually stuck it through and are now sitting fairly pretty.

Those Who Held On Since 2006 Are Doing Fine

As mentioned last week, time tends to heal all real estate wounds. Even if you buy at a particularly bad time, if you hold onto your property and pay down your mortgage, you’ll likely come out ahead.

The problem 10 years ago was that the mortgages tied to those expensive properties weren’t sustainable. Many borrowers couldn’t afford to hold them beyond their first rate reset, which may have come in just six months’ time.

But for those with a fixed-rate mortgage, or the income to endure the ups and downs, it was possible to ride out the storm and wind up in a decent equity position.

Let’s pretend someone purchased a home back in July 2006, when home prices peaked, for around $650,000. Today, prices might be closer to $750,000, thanks to rapid appreciation over the past several years.

Sure, that same property may have fallen as low as $450,000 at some point in time over the past decade, but things have corrected big time.

For sake of simplicity, we will assume they took out a 30-year fixed at a rate of 6.76%, the average for July 2006 per Freddie Mac data.

If they put 20% down, that would leave them with a starting loan amount of $520,000. The monthly payment on that loan at 6.75% would be a whopping $3,372.71 per month.

Had they held the loan for 10 years, the balance would be whittled down to roughly $444,000. Assuming prices today are closer to $750,000, they’d have over $300,000 in home equity. Not too bad for buying at the height of the market.

Chances are they would have refinanced too, to a lower rate, so they’d be in pretty good shape, even if some years were especially brutal.

Rates Were Nearly Double 10 Years Ago

2006 rates

Today, mortgage rates are nearly half what they were a decade ago. Using Freddie Mac data, the 30-year fixed has fallen from 6.76% in July 2006 to 3.48% today.

That’s very close to double, and might explain why home buyers are snapping up properties left and right at the moment.

If you factor in inflation since 2006, home prices are actually pretty flat. Using a CPI calculator, a $650,000 home purchase in 2006 is equivalent to buying a $777,000 home today.

The difference is that you get an interest rate that is nearly half what it was back then. That seems like a pretty good deal, even if it all feels a bit frothy given the massive gains recently.

Mortgages Are Boring Now

So we know home prices are reasonable, and interest rates are super cheap, and to make matters even better, mortgages are ultra-boring these days.

When I was working for a lender in the early 2000s, it was more common to originate an option arm than it was a 30-year fixed. If it wasn’t an option arm, there’s a good chance it was some kind of adjustable-rate mortgage.

It likely wasn’t a 15-year fixed, and if it was a 30-year fixed, it may very well have been interest-only as well.

Today, most mortgages are fully-amortized 30-year and 15-year fixed mortgages, meaning borrowers are paying down their mortgages and enjoying payments that never change over the course of the loan.

This makes the situation even better for everyone because we shouldn’t see a deluge of foreclosures anytime soon due to unsustainable mortgage payments.

To sum it up, relatively flat home prices, rock bottom rates, and plain vanilla mortgages. Sounds good.

What We Should Worry About Over the Next 10 Years

While the current situation looks pretty solid on paper, home prices have increased dramatically, and without the availability of ultra-low mortgage rates, we could face some serious affordability issues.

Heck, folks are already having trouble affording homes in certain hotspots throughout the country, even if they’re making money hand over fist.

Another big problem developing is the lack of a down payment, which was one of the major catalysts during the prior crisis. No skin in the game.

We aren’t quite at zero down nationwide again, but there are many more low-down payment options available today than there were a year ago.

Today, we’ve got plenty of 3% down options at our disposal via programs like Bank of America’s Affordable Loan Solution and the Wells Fargo yourFirstMortgage.

If 3% down is still too much for you, you can now take advantage of 1% down programs from Guaranteed Rate and United Wholesale Mortgage.

Or if you don’t want to provide any down payment at all, you can go with BancorpSouth, Fifth Third, or simply take out a USDA loan.

Of course, the payment (and interest rate) will be higher if you put nothing down. But there is at least one company willing to split the down payment with you in order to keep your LTV at 80% or less.

Things could get ugly again if higher and higher home prices force lenders to come up with the creative financing of old, especially if inventory rises at the same time. But I don’t think we’re there just yet.

Looking back over the past 10 years, a lot has changed and a lot has remained the same. We went through one of the worst crises in recent history but came out stronger, as we usually do.

For those who stuck it through, they should be back above water and in a good equity position.

Those who sold (by necessity or by choice) and are working to get back in the housing market might find themselves in the unfortunate position of buying nearer to the top, again. But at least they’ll get a really low mortgage rate this time around.

It’s hard to say what the future will hold, or how the next decade will play out. But when I read my first post, it feels like we’re facing the same problems again, just without the bad mortgages. In place of exotic financing features are interest rates at 50% off.

What goes down must come up, right? What happens when rates rise? Are we destined to repeat history or will we get it right this time around? Maybe there is no right and wrong. Maybe it’s all cyclical and booms and busts are just a part of life.

Perhaps it doesn’t matter if you don’t speculate and just buy a home you can genuinely afford that you also truly love.

2 Comments

  1. LeoL July 29, 2016 at 5:16 am -

    Congrats and thanks! I learned so much through your blog and it helped me immensely in purchasing my first home. The information and perspective you provide are invaluable. Please keep writing.

  2. Colin Robertson August 2, 2016 at 8:47 am -

    Thanks LeoL, appreciate it!

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