Low mortgage rates help home buyers — if they can qualify
PHILADELPHIA — More space and nearness to family were the main motivations behind Jamie and Alan Rhode’s decision to move from their apartment in Philadelphia’s Fairmount neighborhood to the Plymouth Meeting area. The Rhodes, who both work in finance, planned to rent outside the city for a year or two before buying a house. Then mortgage rates continued to fall.
“We definitely wanted to buy and take advantage of the opportunity with the low rates,” Jamie Rhode said. They are on a month-to-month lease while they look for the right house.
“We thought it would be a great time — that we might not see in the next generation or so — to buy,” Alan said.
The national average 30-year fixed mortgage rate fell to 2.98% in midJune, the lowest level since Freddie Mac, the federally chartered mortgage investor, began tracking rates in 1971. The average rate ticked up slightly to 3.01% last week. The Industry forecasts expect the average rate to hover at or just above 3% through the end of the year.
At the same time, economic uncertainty during the pandemic has led banks to tighten their lending standards. The supply of mortgage credit has fallen by more than 30% from February to June, according to the Mortgage Bankers Association’s measure of how easy it is to get a home loan.
So historically low mortgage rates make now an attractive time for potential buyers of means with stable jobs, but qualifying for a mortgage has become more difficult for lower-income households.
Darlene Meekins, a Realtor with Realty Mark Associates, based in Montgomery County, Pa., said the raising of minimum credit scores by 100 points — a move she’s seen some lenders make — “really makes a difference as far as someone in the low to moderate range qualifying.”
“Because of the (stricter) qualifications, some people are struggling to meet those,” said Meekins, president of the Philadelphia metropolitan chapter of the National Association of Real Estate Brokers, a group of mostly Black real estate agents whose mission is ensuring fair housing and promoting homeownership for people of color.
On top of stricter lending standards, housing inventory has stayed low, restricting choices for buyers, helping to drive up home prices, and fueling bidding wars. Some renters who want to take advantage of low mortgage rates and were close to buying a home will put those plans on hold because of income lost during the pandemic.
But for those who qualify for mortgages, low rates help counteract rising home prices and boost purchasing power. In the first quarter of 2020, when the 30-year fixed mortgage rate was 3.57%, the average national monthly mortgage payment with a 20% down payment was $995, according to the National Association of Realtors. That’s down from a $1,048 average monthly payment a year ago, for savings of $636 annually and roughly $19,000 over the 30-year life of the loan.
Borrowers with lower credit scores can still qualify for some loans. Mortgage advisers and housing advocates recommend buyers talk to a variety of lenders to find the best loan and rate for their situation. Rates can vary widely.
Affordable Housing Centers of Pennsylvania, which aims to increase housing opportunities for low- and moderate-income households and communities of color, is warning clients about the tighter credit requirements. Before the pandemic, several lenders required a minimum score of 580 for Federal Housing Administration loans with down payments of 3.5%, said Kenneth Bigos, the nonprofit’s executive director. Those same lenders are now requiring a minimum of 640, he said.
The scores of most of the organization’s clients hover right around this figure.
“You want to be a wellqualified buyer in this market,” said Jeff Ruben, president of WSFS Mortgage, “because demand is so high, and supply is so low.”
Ruben said lenders have to be cautious in the face of economic uncertainty, which is why outside of government-sponsored loans, “the loans that we’re making today are subject to a much tighter standard” than ever before. In addition to raising minimum credit scores, WSFS and other lenders have less tolerance for debt relative to a buyer’s income.
“As an industry, we just start tightening to make sure we’re only capturing the very, very best, and the most likely to succeed,” Ruben said. You would have to be living under a rock to be unaware of the intensity and divide politics are currently having on our culture and communities. Everything has become political — even wearing or not wearing a mask is taken as a political statement. However, to answer the above question you should not make changes due to election-year politics. Not if you are already invested according to your goals, aversion to risk, income, liquidity needs and any other factors to be considered. The inevitable questions are should I put all my money into cash? Should I put all my money in gold? No one has a crystal ball and predictions of black swan events are less accurate than a stopped watch. If we use historical market data, then the answer is a resounding no. The Stock Trader’s Almanac informs us that since 1833 the Dow Jones Industrial Average (DJIA) has an average return of 10.4% the year before an presidential election, a 6% return the year of the election, 2.5% the first year of a new term and 4.2% in year two. Of course, those are averaging returns over 187 years, but these numbers should not instill fear. Since 1952, the DJIA returns have averaged 10.1% when a sitting president is running for reelection. The same period shows a -1.6% decline during election years with an open field. Popular thought amongst economists is that there is less uncertainty with the incumbent because they are signaling their tax and regulatory policies which influence the markets (source: Stock Market Almanac). This is more important than the color of their party flag. Markets like certainty and dislike uncertainty. Something more telling is whether we have divided or united government. InvesTech provides us with numbers of three differing scenarios dating back to 1928. When one party controls the White House and both houses of Congress the S&P 500 averaged a 16.9% return. When one party controls both houses of Congress and the opposite party the White House, returns drop slightly to 15.6%. When the House and Senate are divided the returns drop to 5.5% suggesting gridlock in the Congress does not benefit investors. Goldman Sachs research team reports that S&P 500 returns over the three months prior has been one of the most accurate election predictors. Since 1928, in 20 out of 23 election years the presidential incumbent has won when the market was up for the three months prior to the election. That is an 87% accuracy rate! Game on in September. The bottom line for a long-term investor is to have a plan and stay the course. Meet with your advisor regularly and keep your plan on track making the necessary adjustments as your personal financial situation dictates. So please take the emotion out of your decisions and vote in November. Until we talk again, be well.
Dale Immekus is the owner of Dedicated Financial Services and an accredited wealth management advisor. Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered brokerdealer and investment advisor. Member FINRA/SIPC. Dedicated Financial & Insurance Services and IFG are unaffiliated entities.