Homes Values vs. Purchasing Power

Home buyers seem to mainly focus on price. Yes, price (aka home values) is important. But purchasing power (derived from interest rates) is just as, if not more important than homes values. In fact, purchasing power has an effect on home values. And many (including me) argue that purchasing power is the most important part of not just the home buying decision process, but real estate in general.

If home values and purchasing power were your birthday cake, home values would be the cake part and purchasing power would be the frosting/icing. Personally, the frosting/icing is my favorite and most important part the cake – similar to how purchasing power should be an extremely important part of the equation for all home buyers and those looking to sell and “move up”.

Let’s look at a real life example of purchasing power and how it effects you…

Let’s say you are looking to spend no more than $1500 on your monthly mortgage payment (principal and interest only).

• At today’s average rate of 4.25 percent, you can get a loan up to $304,000
• 10 years ago, rates were at 7 percent which means you could get a loan up to $225,000
• 20 years ago, rates were at 9 percent which means you could get a loan up to $186,000

Quite the difference, isn’t it?!

If words don’t really do it for you, here’s a chart comparing home values vs. purchasing power since 1991 (courtesy of Dan Green, The Mortgage Reports)…

 

 

And don’t forget about how much of an effect interest rates have on your principal loan balance and equity…

The higher the interest rate, the more of your monthly payment goes toward interest and the less of a dent you make in your principal loan balance you owe. A higher interest rate equates to you building less equity in your house each time you make a payment than you would if you had a lower interest rate.

(Even if you’re not a frosting/icing person, I hope you’re starting to see how it’s not just about the cake)

BTW…No, I’m not trying to get you to buy a house because,”Now is a great time to buy!” (courtesy of you-know-who). I’m just saying that you need to take purchasing power into consideration when deciding whether buying a home or “moving up” is right for you or whether you should just continue renting or stay where you are.

Beazer Homes to Pay $50M to Victimized Home Buyers

I’ve warned homebuyers before, “Don’t get taken to to the cleaners by home builders and their lenders”. And here’s why: In order to avoid prosecution on criminal fraud conspiracy charges, Beazer Homes agrees to pay $50 million in restitution to homebuyers who were allegedly victimized by the builder’s mortgage company.

Beazer and its subsidiary, Beazer Mortgage Corp., admitted to engaging in several fraudulent mortgage origination practices, prosecutors said, including keeping discount points that should have been used to provide some homebuyers with a reduced interest rate.

Other homebuyers were told they were receiving a “gift” from a charity to cover their down payment when, in fact, the purchase price of the home they purchased was increased to offset the supposed “gift.”

Beazer also accepted responsibility for fraudulently circumventing HUD’s “Neighborhood Watch” and “Credit Watch” programs, and of instituting a strategy of “willful blindness” with regard to some stated-income loans, prosecutors said.

Beazer Homes said Wednesday that it also reached a settlement agreement with the Department of Housing and Urban Development and the civil division of the Department of Justice. The company also said several of its subsidiaries have entered into a settlement agreement with the North Carolina Real Estate Commission.

Despite the $50 million agreement, neither Beazer nor homebuyers may be out of the woods. Prosecutors are also accusing Beazer Homes of mortgage and accounting fraud. And sources say that Beazer may declare bankruptcy, which would put homebuyers at the bottom of the list for getting money once the builder’s assets are liquidated.

And if you think that Beazer was the only one doing this and you’re in the clear because you bought from different home builder, you may be in for a rude awakening. There have been several state and federal lawsuits over the past few years involving many other home builders, small and large and I’m willing to bet more will follow.

The more of the story?

If you don’t know exactly what you’re doing nor what pitfalls and shady practices to look out for, you can, and as in this case, will get taken to the cleaners. Hire a Buyer’s Agent who is familiar with new home builders (aka has done numerous new home builder transactions) and take them with you whenever you visit a new home builder’s sales center.

A Buyer’s Agent who knows the ins and outs of new home builders will help you avoid getting ripped off and keep you out of trouble. They will be able to tell you if the builder is telling the truth or feeding you lies or if their “special deal” is really a deal or just fluff (as was the case with Beazer). Your Buyer’s Agent will also be able to guide you through the builders gazillion page contract and addenda, mortgage/financing process, builder’s Design Center process, pre-drywall inspection, final inspection, settlement, etc.

What will your Buyer’s Agent cost you? Not a penny more than what you would pay if you did not have an agent – the builder has already built the commission into the sales price. And no – the builder will not refund or credit you that amount of commission if you don’t have an agent.

Additional sources: Inman News