How will the Nebraska housing market change in an economic downturn?
The economy looks like it is going to take a sharp (hopefully brief) downturn in 2020. There are a ton of opinions out there about how it will affect housing. I thought I’d throw my two cents in on what I see coming over the next year.
I am a local mortgage broker serving Omaha, Papillion, La Vista, Bellevue, and all of eastern Nebraska. If you have questions on the Omaha housing market I’m happy to have a conversation with you.
- Will home prices decrease?
- Is this like the 2008 crash?
- Changes coming to home loans
- How you can prepare
Will home prices decrease?
Now keep in mind this is all my opinion as a 17 year veteran of Omaha real estate and lending, but I do not think houses will go down in value during this down turn. In fact, during most recessions house values continue to go up and 2008 was unique in that it was a housing specific downturn.
Being in Nebraska has its advantages in house values as well. We do not see the same wild jumps in home values like you might see in California or Arizona, but we also do not see the big downturns. Here houses consistently increase in value at an average of 3% to 5%. While we may see more 3% increases and less 5% increases, they should continue to increase.
Is this like the 2008 crash?
I worked in the mortgage industry for 5 years before the 2008 crash and I can tell you with the benefit of hindsight that what was being done back then was a powder keg waiting to explode.
The loan programs in 2008 had little oversight and were handing out loans to people who were almost guaranteed to default. There were “pick a payment” loans that allowed a person to just add the interest to their loan balance. There were stated income, stated asset, and in some cases stated employment loans. You could literally give a loan to someone with no money and no job.
This coming 2020 recession is not like that.
Underwriting is still tight. Since 2008 underwriting standards have gotten more strict, not less. The buyers getting loans now must document that they have the ability to repay the loan to qualify. Now there will still be an increase in defaults, but it will be no where near the level of 2008.
Changes coming to home loans
After 2008 the lending standards tightened up a ton. The stated income/asset programs were gone. Underwriting standards increased and buyers that qualified in 2007 no longer qualified by 2010. The industry stopped handing out mortgages to people who could not pay them back.
I think you are going to see some more tightening coming in the near future.
If you have read any of my other articles about FHA or VA, you know that these programs allow much higher debt to income ratios and much lower scores than traditional conventional financing. This is going to get more strict. Lenders are going to start requiring higher credit scores on FHA and VA (likely 640 or above) and will start to reduce the debt to income ratios they will allow to 50% or even 45%. I believe this will start to trickle out over the next month or two.
Good credit and purchasing a home with in a buyer’s budget are going to become the norm for all loan programs.
What this is going to mean for buyers is more preparation. Prior to 2008 a buyer could see a house, get an accepted offer, and have pretty much any bank approved them for some type of financing regardless of credit, income, assets, or ability to repay.
After 2008 buyers still found the house first but the agent sent them to a lender to get pre-approved. With fewer buyers qualifying for financing, it became more important to get pre-qualified before making an offer. Good realtors started only showing houses to potential buyers once they had that pre-approval letter.
Lenders, realtors, and buyers are going to have to make adjustments after these 2020 changes as well. A buyer needs to meet with a lender early to help them navigate coming changes to mortgage guidelines. Realtors are going to have to make it clear to their buyers that a full pre-approval, with complete documentation, is necessary before they start looking for a home. And lenders, just like after 2008, are going to have to get more detail oriented on loans.
The loan officer and realtors more and more will have to become an adviser and not just a salesman.
How can you prepare?
In a recession there are things you cannot control. Your job and finances may take a hit that is unavoidable. But if you are looking to purchase a home in a recession there will be opportunity for those that prepare.
Meet with a loan officer early to get an idea of where you are at with your credit and finances. There may be small and easily correctable issues on your credit that we can take care of if they are discovered early. With more debt to income ratio restrictions coming, you will need to get an idea of how much house you can afford before you start shopping.
Start early and find a good team of professionals that will guide you through the home buying process. With the coming market tightening, it is more important than ever to have an adviser and not a salesman.
Other useful links
- How to improve your credit
- The 20% down rule on conventional
- What is Escrow?
- How is income calculated?
- Why your assets matter
- Mortgage Calculator
- Is Credit Karma accurate?
- FHA vs Conventional, which is better?
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