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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: secondcor521 on January 31, 2021, 02:02:32 PM

Title: Two housing questions in one thread - mortgage breakpoints and housing bubble?
Post by: secondcor521 on January 31, 2021, 02:02:32 PM
Hi all,

My DS25 is soon going to be in the market as a first time homebuyer.  Probably a conventional 15Y or 30Y fixed mortgage.  Very good credit score, good income, no debt, good job.

Question 1:

I know about the 3% minimum down payment with a conventional loan.  I am well aware of the 20% down to avoid PMI breakpoint.  Are there any notable breakpoints between those two?  For example, do you get a free toaster if you put down 10%?  Escrow not required at 15%?  Etc.

Question 2:

This is a rather ticklish one.  The local market is currently a seller's market with very limited supply and occasional bidding wars.  Prices seem to be rising at about a 10% to 15% annual clip over the past year or so.  Local builders are building new homes at a good clip, probably because it's an attractive market for them to do so - basic houses can be put up in about 4 months here.  The local economy is in pretty decent shape.

How does one figure whether: (a) prices will continue to rise at that 10% to 15% rate for the next few years, thus buying sooner is better, or (b) price increases will slow and prices may even drop in absolute terms (a bubble bursting), thus waiting until the bubble bursts is better.  (Of course any other scenario in between or outside those two is possible.)

The only factors I see for bubble bursting are:  (1) COVID-wary sellers finally put their homes on the market either because they need to or the virus fears subside or get worked around somehow, (2) Local builders race each other and overbuild and create excess supply, (3) local wage growth becomes a limiting factor (housing becomes less affordable), or (4) interest rates rise (housing becomes less affordable).  With factor (4), I think the prices will just drop to make the payments the same, so I don't see that as a major factor.

His mom, my Dad, and my opinion is that the strong upward pricing trend will persist at least the next few years, so our inclination is to recommend that he buy as soon as he is ready.  This would include buying with less than 20% down, because PMI only appears to add about 0.9% to the interest rate.  A 30Y fixed at 3% plus 0.9% PMI is still better than the 10% to 15% penalty for waiting a year.
Title: Re: Two housing questions in one thread - mortgage breakpoints and housing bubble?
Post by: zolotiyeruki on January 31, 2021, 09:08:51 PM
As I understand it, the spike in housing prices is driven primarily by a huge inventory shortage.  I'm not sure how COVID is causing the inventory shortage, but it's a real thing.  I've also heard at least anecdotes of people leaving the big cities for the suburbs in the aftermath of the protests last summer.  Maybe it's just a matter of businesses and employees hunkering down, rather than workers seeking new employment?

What's going to happen to housing prices?  It's anybody's guess.  If all the vaccines work and the pandemic fizzles out, then housing supply could increase as more people are comfortable moving.  Or it might not, since more people can work from home.  And we have a government pumping money into the economy, which could also be contributing to the price increases.  The cost of building supplies has skyrocketed in the last year--lumber prices, in particular, have doubled in price.  When I looked at fiberglass batts, they were 50% more expensive than they were a year ago.

IMO, yes, eventually prices will level out and maybe even drop a bit, as more supply comes online and the surge in demand for building supplies subsides.  But if/when that happens is unknown.

As for the factors you mention, I agree with you on #4. #2 is possible, but the crash of 2007 is probably recent enough that (hopefully!) builders won't make the same mistakes again. #1 will happen eventually, but my guess is that it'll be a gradual process.  But I could be totally wrong--positive COVID tests have dropped about 40% since their peak about two weeks ago, and hospitalizations are down about 25% over the same period, which is a rather remarkably fast change.  As for #3, that really depends on where you are.  If you're in a suburb of a major city outside of California, then I don't see that happening--with the opportunity to work remotely, living in the city loses a major selling point (i.e. proximity to work).
Title: Re: Two housing questions in one thread - mortgage breakpoints and housing bubble?
Post by: Paper Chaser on February 01, 2021, 05:29:51 AM
I think you have to consider who is driving the price increases in the area to gauge future demand. If your son is looking in the Boise area where your profile says you are, there's been an influx of well paid tech workers from Northern CA and Seattle. They have high incomes/savings and potentially a bunch of equity from selling an expensive home elsewhere. Remote work and higher real estate prices in the large cities are the motivation. Low interest rates are added lubrication.

I'm not sure if any of those things are likely to change significantly in the near term future. Work from home seems likely to stay for the most part, especially in the tech sector. Interest rates will remain low for a few more years according to most experts. So I think it comes down to anything that might reduce the pool of high paid tech workers coming in (whether costs in your location climb enough and/or costs in the big cities drop enough to be more comparable with one another) and local home supply, but that seems like it will take a few years to build enough to meet the current demand.

I guess I agree with you, that it may be better to buy now than later. But I also think it should be weighed against renting too. Home ownership is great IMO, but if this is to be a mostly financial decision then you have to consider all of the options, including staying a renter.
Title: Re: Two housing questions in one thread - mortgage breakpoints and housing bubble?
Post by: Aegishjalmur on February 01, 2021, 08:05:48 AM
On PMI, the rates decrease as you get lower at certain intervals:
85% and below.

Would your DS be able to get a 2nd loan for a portion of the down payment? If he could, he may be able to eliminate or reduce his PMI by lowering the LTV on his first mortgage. Depending on the area, his career, ect he may be eligible for a down payment assistance loan.

For example:

He'd have to do the research to find one he's eligible for, and do the math on if it would be worthwhile cost wise for him but there are options to consider.
Title: Re: Two housing questions in one thread - mortgage breakpoints and housing bubble?
Post by: jrhampt on February 01, 2021, 08:23:51 AM
On question 2: We're betting that the housing supply will go up in a year or so when the supply shortage due to COVID eases.  In our area New Yorkers are still buying up most of the available supply at high prices.  I think we're way overpriced right now, so we sold the big house in the summer and we're stuffed into our 600 sq ft beach cottage and are making it work, saving loads of money.  We may start looking again when the market calms down (there are some things we'd like that the cottage doesn't have - a garage where my spouse can do car maintenance, a spare room for out of town family, maybe an extra half bath), or we may just stay here a while longer.  The house next door is larger and we considered buying it, but it sold this fall in less than 24 hours to people who aren't even living here full time -- at $35k over asking price.  It's just not a great time to buy, but I think that will change.
Title: Re: Two housing questions in one thread - mortgage breakpoints and housing bubble?
Post by: YttriumNitrate on February 01, 2021, 08:38:52 AM
At least for one bank, there are breakpoints at every 5% change in loan to value. However, all the breakpoints may not be applicable based on your credit score. See the "Conforming Product Adjustments" chart on page 2 in the linked PDF below. (
Title: Re: Two housing questions in one thread - mortgage breakpoints and housing bubble?
Post by: secondcor521 on February 02, 2021, 08:17:55 AM
Thanks everyone!
Title: Re: Two housing questions in one thread - mortgage breakpoints and housing bubble?
Post by: affordablehousing on February 02, 2021, 12:09:21 PM
If the market is Boise as on your tag, I think that might be the hottest market in the country right now. It's cheap, easy living, safe, lots of space, and enough culture to provide a good life and a good excuse for the coasters to leave their expensive houses and retire. I think that trend may be driving some activity and the big question will be whether there's any reaction AGAINST working from home forever. I think non major vhcol cities are going to enjoy a rise for a few years as the population redistributes.