The Dreaded Question, Part II

Originally posted on cuinsight.com.

Guest post written by Dan Green, Executive Vice President, Marketing, Mortgage Cadence, LLC

Mortgage Cadence, LLC is the NAFCU Services Preferred Partner for Mortgage Processing and Fulfillment Services.

In a recent blog post, I posed the “dreaded question”: Where do homebuyers come from? Quick review. They come from three places: non-owner/non-renters (NONRs), renters, and current homeowners. First-time homebuyers emerge from the first two categories while those interested in buying a different or another home come from the third. Pretty obvious, really, though the “dreaded question” is worth contemplating. We have been so focused on refinancing existing loans for the past several years, and now that it is coming to an end, it’s time to make way for those who should, for many reasons, be buying homes. The market has shifted its focus, and it’s time for us to shift our thinking.

They are not, however, buying homes—not first-timers or repeaters—though they should be. While the reasons the housing market has not yet rebounded since the end of the refinance boom are the same for both first-timers and repeaters, we’ll concentrate on the first-timers.

Why should they be buying? Those of us in the mortgage business know the answers. While off its peak, housing has never been so affordable. The average would-be homeowner earning the median income has about 1.7 times the wages necessary to make their mortgage payment. Although homes were more affordable during the depths of the recession, the situation has never been this good. Buying a home is a relative bargain.

Rates remain at historic lows, too. Horror of all horrors, they reached 4.50% this summer, causing a hue and cry over how HIGH rates had gotten in such a short span of time. Admittedly, 4.50% is not 3.50%, yet here, too, the last time rates were in the fours neither John, Paul, George, nor Ringo had professed their fervent desire to hold our hands, radios and televisions had tubes, and Lawrence Welk was hot. The hysteria over rising rates is just that. No whining until we see 8.00%. That’s about 400 basis points in the distance. Rates remain low, very low.

Homes are affordable. Rates are low. Why isn’t the purchase market booming? Two obvious answers. First is the employment picture. People remain concerned about jobs despite evidence to the contrary. Unemployment continues its decline though it has been a long, slow slog to improvement. For some things, people have long memories. Employment, or more importantly, unemployment, is one of those things. Lack of job confidence keeps would-be homeowners on the sidelines.

Second, and this affects first-time buyers directly, is student loan debt. While the median wage earner theoretically has 1.7 times the earnings to make a mortgage payment, they may not actually have the money due to other debt. Although not a criticism of higher education finance, this is a long-term factor that will likely affect the housing market for the foreseeable future.

The first two reasons are real, much talked about, and well-documented. And they’ll both resolve with time. There is a third, less obvious reason first-timers have yet to take the plunge: they don’t understand why they should. We, mortgage lenders, are not educating would-be homeowners on the benefits of owning versus renting. We are educating them on all sorts of important stuff, but much of it is geeky esoteric mortgage minutia that simply doesn’t pull at the hearth and home heart strings. Sure they need to understand FICO scores, debt-to-income, and loan-to-value ratios, plus their various and sundry loan options and a regulation or two. If we want them to buy a home and finance it with us, we have to help them understand why it is good for them.

So why is it good for them? Homeownership still makes good financial sense over the medium- and longer terms. If your first-time buyer is secure in his or job and plans to remain in his or her community, then buying generally makes solid economic sense. Prove it to yourself. Check rents in the areas in which you lend. Compare them with the monthly mortgage payment on a like property. In many parts of the country, the mortgage payment is lower. Then tax-effect the mortgage payment. If it was lower to begin with, it is now lower still. You have proven it to yourself. Now prove it to your would-be buyer members.

There are other benefits as well, like the fact that homeownership has historically been the one small step that becomes the giant leap on the road to financial well-being and wealth creation. History doesn’t necessarily repeat itself, though, as Mark Twain says, it does rhyme. Asset accumulation typically starts with homeownership. The fact is, we have to start selling the benefits.

Would-be repeat buyers face slightly different issues, especially if they refinanced into a 3.50% 30-year fixed or a 3.75% 15-year fixed that they originally planned to pay off. Trading out of those once-in-four score deals requires an extremely compelling reason. This is one of the reasons that focusing on first-time buyers makes good sense. They face compelling reasons to buy. They simply need to understand what they are.

And the NONRs? Everything I read about the housing market and every presentation I watch about mortgage finance talks about adult children living with their parents and the need, or at least, our desire, to get them out of Mom’s basement. I figured they needed their own acronym, hence NONR. Your challenge: come up with a compelling reason to move out of a place where there’s home cooking that’s not theirs. Good luck.

Mortgage Cadence, LLC, is the NAFCU Services Preferred Partner for Mortgage Processing and Fulfillment Services. More educational resources and contact information are available at www.nafcu.org/mortagecadence.

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