#housingmarket

Since most people finance their home purchases, buying a home usually involves applying for a mortgage.  Here is some basic information to help guide you through the process.

Mortgage prequalification vs. preapproval

Before applying for a mortgage, you’ll want to shop around and compare the mortgage rates and terms that various lenders offer. We can provide some referrals if you need one. When you find the right lender, find out how you can prequalify or get preapproval for a loan. Prequalifying gives you the lender’s estimate of how much you can borrow and in many cases can be done over the phone, usually at no cost. Prequalification does not guarantee that the lender will grant you a loan, but it can give you a rough idea of where you stand. If you’re serious about buying, however, you’ll probably want to get preapproved for a loan. Preapproval is when the lender, after verifying your income and performing a credit check, lets you know exactly how much you can borrow. This involves completing an application, revealing your financial information, and paying a fee.

Generally, if you’re applying for a conventional mortgage, your monthly housing expenses (mortgage principal and interest, real estate taxes, and homeowners’ insurance) should not exceed 28% of your gross monthly income. In addition, most mortgages require borrowers to have a debt-to-income ratio that is less than or equal to 43%. That means that you should be spending no more than 43% of your gross monthly income on longer-term debt payments.

It’s important to note that the mortgage you qualify for or are approved for is not always what you can actually afford. Before signing any loan paperwork, take an honest look at your lifestyle, standard of living, and spending habits to make sure that your mortgage payment won’t be beyond your means.

Before you apply

Do some homework before you apply for a mortgage. Think about the type of home you want, what your budget will allow, and the type of mortgage you might want to apply for. Obtain a copy of your credit report, and make sure it’s accurate; you’ll want to dispute any erroneous information and     quickly correct it. Be prepared to answer any questions that a lender might have of you, and be open and straightforward about your circumstances.

What you’ll need when you apply

When you apply for a mortgage, the lender will want a lot of information about you (and, at some point, about the house you’ll buy) to determine your loan eligibility. Some of the information you’ll need to provide:

• The name and address of your bank, your account numbers, and statements for the past three months;
• Investment statements for the past three months;
• Pay stubs, W-2 withholding forms, or other proof of employment and income;
• Balance sheets and tax returns, if you’re self-employed;
• Information on consumer debt (account numbers and amounts due); and
• Divorce settlement papers, if applicable.

You’ll sign authorizations that allow the lender to verify your income and bank accounts, and to obtain a copy of your credit report. If you’ve already made an offer on a home, you’ll need to give the lender a purchase contract and a receipt for any good-faith deposit that you might have given the seller.

Types of mortgages

Like homes themselves, mortgage come in many sizes and types.  The type of mortgage that’s right for you depends on many factors, such as your tolerance for risk and how long you expect to stay in your home.  The following are some of the more popular types of mortgages available:

• Conventional fixed rate mortgages
• Adjustable-rate mortgages (ARM)
• Government mortgages (e.g., FHA or VA mortgage loans)
• Hybrid adjustable-rate mortgages (ARM)
• Jumbo loans

Finalizing the application

As your mortgage application is processed and finalized, your lender is required by law to give you a Loan Estimate within three business days of receiving your application. The Loan Estimate is a form that spells out important information about the loan you applied for, such as the estimated interest rate, monthly payments, and total closing costs for the loan.

Financial planning is important at all stages of life, and we are here to assist you, whether it is about buying a home, starting a business, or retiring. Feel free to contact us for a complimentary consultation at financialplanning@bfsg.com.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Steven Yamshon, Ph.D., Managing Principal

Balboa Island is a coastal community located in Newport Beach, California, that is popular among tourists, vacationers, and full-time residents. Prior to development in 1921, Balboa Island was a swamp with large wetlands being removed to make way for Newport Harbor. Developers dredged millions of tons of silt and sand out of the muddy patches to facilitate a man-made bay.

Since Balboa Island is barely 3 feet above sea level, it could be affected by rising ocean levels caused by high tides, storm surges, flooding, and liquidfaction. If climatologists’ projections prove to be correct, sea levels could rise between 2 and 7 feet within 100 years, although a precise measurement is impossible to predict. A rise in seawater of this magnitude would lead to property destruction, a lack of ingress and egress access points, and a declaration of abandoned land.

A long-term change in the Earth’s temperature causes ocean water to expand. Scientific studies have shown that increasing temperatures lead to a melting of ice sheets on glaciers in Greenland and Antarctica. This melting of ice adds new water to the oceans, increasing its volume. According to the United States Environmental Protection Agency, approximately 1 to 2 inches of the increase in sea levels is due to glacier melt flowing into the oceans, with another 2 to 4 inches due to the expansion of ocean water that results from warmer ocean temperatures.

At present, sea levels are rising at the rate of an inch per decade, with the rate of the rise doubling during the past three decades. This would eventually be catastrophic for businesses, residences, and tourism on Balboa Island and in other beach or low-lying areas. The risk map from Climate Central illustrates the areas that would be subject to coastal flooding.

Although the majority of the land area within the Newport Beach city limits would be spared, all beaches, Balboa Island, Balboa Peninsula, Back Bay, Lido Isle, and Pacific Coast Highway may not be usable in their current forms or locations if mitigation and adaption measures are not taken.

Knowing that the sea level will likely rise and that coastal areas will experience heavy flooding at the very least, does it make sense to buy expensive coastal property?

References:

Balica, S. et al. (2012). A flood vulnerability index for coastal cites and its use in assessing climate change impacts. Natural Hazards. Vol. 64, 73-75.

Bird, E. (1993). Submerging Coasts. New York: Wiley.

Brown, L. (2011). World on edge: How to prevent economic and environmental collapse. New York: W.W. Norton.

Church, J.A., et al. (2010). Understanding sea level rise and variability. Oxford, UK: Wiley.

Domingues, C.M. (2008). Improved estimates of upper ocean warming and multi-decade sea level rise. Nature, Volume 453 (7198), 1090-1093.

Kopp, R.E., et al. (2009). Probabilistic assessment of sea level rising during the last interglacial age. Nature. Vol. 462 (7275). Pp 863-867.

National Oceanic Atmospheric Administration. (2018). Sea Rise Estimates, Coastal Data Digital Tool. Retrieved on May 27, 2020. https://coast.noaa.gov/digitalcoast/

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The title might take many of you by surprise and this topic is not to discourage homeownership but is more geared to explaining why your home (and possibly other properties) may not be the best investment or why your home should not be viewed as an investment.

The primary focus of this article will be on your primary residence and not on rental properties. We are also going to assume that this is just an average community without any additional factors such as a gold rush, or a green rush, or an establishment as the next Silicon Valley. In those circumstances, real estate can outpace the national average. Do not forget the three things that matter in real estate is location, location, location!

The ability to use leverage (borrow money from the bank) is what attracts people to invest in real estate. When you buy the home you only have to put down 20% or less in some cases and the bank gives you a loan to pay on over the next 30 years (or whatever term you select). For example, purchasing a home for $500,000 in a traditional scenario requires 20% down ($100,000) and the bank provides a loan over 30 years for $400,000. With rates near historic lows (2.75%) the payment for this 30-year loan is about $2,041 per month.

The downside to using leverage is that it has a cost. Looking at the loan above ($400,000 loan at 2.75% interest for 30 years) you would pay over $187,000 in interest over the life of the loan! To put this another way, instead of buying the home at $500,000 you are paying $687,000 for the home ($500k purchase price + $187k interest paid). Owning a home is expensive and has many additional costs besides the loan. With a home, you have to pay property taxes, homeowner insurance, repairs, and potentially other costs like homeowner’s association (HOA) or mortgage insurance if your down payment is less than 20%. Below are the estimated costs for a $500,000 home in Orange County:

What we see is that the true cost of homeownership is much higher than we realize. The example above does not take into account any upgrades or repairs and maintenance the home may need as well. With the costs for owning a home so high, this lowers the actual investment return of the home.

We all know that home prices go up over time, but many people are not aware that the primary driver for the increase in home prices has been inflation.  If you look at the chart below, it shows since March 1999 until now real estate home prices (1) have grown 131.37% and stocks (2) have grown 342.27%.

Another factor that needs to be considered when looking into real estate as an investment is liquidity. Other investments like the equity and bond markets provide liquidity and you can have access to your money quickly. For real estate, this is not necessarily the case and it can be difficult to get your money back. If major employers move out of the area, you cannot quickly sell your home before home prices drastically shift downward.

Please understand we are not telling you to not buy a home. Homeownership is one of the biggest accomplishments one can achieve and provides security and stability for you and your family. We just caution against considering your primary residence to be considered an investment like many people recommend. Real estate is good as part of an overall portfolio but can be done in many ways in a more liquid manner. Please feel free to contact us to discuss how this article impacts your circumstances.

1. U.S. Existing-Home Sales, National Association of Realtors (www.nar.realtor.com)
2. The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.

Disclosure:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Benefit Financial Services Group (“BFSG”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BFSG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BFSG is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BFSG’s current written disclosure Brochure discussing our advisory services and fees is available upon request

BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

So far 2020 has not impacted the current home buying boom and it does not appear to be slowing down. The National Association of Realtors reported that existing-home sales grew nearly 21% from one year ago and homes sold faster in September than what we normally see during this season as low-interest rates drove pent-up buyer demand.⁽¹⁾

Forbes magazine reports housing is in a “full-fledged boom”. Last quarter saw $1.1 trillion in mortgages issued, the most in 14 years, while in September, the number of people buying new homes hit a 14-year high!⁽²⁾

In addition, residential construction spending went up 2.8% in September, to a level 10.1% higher than a year ago. These new homes should soon begin to relieve the inventory shortage many markets are experiencing.⁽³⁾ Part of what is driving this trend is the number of young buyers (under age 35) entering the market. Looking at the chart below we can see they left the market after the 2008 crisis but since 2018 that trend has begun to reverse. Given record low inventory and increasing demand the housing market is currently looking very strong.

1. Source:  National Association of Realtors (https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales).
2. Source:  Forbes (https://www.forbes.com/sites/stephenmcbride1/2020/10/29/american-housing-is-in-a-full-fledged-boom/?sh=7ae6e09d3df9).
3. Source:  U.S. Census Bureau (https://www.census.gov/construction/c30/pdf/release.pdf).