The Federal Housing Administration (FHA) recently announced plans to eliminate the net worth requirements mortgage brokers must meet in order to sell FHA loans.
Why should you care? As we constantly remind you on the broadcast, appreciation is a product of the right mix of supply, demand and capacity to pay. When the mortgage meltdown wiped out much of the private sector of the mortgage business, there was a big lack of capacity to pay. People couldn’t get loans to buy properties! And even though the Fed and the government made money available through increased FHA, Fannie and Freddie loan limits; and kept rates artificially low through aggressive Fed purchases of MBS (Mortgage Backed Securities) , there was one small problem: most of the mortgage originators in the country weren’t set up to do FHA. So even though the money was there, it couldn’t get to the market because the distribution channel was too small.
However, the industry rallied around the slogan that “FHA is the new sub-prime” and got themselves re-trained and re-tooled to sell FHA loans. But with strict requirements about who was allowed to sell FHA, many mortgage brokers found themselves locked out. Even so, FHA loans now make up nearly 40% of the market. It’s interesting that as the money found its way to the market, home sales began to pick up and prices began to stabilize. Coincidence? Perhaps. But with a big pullback on new home construction (decreasing the addition of new supply), population continuing to grow (increase of demand), it seems to us that as capacity to pay (availability of financing increases), this can only bode well for residential properties whose price falls under the FHA limits.
We think it’s a great time to meet with your mortgage broker and find out how FHA works and if it will work for you. Then, look for residential real estate markets where there are strong sustainable market drivers, properties priced well under the FHA thresholds (lots of room for upside) and good rents relative to price (low GRMs – read Equity Happens if you don’t know what this is). We still like to invest for equity, but make sure the property cash flows because you may have to wait several years to see the appreciation.
Again, anything that makes more purchasing power available to the real estate sector will be good for values.