Why Buying Investment Property in Texas Now Makes More Sense Than Ever

By Mike Lesmeister, CRMS, CMPS

In today’s unpredictable economic atmosphere, many investors are struggling with decisions regarding their next move. The stock markets are unstable, yields on bank time deposits and other fixed-income investments are nearing record lows, gold has had a huge run-up that, judging from its historical performance, may not be sustainable, and long-term inflation lurks on the horizon.

In this environment, one option to consider is investing in residential real estate. Contrary to the news that housing values are plummeting and you can’t get a mortgage, many investors have silently made a killing by investing in rental properties. Now, these are not the “flip and get rich quick” schemes you see on cable television, but a long-term strategy of meeting increased rental demand in the Houston area by buying homes at distressed prices and financing them at record low, long-term mortgage rates.

The opportunity here is three-fold; through positive cash flow that can be gained on the difference between rental rates and the debt service on the loan, through the tax advantages real estate offers, and through the long-term appreciation and inflation-hedge real estate represents. Currently, the rent-to-mortgage payment ratio in Houston is just below 1%, meaning that the average rent in Houston should cover mortgage repayment on a 100% financed property.  So, when adjusted for down payment, taxes and insurance, it should not be too difficult to find a property that provides positive monthly cash flow.

Houston remains a strong market for rentals as our relatively strong economy continues to attract workers from other states. This population growth, coupled with the need for housing by immigrants and homeowners displaced due to foreclosure or a previous job loss, creates a significant demand for housing, particularly in areas with good schools. It is not uncommon for newly listed rentals to garner several applications within hours of listing.

Financing rental properties is not as easy as it once was, but for investors with cash available and good credit, it is readily available. Potential landlords should expect a 20-25% down payment, have credit scores over 700, and demonstrate cash reserves equivalent to six months’ worth of housing payments. Interest rates and closing costs are slightly higher than those charged on owner-occupied properties, but not significantly so. At current rates, it would not be unusual for a well-heeled buyer to be able to purchase a $100,000 home with 20% down at an interest rate under 5% over 30 years with closing costs totaling $3,000, excluding prepaid interest, taxes, and insurance. This home in the right area could easily fetch over $1,100 in monthly rent. To search properties that might be suitable for investment, visit www.houstononlinehomefinder.com. To get pre-qualified for a mortgage to purchase investment property or for a rate quote from a BBB-accredited mortgage lender, visit www.HLSTX.com.

Many would argue the timing is right for purchasing investment property in Houston where home prices are very affordable relative to other large metropolitan areas. As the econo

Average rates for the benchmark 30-year fixed mortgage as reported by Freddie Mac stood at 4.12% this week. This represents a decrease of .10% over last week’s average.

The average for the 15-year fixed program equaled 3.33%, a decrease of .06% on the week.  Both of these averages set new lows for 2011.

Mortgage-backed security prices have continued to increase this week as the equity markets throughout the world remain under selling pressure. The eager anticipation surrounding President Obama’s Thursday address on job creation did not carry forward in a positive way to stock market trading on Friday.

Also, this week’s jobs data statistics continued to illustrate a total lack of employment growth in the US economy. Simply put: The American investor has lost faith in stocks and is unshakeable in his resolve to avoid risk .

Home Loan Specialists is posting par rates for our 30-year fixed (conventional) loans at 3.875% (APR 4.06%) and 15-year at 3.25% (APR 3.57%).

Our advice to refinancing candidates is to request a breakeven analysis if their existing rate exceeds 4.875% for 30-year terms and 4.125% for 15 year terms. A very simple tool for this purpose can be found on our website (http://www.HLSTX.com/) under mortgage calculators.

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Average rates for the benchmark 30-year fixed mortgage as reported by Freddie Mac stood at 4.22% this week, unchanged from the previous week’s average.  The average for the 15-year fixed amortization equaled 3.39%.  This average decreased .05% on the week.   Mortgage-backed security prices were largely unchanged through Wednesday of this week but rebounded on Thursday and Friday in response to very deflating jobs data reports.  Today, Home Loan Specialists is posting par rates of 3.875% on 30-year fixed conventional and 3.75% on the 30-year fixed FHA loans.  15-year conventional rates are listed at 3.25%.

This summer we have steadily recommended that buyers and homeowners with an interest in refinancing should take action immediately.  During August rates stayed low as a result of increasing turmoil in the European Union economies.  The perception was that EU bonds are a much less favorable investment than American Treasury bonds. This kept mortgage bond prices high and (therefore) rates depressed.  Although this perception continues to dominate bond trader attitudes, we see its influence diminishing in the face of pending inflationary pressure.

In other words, now is the time to take advantage of these incredibly low rates before the market realizes that all the money our government is printing for wars, stimulus, quantitative easing, and handouts around the world has become unsustainable by the American tax payer without a serious inflationary result.

Lately, many mortgage brokers and banks and financial websites have been talking quite a bit about how low interest rates have recently fallen.  Home Loan Specialists is now posting the lowest par rates since the inception of our company in 2006.  However, what do these numbers really mean to you as a Texas homeowner?

Historically, mortgage rates have closely followed the stock market movements.  The NASDAQ charts are very well correlated with mortgage bond daily pricing which, in turn, dictates your mortgage rates.  In theory, when stock prices rise inflation is at hand and mortgage rates increase.  Conversely, stock market losses signal lower mortgage rates ahead.

The recent nosedive of US stock prices has continued to confirm this relationship as mortgage rates dropped an average of .25% last week.  This rate decline was seen in all of our most popular loan programs including the 10 and 15-year fixed, jumbo, and government rates.

Qualified borrowers should give serious consideration to signing the contract and locking in immediately.  Now is the time to consider refinancing your current home, buying an investment property, or buying a new home.

Below, we developed a refinance analysis for borrowers who purchased a new home in 2006.   It is stunning how much you can save over the life of your Texas mortgage!

Be sure to call our office at (832) 286-1600 or email Rick@HLSTX.com for your customized analysis!

Original Loan Information from 2006 (5 years ago)

Original Loan Amount: $700,000

Original Interest Rate:     6.25%

Original Loan Duration:   30 Years (360/360)

Refinance Today – 30-year Loan

New Loan Amount: $650,000

New Interest Rate: 4.875%

Old Monthly Payment: $4,310.02

New Monthly Payment: $3,439.85

PROJECTED SAVINGS: $306,848.00

Refinance Today – 15-year Loan

New Loan Amount: $650,000

New Interest Rate: 4.25%

Old Monthly Payment:  $$4,310.02

New Monthly Payment: $4,889.81

PROJECTED SAVINGS: $665,029.00

The borrowers in this example will basically be saving an entire house worth of money if they refinance their already low mortgage to a 15-year loan.  Their monthly payments will go up minimally because of the shorter term; however, their projected savings and equity-building opportunity is significant.

As we mentioned before, now is the time to look into refinancing your home, purchasing a new residence and even beginning your foray into investment properties.

With this seemingly never-ending heat wave gripping the Houston area, here are some simple ways that homeowners can attempt to stay a little cooler while inside their homes.

• Close your blinds and curtains to keep out the sun and the heat.
• Close the vents and doors to any rooms that aren’t being used.
• If you do not have air conditioning, keep your activities to the lowest level of your home since heat rises.
• Avoid using the stove or the oven (use the microwave) and put-off on running the dishwasher (don’t use the heat cycle for drying) or washing laundry until after the sun goes down.
• Replace manual thermostats with programmable thermostats and set them at around 78 degrees or higher during summer months.  Raise the temperature of the thermostat when you leave, but do not turn the air conditioning off. Your unit will have to work too hard to get your home’s temperature back down later.
• Keep your air conditioner clean. Outdoor units can get clogged from weed pollen and other materials that are floating around in our outside air.  Use a hose to spray your a/c unit down; making sure all plant debris is washed away from the unit.  Ensure the inside filters are cleaned or changed monthly.
• Use ceiling fans (or install some) to allow you to be comfortable at a higher ambient temperature. The air movement can make you feel several degrees cooler and make it much easier on your a/c and utility bill.
• Always have a pitcher of icy water ready in your refrigerator. Letting the water run from the tap until it turns cold is wasteful and inefficient.

Aside from keeping yourself and your family safe from these brutal temperatures, also be sure to check on your neighbors, friends and relatives you think might be at risk in this kind of weather, and keep your pets inside with you.

Average rates for the benchmark 30-year fixed mortgage, as reported by Freddie Mac, stood at 4.50% this week. This represents a change of +.01% over last week’s average which reached a new low for 2011.

The average for the 15-year fixed amortization equaled 3.67%, down .01% on the week. The 15-year average represents yet another new low for 2011.

Mortgage-backed security prices remain strong in contrast to the extreme volatility noted in the equity markets this week. This is largely a result of European economic instability particularly with respect to Greece.

Today, Home Loan Specialists is posting par rates of 4.25% on 30-year fixed conventional and FHA loan programs. 15-year conventional rates are listed at 3.5% with 10-year rates available as low as 3.25%. These rates do not include origination fees.

Now is an especially attractive time for active military and Veterans to take advantage of VA-guaranteed home loans and Texas Vet Home Loans. According to the Texas Veterans Land Board, current rates on a 30-year fixed rate purchase loan stand at 4.26%. These loans are particularly attractive for Texas Veterans because in most cases they require no down payment and many closing costs can be funded through seller contributions. Vets can purchase home at substantial discounts due to the weak housing market and afford even more home due to the low rates available. Additional information can be found by visiting http://www.mytexasvaloans.com.

Average rates for the benchmark 30-year fixed mortgage asreported by Freddie Mac stood at 4.55% this week.  This represents a change of -.05% over last week’s average.The average for the 15-year fixed amortization equaled 3.74%, down .04% on theweek.  Both averages continue torepresent 2011 year lows.

Mortgage-backed securities continue to be pricedhigher in contrast to the equity markets which have been challenged this weekafter bearish employment statistics were reported by the government.  However, recent market volatility hasindicated there is some resistance at the current levels, making it unlikely rateswill move much lower over the short term. Longer term expectations continue tofavor higher interest rates.

Currently, Home Loan Specialists is posting par rates (rates exclusive of origination fees) of 4.25% on 30-year fixed conventional andFHA loan programs for well qualified borrowers.

15-year conventional rates are listed at 3.5%.  These rates present an attractiveopportunity for first-time buyers to advance to home ownership with monthlyobligations that meet or beat their rental leases. Current low rates andattractive rental revenues also make the purchase of residential investmentproperties very attractive. Refinance activity is also experiencing  renewed interest by buyers who closedwithin the past 5 years at 30 year rates above 5.5%.

Luxury home buyers have discovered this year that securing mortgage financing for a million dollar home is not as easy as in the past. The deterioration in the credit markets have made it increasingly difficult for buyers to obtain mortgage financing for high priced homes. Nevertheless, the markets have improved throughout the year, with rates and rate spreads falling and more lenders entering the market.  Nonetheless, rising rates that could make today the final window of opportunity to purchase a home at an attractive price point, and with attractive financing.

A jumbo mortgage loan is a home loan in excess of the “conforming loan” limit; a limit is set by the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator for both FNMA (Fannie Mae) and FHLMC (Freddie Mac). The current conforming loans limit is $417,000 ($625,000 in Alaska, Guam, Hawaii, and the U.S. Virgin Islands). The secondary market for jumbo loans, however, is limited primarily to mortgage lenders themselves who are backed by lines of credit provided by investment and commercial banks as well as large insurance companies. Because there is less of a secondary market for these larger loans, they tend to be somewhat more difficult to find and priced higher than conforming loans. This rate differential has ranged from .25% to 1.5% depending on the market environment.

Over the past several years, as the credit markets became increasingly loose, jumbo loans gained popularity. Many jumbo loans were made to investors and to other borrowers using “stated income” programs, now often referred to as “liar loans”, which required little in terms of income and asset verification. As the credit markets tightened, so did the underwriting of jumbo loans.  Full documentation is now mandatory and jumbo loan applicants must demonstrate credit scores of at least 720.  In addition, jumbo applicants must not show any 30-day mortgage or rental payment delinquency in the prior 12 months.           

Three additional factors have created further disparities between conventional and jumbo loan underwriting. These are the required reserves, maximum loan to value, and debt to income ratios. Jumbo loans require that liquid assets equaling 12 months’ reserves reside in the borrower’s financial portfolio with three months’ of bank statements confirming the assets mandated. Conventional borrowers are normally required to prove only 2 months of liquid reserves.  Traditional loans can be obtained for up to 95% of the value of the home whereas many lenders cap jumbo loans at a 75-85% loan-to-value.  Lastly, the maximum debt to income ratio allowed for a conventional loan is 43% whereas a jumbo loan applicant must only demonstrate a maximum of 40% total combined debt.

In addition to increasingly stringent underwriting standards, the market for securitized jumbo mortgage pools has virtually disappeared.  Consequently, so did the loans.   No more than a year ago, it was difficult to find any fixed rate jumbo financing in the mortgage marketplace.  Most borrowers had to settle for adjustable rate loans in the hopes that they would be able to refinance in the future. Furthermore, the number of lenders in the jumbo market also declined, leading to increasingly higher rates.

The good news is that, today, there are more lenders in the jumbo loan marketplace.. 30-year fixed rate financing is available from select lenders and rate spreads on jumbo mortgage loans have declined relative to conforming loans. In  December, 2008, we were seeing spreads on a 30-year fixed rate mortgage of almost 2%. Today, these same spreads are down to less than 1%. In addition, as interest rates have fallen, rates on jumbo mortgages have declined.  This being said, short term trends have shown a modest uptick in both rates and spreads, a trend that will likely continue.

As a result, this is likely the best time in recent memory  and in the near future, to finance a new luxury home or to refinance your current jumbo mortgage. The low rates are due to the government adding liquidity to the market, primarily through Fed mortgage backed security purchases.  Rates would be significantly higher had we not had this intervention. The announcement that this practice will be discontinued in the first quarter of 2010, coupled with the likelihood of higher rates due to the falling dollar and dramatically increased government spending, make it likely that we will see higher rates next year. For luxury home sellers this creates a motivation to sell soon despite a relatively weak housing market. It also creates a window of opportunity for buyers to secure financing that may be at the most attractive rate levels we will see for the next decade.  

In conclusion, we believe that there is positive news for buyers, considering rates have moderated and more programs are available in the jumbo space than there were a year ago. Existing borrowers can also take advantage of the changing market by refinancing their adjustable rate loans to fixed rates. While underwriting is indeed more stringent, financing is still available for qualified buyers.

The outlook for the future may not be quite as attractive as an increasing rate environment will force many buyers to a lower price point.  Furthermore, a contracting economy typically leads to less mobility as potential buyers re-think about moving and instead re-trench. The bottom line:  acting now is likely your best strategy if you are a buyer or a seller of a luxury home.

Rate spreads between 30-year conventional agency mortgages and jumbo mortgage loans have declined again. According to data provided by Banxquote, the spread is currently at .76% , down from .80 last week, .85% last month, and a whopping 1.82%. The current spread is at its lowest point since the credit crisis began. The National Average for 30-year fixed rate jumbo loans currently stands at 5.77%. The 15-year fixed rate is at 5.22% nationally.

Borrowers considering refinancing their current jumbo mortgage from an adjustable rate loan to a fixed rate mortgage should plan to do so as soon as possible as inflationary pressures appear to be around the corner.

Check our current jumbo mortgage rates in Texas at http://www.hlstx.com/TexasMortgageRates.