Why a Foreclosure Wave Isn’t on the Horizon
Even though data shows inflation is cooling, a lot of people are still feeling the pinch on their wallets. And those high costs on everything from gas to groceries are fueling unnecessary concerns that more people are going to have trouble making their mortgage payments. But, does that mean there’s a big wave of foreclosures coming? Here's a look at why the data and the experts say that’s not going to happen.There Aren’t Many Homeowners Who Are Seriously Behind on Their MortgagesOne of the main reasons there were so many foreclosures during the last housing crash was because relaxed lending standards made it easy for people to take out mortgages, even when they couldn’t show they’d be able to pay them back. At that time, lenders weren’t being as strict when looking at applicant credit scores, income levels, employment status, and debt-to-income ratio.But since then, lending standards have gotten a whole lot tighter. Lenders became much more diligent when assessing applicants for home loans. And that means we’re seeing more qualified buyers who have less of a risk of defaulting on their loans. That’s why data from Freddie Mac and Fannie Mae shows the number of homeowners who are seriously behind on their mortgage payments (known in the industry as delinquencies) has been declining for quite some time. Take a look at the graph below: What this means is that, not only are borrowers more qualified, but they’re also finding ways to navigate through their challenges, exploring their repayment options, or maybe even using the record amount of equity they have to sell and avoid foreclosure entirely.The Answer Is: There’s No Sign of a Wave ComingBefore there can be a significant rise in foreclosures, the number of people who can’t make their mortgage payments would need to rise significantly. But, since so many buyers are making their payments today and homeowners have so much equity built up, a wave of foreclosures isn’t likely.Take it from Bill McBride of Calculated Risk – an expert on the housing market who, after closely following the data and market leading up to the crash, was able to see the foreclosure crisis coming in 2008. McBride says: “We will NOT see a surge in foreclosures that would significantly impact house prices (as happened following the housing bubble) for two key reasons: 1) mortgage lending has been solid, and 2) most homeowners have substantial equity in their homes.”Bottom LineIf you’re worried about a potential foreclosure crisis, know there’s nothing in the data to suggest that’ll happen. Buyers are more qualified now, and that’s one reason why they’re not falling seriously behind on their mortgage payments.
A NEW day in real estate is coming …
The day is finally upon us. On August 17th, the real estate market will undergo a much-needed revamp across the United States. Numerous articles have been written about class action lawsuits challenging our industry’s traditional commission structure, the blockbuster federal court decision, and the multi-billion-dollar judgment last October in favor of the plaintiffs. Since then, the major national brokerages and our national trade organization agreed to make significant changes in how Realtors represent and are compensated by buyers and sellers. The day of reckoning is August 17th. Some areas of the country will be sooner, but all changes must take place by the 17th. The current system of sellers paying compensation to buyer agents has been criticized from both sides of the transaction: Sellers Compelled to Pay Both Their Agent and the Buyer Agent The first criticism is that it’s not fair for sellers to feel compelled to offer compensation to buyers’ agents whose job is to negotiate against them. This has been a longstanding practice in our industry. Sellers paid one commission (typically 5%-6%) that was usually divided between their list agent and the agent who represented the successful buyer. Sellers were told that if they didn’t offer what buyer agents in the market expected, some agents would boycott showing their homes. Indeed, this happened. Buyers Steered to Homes Where Their Agent Was Offered More The second criticism is that it’s not fair to buyers when their agent steers them to homes where that agent is offered the most money by the seller. Clearly, buyer agents should be showing their buyers the homes that best fit them instead of the homes where sellers offer more. Unfortunately, steering buyers is a sad but true blemish on the complexion of our industry. Commission Structure Changes Our industry enacted the following changes: Buyer agents are no longer allowed to show homes to buyers they are “working with” without a written representation agreement. The agreement must define the agent’s duties and compensation. The compensation must be a fixed amount or able to be computed (e.g., 2% of the purchase price). The compensation cannot be based on whatever a seller or listing agent might be offering to a buyer agent. Agents will be able to host open houses and allow buyers to walk through without making them sign a representation agreement. However, agents are cautioned not to begin answering buyers’ questions at the open house because this may be deemed “working with” that buyer, which requires the buyer to sign a representation agreement. The amount buyers pay to a buyer agent is completely negotiable based on the level of service the agent offers. For instance, a buyer agent who drives buyers around personally showing them homes should justify higher compensation than an agent who instructs buyers to see homes on their own and then negotiates the purchase once they find a home they like. On the seller side, the only compensation the seller should be expected to pay is the compensation to their listing agent. It could be a percentage of the sale price or a fixed amount. It’s completely negotiable. This should immediately cut sellers’ commissions in half. Additionally, listing agents should not ask sellers to make offers of compensation to buyer agents. While the settlement only prohibits offers of compensation to buyer agents in MLS, agents who don’t like the change are talking about trying to convince their sellers to let them make offers of compensation to buyer agents in other ways – on the listing agent’s website, via flyers, emails, texts, and phone calls. While the settlement does not specifically prohibit this practice, the Department of Justice, the federal jury, and consumer consensus have made it clear that sellers and listing agents inducing (bribing) buyer agents to show their homes over other homes that may fit the buyer better is a bad and possibly illegal practice. It results in increased costs for sellers and the steering of buyers to homes where the agent makes more. Now some advice…if you are selling your home and an agent you interview suggests that you offer buyer agent compensation, interview other agents who are up to date on these changes. Financing the Buyer Agent Fee If buyers find it tough to pay their buyer agent out of pocket at closing (in addition to their down payment and closing costs), there is no prohibition on a buyer including a term in their purchase offer that the seller agrees to compensate their agent a specified amount out of the seller’s closing proceeds. Buyers often make offers that include costs to be paid by a seller. Sellers simply look at their net sale price in the offer after the buyer requests “concessions.” Doing this allows buyers to “build in” their buyer agent fee to the purchase price and their loan amount. Big Changes Beginning August 2024 Pretty big stuff, right? Lower commissions for sellers. Agents show buyers the homes that fit them best instead of homes where that agent makes more money. It’s all effective August 17th. Our industry will be better because of these changes, even though many agents hate it and are looking for ways to work around it. In the end, they will adapt or be out of the business (deservedly so). Change is not easy, but in the end, I feel this will be a good thing for sellers and buyers. For those lambasting the change and resisting the inevitable, I offer these wise words by John F Kennedy: “Change is the law of life. And those who look only to the past or the present are certain to miss the future.”
How Affordability and Remote Work Are Changing Where People Live
There’s an interesting trend happening in the housing market. People are increasingly moving to more affordable areas, and remote or hybrid work is helping them do it.Consider Moving to a More Affordable AreaToday’s high mortgage rates combined with continually rising home prices mean it’s tough for a lot of people to afford a home right now. That’s why many interested buyers are moving to places where homes are less expensive, and the cost of living is lower. As Orphe Divounguy, Senior Economist at Zillow, explains:“Housing affordability has always mattered . . . and you’re seeing it across the country. Housing affordability is reshaping migration trends.”If you’re hoping to buy a home soon, it might make sense to broaden your search area to include places where homes that fit your needs are more affordable. That’s what a lot of other people are doing right now to find a home within their budget. Extra Space Storage explains:“55% of American adults are looking to relocate to a different state or city for more affordable homes and lower costs of living. . . Specifically, states with a strong economy, lower costs of living, and remote work options continue to be the ideal places to live in the U.S.”Remote Work Opens Up More Home OptionsIf you work remotely or drive into the office only a few times each week, you have many more possibilities when looking for your next home. That’s because you can cast a broader net and include more suburban or rural areas nearby. As Market Place Homes says:“People start to reconsider where they want to live when commute times are slashed in half or eliminated altogether. If they have a longer commute but don’t have to do it daily, they may feel like they can tolerate living farther away from their job. Or, if someone works entirely remotely, they can move to a cheaper area and get a lot of house for their dollar.”How a Real Estate Agent Can HelpA real estate agent can help you find the perfect home for your budget. They’re especially valuable if you’re moving to a new, unfamiliar area. Bankrate says: “If you’re moving far away, you may not have a good idea about which neighborhoods or towns will be the best fit. An experienced local agent can help you find the lifestyle you’re looking for in a home you can afford.”So, if you're thinking about relocating to somewhere with more affordable homes, what are you waiting for? With the added flexibility of remote work, you might have more options than before.Bottom LineDreaming of a place where your money goes further? Connect with a real estate agent so you have someone to help you find your next home. Together, you’ll make your dream of homeownership a reality.
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