Options exist for first-time homebuyers, even in ‘perfect storm’

Dana Gentry

(Nevada Current) Housing prices are tumbling in Nevada, but with interest rates on a fixed loan at 7%, qualifying for a mortgage, even at lower prices, is a challenge for first-time buyers who often lack the income for the larger payment.

Lee Barrett, incoming president of Las Vegas Realtors, calls it a “perfect storm.” But not one that can’t be navigated. “I think it’s a natural flow of the market. Everything that goes up has to make an adjustment.”

Including interest rates.

“It’s better to actually jump in as prices are declining slightly,” says Barrett. “You’ll get a higher interest rate, but you can refinance it.”

Lender Frank Castanos of PRMG in Las Vegas agrees. “Paying rent is 100% interest. Paying a mortgage is like paying back yourself.”

The median price of a single-family home was $450,000 in Southern Nevada for September, down more than 6% since peaking at $482,000 in May. Median values in the Reno/Sparks area peaked at $615,000 in May and fell to $535,000 in September.

Adjustable-rate mortgages (ARMs), which are gaining popularity again, landed thousands of Nevada homeowners in foreclosure during the Great Recession, as values plummeted and made refinancing impossible.

A 5/1 ARM generally provides a lower fixed interest rate (currently 5.5%) for the first five years, but depending on the economy, payments can eventually increase. A 30-year fixed-rate mortgage is currently about 7%.

Barrett says he’s recommending borrowers buy down the interest rate, a popular maneuver during the 1980s, when rates were in the double-digits.

“Two-for-one buy downs are a really good way to get into a property,” he says. “You have to qualify for a higher interest rate, but your first year and your second year are at lower rates.”

For instance, borrowers with a 7% interest rate would pay upfront to get a 5% rate for the first year and 6% rate for the second year, and the full 7% in the third year, with the hopes that rates drop enough to refinance.

“I’d stay with a fixed-rate,” advises Castanos “The difference isn’t that much and you can refinance just as easily if rates come down.”

Castanos says he doesn’t anticipate home prices to plunge, ala the Great Recession.

“Inventory level is so low, so supply and demand is going to either keep prices flat or possibly increase once we get out of the holiday season,” he predicts.

Barrett says he’s not concerned about unconventional loan products resulting in defaults down the road. He says lenders learned from the Great Recession that flooding the market with foreclosures amounts to self-harm when values plummet.

“You can do a gentle reduction of your inventory and not affect the whole market,” he says.

Rick Sharga of ATTOM, a real estate data analyst, doesn’t expect “a huge wave of foreclosures” because most financially-distressed homeowners have equity.

“If these borrowers can’t leverage the equity to refinance their current mortgage, they at least have the option of selling the property rather than losing their equity to a foreclosure auction,” he says. “This option wasn’t available to distressed borrowers during the Great Recession, when many borrowers were underwater on their loans.”

Castanos says he’s heard rates are expected to “stabilize by early next year,” amounting to a drop of maybe one percentage point.

“Will we go back to the rates that we had last year? Absolutely not,” he says. “Unless something happens out of the norm.”