Over the last two years there’s been a lot of movement in the markets. Stocks went way up, but have more recently backslid. In terms of the American workforce, we’re told that most working-age people are gainfully employed and that businesses are now competing for the best talent. How does all this affect the housing market and what you can afford? Whether you have previous experience in buying a home or are just now considering it for the first time, it can be pretty confusing to tell whether now is a good time to buy a home or not. Let’s take a moment to step back and figure out where we are by briefly reviewing the modern history of mortgages in the United States.
The Early Mortgage
Did you know in the early 1900’s home buyers were typically expected to have a down payment of 50% of a home’s value when applying for mortgages? Beyond that, the typical period to pay off the remaining 50% or so of a mortgage was around 3 to 5 years! The system was far from perfect, and a lot of Americans were left with the dream of home ownership simply out of reach.But things got even worse during the Great Depression when most home mortgage loans stopped being offered altogether. Enter Franklin D. Roosevelt’s New Deal,which aimed at stimulating economic growth in the United States. One major creation of the New Deal was the Federal Housing Administration (FHA), which introduced 15 and 30 year mortgages that offered insurance to lenders who had become fearful of borrowers defaulting because of the Depression. In addition to creating a safer environment for lending, these new mortgages offered the middle class the opportunity to buy a home with lower down payments and more extended terms for repayment.
Booms and Busts
There was likely never a more prosperous time for the average American than in those years following the Second World War. Soldiers were returning home and it seemed that just about everyone could take part in the American dream of home ownership. For decades following, the country’s booming economy fed increasing appetites for more expensive housing.Eventually, the housing market could no longer meet so much demand. As a result,interest rates rose steadily through the 70’s and 80’s and soared to the 20%range. With fewer people to afford this level of interest, the market adjusted again to below the 10% level in the later 90’s. Part of this market adjustment was due to the rise of sub-prime and predatory lending, practices which aim to offer loans to borrowers who lack the ability to afford them. When the jig was up, and owing in part to the record-high number of mortgage defaults that would follow, the country entered a massive economic downturn that would come to be known as the Great Recession in 2007-2008. Following this period, the government responded by increasing regulations to crack down on sub-prime and predatory lending. The government also responded by lowering the cost of credit to historic lows, which allowed for lending institutions to offer mortgages at rates nearly as low as 3%!
After so much government stimulus and with the economy continuing to show positive signs of growth, the government is currently responding by raising interest rates on credit. In turn, lenders are offering mortgages at slightly higher rates (today, the average mortgage rate is 4.5%).While it’s impossible to tell what the future holds, there are signs that the government won’t be raising the cost of credit as quickly in the future as it has been recently. This is because the economy and wage growth may not be improving quite as well as traditional indicators suggest. Giving some back bone to that theory, we are starting to see home prices once again drop due to being priced too high to sell. With interest rates still near historic lows and home prices starting to fall, I hope you now agree that now is a great time to buy a home.