The inventory of homes for sale is at an 11-year high. Interest rates are bizarrely low -- under 4.4% on a 30-year-fixed rate loan, at last report. One would think that buyers would be burning up the market, but many are finding it difficult to actually close the deal.
Here are five reasons buyers are finding it very difficult to actually find and close on homes, even on today's "buyer's" market:
1. Distressed homes cause buyers distress. Short sales and foreclosures make up about one-third of the homes currently for sale, which sounds like a wonderland of opportunity for buyers to get into the market at a bargain price. But, often, the best-priced foreclosures in the best condition tend to get scarfed up by cash investors (see #3), leaving the average first-time home buyers to fight over the dregs, in terms of location and condition.
Even with recent attempts by some banks to streamline the process, short sales still take up to 6 months, on average, to close -- if they close at all. In fact, when the National Association of Realtors projected that many as 180,000 buyers were unable to close in a 90 day time frame earlier this year, Congress voted to give them an additional three months to close without losing their home buyer tax credit.
2. You've gotta have skin to put in the game. It's a rampant mortgage myth that you need to put 20% down to get a loan these days; increasingly, opportunistic buyers are taking advantage of 3.5% down FHA loans. But even 3.5% of the average home sales price in America overall, $232,200, is still $8,127 -- if you're in a Western state, hike that up to $9,625 (that's 3.5% of the Western U.S. average home price of $275,000).
And that doesn't even begin to account for closing costs! FHA loan closing costs can run as high as 5% or 6% in some areas -- even if you can get the seller to pay 3%, you could easily still need to come up with another $6,000 or $7,000 to close the deal, on top of your down payment. Many of the closing cost and down payment assistance programs that were available at the beginning of the housing crisis have long been dismantled or disallowed.
3. Cash buyers are gobbling up bargain priced properties. With uber-low home prices and the stock market not inspiring a great deal of trust in cash-flush investors, many are turning back to the lower-priced homes on the real estate market seeking to recover and grow their portfolio funds. Earlier this year, FHA even removed their 90-day flipping prohibition, meaning that investors who buy and flip low-priced homes can sell them to FHA-financed buyers as soon as the day after the investor purchases them. This eliminated one major disadvantage to flipping, and encouraged investors with cash to get back in the game.
But why does this make it tougher for "regular" buyers using mortgage financing to close their deals? Investors with cash can often command a deep discount and beat out even higher offers from mortgage-financed buyers because an all cash deal promises a quick close and freedom from all the glitches that so often foul up financed sales, from inspection and appraisal issues, to HOA and FHA drama (see #5, below).
4. You think you're going to get a house for $10. Unrealistic buyers are the least likely to be successful on today's real estate market. Mortgage industry asset managers must abide by pretty firm guidelines about how low of a price they can accept, and usually can agree to only a modest discount from the current fair market value of a bank-owned home. Short sales are designed to make sure the bank gets as close as possible to market value, as well, since the bank is inherently losing money on those deals. And even individual sellers on "regular" equity sales are frequently selling for less than planned, many for just barely enough to pay off their mortgages.
5. HOA and FHA drama. It's extremely difficult to get a mortgage lender to finance the purchase of a condo in a Home Owners' Associations (HOAs) with a high rate of unit owners being behind on their monthly dues (over 15%), or a low rate of owner-occupancy (less than 75%t). Unfortunately, when there are a number of foreclosures or short sales in a complex, both of these rates move in the wrong direction, and units become nearly impossible to buy unless you have lots of cash.
Similarly, FHA loans can be tough to close on homes that have condition problems, or on condos that are not located in FHA-approved complexes. There are workarounds for these issues, but they don't always work!
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