In my last post I looked at the rent vs. buy debate to show why buying a home makes sense for non owners. According to recent reports, many people are realizing that renting has many disadvantages, and are looking to buy a home.
A recent report from Transunion shows that more renters are actively looking to buy a home:
Current Market Encouraging Renters To Buy A Home
There are several reasons that renters are looking to get out of the rental trap. One of the biggest factors is the current state of the real estate market.
Buyer demand is strong, but with inventory of available homes at historic lows, home values are being driven up.
With home values doing well, confidence in the real estate market and the overall economy are high, and people are seeing the opportunity that exists out there.
The most recent Forbes American Dream Index rose for the fourth straight month–this index measures confidence in the economy.
A recent Gallup poll indicated that people feel real estate is the best long term investment.
With the housing market doing well, people recognize opportunity.
As for the rental market, they are seeing the limitations.
The rental market has been pretty hot as well. Rents are being pushed higher and higher, and available rentals are scarce.
As a result, many renters are seeing that the benefits of home ownership outweigh renting.
Misconceptions Holding Back Buyers
I’ve covered the misconceptions that exist for people looking to buy a home before, so I will just touch on them again.
First and foremost, it does not take 10%, 15%,20% or more for a down payment
And it does not take nearly perfect credit to qualify for a mortgage, either.
Although more and more renters are starting to see the opportunity in the current market, there still remains too many people that are fearful that we are heading for another crash.
For a quick review of why we are not in a bubble, here is what is different between 2006 and now:
2006: Mortgages were easy to get. Too easy.
Today: Mortgages are easier to get now than after the crash, when lenders tightened their lending guidelines to extremely strict standards.
However, they are nowhere near as easy as they were leading up to the crash:
2006: Because mortgages were so easy to obtain, artificial demand was created. Builders reacted to this and built too many homes.
Today: New construction home starts are at the lowest they have been in decades, so overbuilding is not an issue (they are not even back up to their historical normal levels):
In the last real estate boom, many people received mortgages that should not have been qualified to begin with.
As a result, the number of defaults skyrocketed, which brought the real estate market crashing down with it:
Corelogic recently released a detailed report, United Sates Residential Foreclosure Crisis: 10 Years Later.
One key takeaway from the report is this quote from Dr. Frank Nothaft, Chief Economist for CoreLogic (emphasis mine):
“The country experienced a wild ride in the mortgage market between 2008 and 2012, with the foreclosure peak occurring in 2010.
As we look back over 10 years of the foreclosure crisis, we cannot ignore the connection between jobs and homeownership.
A healthy economy is driven by jobs coupled with consumer confidence that usually leads to homeownership.”
The economy is a big boost to this surge in renters looking to buy a home (See American Dream Index above).
Better Lending Standards Means Less Defaults
The foreclosure crisis and mortgage meltdown are not issues this time around.
Banks aren’t handing out mortgages like participation trophies this time around.
Another issue prior to the crash was the widespread use of 0% down loans. People were able to get into a home without any “skin in the game”. This lead to many defaults.
0% down loans are not around this time–except for VA Loans and USDA Loans. But these loans are not available to everybody.
There are some people nervous that if mortgages aren’t requiring a 20% down payment, that we could be headed back to 2006 and the foreclosure crisis all over again.
The biggest factor that leads to delinquencies is the credit score:
So, the down payment doesn’t lead to more and more delinquencies. Giving loans to people that shouldn’t get a loan leads to more and more delinquencies.
Zelman also said back in October that now is the best time to buy a home:
Have Home Values Peaked?
Finally, with home values approaching or surpassing their pre-crash peak, there are concerns that a crash is inevitable. But artificial manipulation created the crash.
Historically, the real estate market has appreciated at a roughly 3.5% annual rate.
Had the artificial boom and resulting crash never happened, and real estate had continued to grow at a normal pace, current home values would be where they should have been along:
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