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Since the financial and real estate crisis of 2007-2009, the data shows that fewer people own houses than before, often by choice, and that people are buying their first house at an older age again often by choice.

There are many reasons for this, but one factor that is written about and discussed from time to time is the premise that renting is cheaper than owning a house. While this can be true in the short term for certain markets such as Denver, CO., the data is indisputable that people who own homes are wealthier than renters.

The Numbers Are Eye-Opening

According to the most recent Survey of Consumer Finance which was completed in 2016 by the Federal Reserve Board (the report is completed every three years) here are the findings on wealth:

  1. In 2016, the median net worth of homeowners in the U.S. was $231,400 (a 15% increase from the last survey in 2013).
  2. The median net worth of renters in the U.S. was $5,200 (a 5% decrease from the last survey in 2013).
  3. The median net worth of a homeowner in the U.S. is 45 times greater than the median net worth of a renter in the U.S.

While there may not be a direct cause and effect relationship that entirely explains the disparity (there are undoubtedly other factors), the Survey of Consumer Finance makes clear that there is without a doubt a strong correlation between home ownership and wealth.

It is estimated by the U.S. Census Bureau that that there were approximately 118.3 million households in 2016. This data also showed that 63.4% of the households owned their home and 36.6% rented. (Source: Pew Research analysis of Census Bureau Housing Data, report published July 19, 2017 based on 2016 data).

  1. While approximately 65% of the households headed by someone under 35 rented; Almost 35% owned;
  2. More telling is the fact that 41% of the households headed by someone between the ages of 35 to 44 rented; and
  3. Approximately 20% of the households headed by someone between 45 and 60 rented.Often people try to explain the disparity in net worth between renters and homeowners by stating that only young people rent and older people own homes. Again, while a factor, this reason does not account for the large disparity in net worth given the high numbers of renters across all age groups and the relatively strong homeownership number for those under 35.  

What Accounts for the Disparity?

  1. Simply put, homeownership is a form of ‘forced savings’. Every time you pay your mortgage you are contributing to your net worth. Every time you pay your rent, you are contributing to your landlord’s net worth.
  2. Homeowners are the beneficiaries of 100% of their home’s appreciation. In Colorado, homes have appreciated 366% since 1991, which is the second highest number for any state in country during that period. Renters experience no appreciation.
  3. The monthly cost of having a mortgage is fixed (i.e. it does not rise), which supports financial stability. A renter is subject to annual rent increases that have averaged between 5% to 10% in the Metro Denver area over the last 10 years. From 2010 through 2017, rents have increased 48% in the Metro Denver area. With wages rising at a much slower pace, renters lose purchasing power every year and are in a worse financial position every year.
  4. To the extent that rent payments may be less than a mortgage payment in the early years, most renters do not invest the difference and they spend it on other items, so the opportunity for investment returns on any savings is lost.
  5. Homeowners receive preferential tax treatment under the Internal Revenue Code with many of the costs of homeownership being deductible. None of the costs of renting are deductible.
  6. The ability to convert equity into cash in order to meet other financial objectives. No such option exists for renters.

Conclusion

We often hear people wonder out loud if “now is a good time to buy” or “if there is a real estate bubble that is ready to pop.” The simple reality is that over time home values have appreciated substantially, especially in Colorado. This is anticipated to continue with Colorado’s population projected to continue to increase due to the strong economy and a desirable lifestyle for many. Given the lack of building and the desire of most people to live close to centers of employment, prices will continue to go up simply due to supply and demand.

Until there is a recession or economic slowdown that impacts the local economy in a meaningful way, Colorado will not experience a decline in prices and will likely continue to experience appreciation although not likely at the levels seen since 1991. But who would have thought my first house that was purchased in 1992 for $88,000 would today be worth between $400,000 and $425,000?

Nationwide, the housing prices have increase 161% since 1991. In Colorado housing prices have increased 366%, which is second only in the country to District of Columbia. (Source: Federal Housing Finance Agency (FHFA), House Price Index, November 27, 2018). Since the recession of 2008 and 2009, the net worth of homeowners has continued to increase, while the net worth of renters has declined during the same time period.While it is clear not everyone can or should buy a home and there are situations where it does make financial sense to rent for some, period. However, for those whose financial situation and current goals support taking on the financial obligation of homeownership, it is well worth it.

A Non-QM mortgage is a Non-Qualified Mortgage loan. A conventional mortgage, FHA, or VA loan are all considered qualified mortgage loans. In 2014, the Consumer Finance Protection Bureau (CFPB) adopted new rules that defined qualified mortgages (QM). This gave mortgage lenders protection on loans that met standards set by the federal government. This reduced the risk with fewer mortgages ending up being delinquent or in foreclosure. Also, the CFPB began the Ability to Repay minimum standards. After the new CFPB rules were adopted, loans that did not stick to QM standards were found to be non-QM loans.

A loan that is non-QM is not necessarily a higher risk loan. It just means that loan does not follow the QM definition. Generally, non-QM loans are designed today to offset some of the risks of the past.

The following are good examples of non-QM loans today:

Why Non-QM Loans and Non-Traditional Mortgages Are Coming Back

Non-QM loans are becoming easier to get as the fiscal crisis recedes in the rear-view mirror. They are a good financial tool because they help people who cannot otherwise qualify for a conventional, FHA, or VA loan to get a mortgage. These programs allow for alternate documentation for income, allow for lower credit scores, and can be more forgiving of negative credit events. Because these loans carry more risk, they tend to have higher interest rates. You will see rates range 1% to 4% above conventional interest rates depending on specific circumstances. But for some, this will not be a hinderance because it allows them to accomplish their goals.

For more information on the mortgage options that are currently available, contact us and we can work with you to evaluate all your options and identify the mortgage that fits your situation.

MORTGAGE PROGRAM HIGHLIGHTS

There are many misconceptions regarding down payments and mortgage insurance and it is hard to know where to start. The ones I hear most often:

  1. You must have a down payment of 20%;
  2. If you put less than 20% down, it is financial mal-practice or not a good thing;
  3. Paying mortgage insurance is bad; and
  4. You are required to pay mortgage insurance on a mortgage if you put less than 20% down.

20% Down Payment Myth Number 1

In survey after survey, generally 50% of the respondents say the number one thing keeping them from purchasing a home is they don’t have 20% for the down payment. This is not accurate because 20% is almost never the required down payment. Simply stated, there is not a minimum down payment requirement. Some people are able to qualify for no down payment programs such as VA, while others choose to go with FHA, which requires as little as a 3.5% down payment. Conventional mortgages can be obtained with as little as a 3% down payment. In all cases, the down payments don’t even need to come from the borrower. The can come from different sources such as gifts from family members.

20% Down Payment Myth Number 2

The second thing I hear, usually from older people who have benefited from years and years of real estate price appreciation and have built up significant financial assets, is that it is financially risky to put less than 20% down. They forget that people who are just starting out don’t have that luxury and that by delaying purchasing their house they are costing themselves money in the following ways (not to mention that they did not put 20% down when buying their first house). The arguments for buying a house with less than 20% down are strong:

  1.  Buying a home fixes the monthly housing expense. By continuing to rent, people are subjecting themselves to annual increases in their housing expenses due to rent increases. Unless they are getting raises that exceed the rent increases, they are losing ground every year; and
  2. Real Estate Appreciates. I have clients that have purchased a home with 3% down. Within 12 to 18 months, they have gained $50,000, $75,000 or in some cases even $100,000 of equity. They are then able to move up the real estate ladder by using that equity for a down payment on their next house.

Every three years the Federal Reserve Bank conducts a survey of household finances. The most recent survey covers the years 2013 through 2016 and reports that the median net worth of a homeowner is 46 times higher than a renter. (Source: The Federal Reserve Board’s triennial Survey of Consumer Finances, September 2017).

The advice of not putting less than 20% may be well-intentioned, but it is outdated advice in most cases, can cost money through lost appreciation opportunities, and the fact that they may pay more due to the same appreciation factor. The more appropriate advice that I think a new buyer needs to understand is that if they put less than 20% down the payments will be higher due to the loan amount being higher and if they continue to wait appreciation will continue to make houses more expensive resulting in a higher payment in the long run. As a result, prospective homeowners need to make sure they are evaluating and making the best decision about a home purchase and a mortgage that is right for their current situation which can include mortgage insurance.

Mortgage Insurance Myth Number 1

A common perception is that if you have less than a 20% down payment, you are required to pay mortgage insurance and that is bad. A contrary argument might be that it is good because without mortgage insurance a significant number of people would never be able to qualify for a mortgage. People who cannot qualify for a mortgage are required to continue to rent, thereby losing economic ground every year due to rising rents exceeding their rising income (see Down Payment Myth Number 1). Additionally, if they continue to rent there is a delay in building the kind of equity that helps build net worth (see Down Payment Myth Number 2).

Mortgage Insurance Myth Number 2

When someone has a down payment of less than 20%, there are many options to reduce or eliminate paying monthly mortgage insurance if they want. We work with our clients to evaluate these options and assess their eligibility. Among the options are: 

When the proper analysis is performed, it is often determined that sometimes paying the mortgage insurance for a while is the best financial option or the best option for qualifying for the mortgage. Other times, taking advantage of one of the programs designed to reduce or eliminate monthly mortgage insurance is a better option. Everyone’s individual situation is different and must be analyzed to arrive at the best option.