Cheaper Homeownership Lures First-Timers

First-time-mortgage It’s sometimes interesting to look back on mortgage markets of yesteryear. In this case we’re going all the way back to September 2008.

In the first week of September, a good discounted 5-year fixed mortgage could be had for around 5.50%.  Today, rates are 3.75% or lower.

That’s a big change in a small amount of time, and it’s coming at a welcome time for the real estate industry.  From a housing demand perspective, any change is welcome right about now.

The changing cost dynamics are especially good for first-time buyers, which some feel are critical for turning our market around.

For most new buyers, apart from 1.8% higher unemployment, things are looking better than they did eight months ago.  CREA says “Buyers, especially first-time buyers, are being lured by historically low mortgage rates, greater affordability and increased supply.”

Phil Soper, chief executive of Brookfield Real Estate Services, agrees.  “The uptick in first-time home buyer purchases across the country is quite astonishing,” he says.

This trend is being stoked by improvements in affordability. For example, the payment on a $200,000, 35-year amortized mortgage was 20% more in September than it is today.

To qualify for that mortgage one also needed 20% more income than is necessary today.  For many first-timers, money is tight, so these affordability improvements can mean the difference between renting and buying.

The drop in home prices isn’t hurting new buyers either.  TD estimates the average Canadian home has fallen 13.3% in value from the peak 17 months ago.  That further reduces the cost of carrying a new home—in some markets, significantly.

We haven’t even got into all the tax credits, Home Buyers Plan enhancements and other lures for first-timers.

Suffice it to say, opportunity is knocking for first-time buyers.  While only time can tell, some feel it’s time to answer.

  1. Let’s just hope all of those first time home buyers aren’t only buying in because of low mortgage rates. Otherwise the inevitable rate rate rise could be a killer

  2. Are you kidding me! Do you actually think most people feel times are better now than they were 8 months ago? People are losing jobs left and right; most people have taken a huge hair cut on there retirement savings; houses are still waaay overpriced. The only thing that has improved is mortgage rates…which are being manipulated by the BOC. The BOC is creating a disaster and no one seems to give a damn.
    By creating these ultra low rates we are just herding in another generation of first time home owners into houses they cannot afford and propping up home prices for one last bubble. This will end badly…very badly.
    Why is it so hard to find common sense these days. Honestly, it would not be that hard to make this whole situation better. Simply require a 10% down payment…minimum and only allow for 25 year amortizations max. Sure it might take a year for any improvment, but by implementing something like this you would soon see house prices become affordable and in line with historical prices very quickly.
    Anyone else agree??

  3. Ryan, I completely agree with you. But I also believe in the principles of buyer beware, and also of survival of the fittest.
    If others make poor financial decisions and allow themselves to be unwisely lured into residential real estate during a falling market, then I’m perfectly happy to profit from those mistakes when the time is right.
    Such is life.

  4. I worry too about the lure of first timers to the market for the wrong reasons! Rates will go up over time and then true affordability will be tested. There have been tons of first timers entering the market in our business, so much so that we’ve had to change the pre approval process in order to allow for self examination of their decisions before buying!

  5. It’s the best time ever to jump squarely into the biggest debt of your life! Rates this low wont last forever…but your payments will! Go for it, jump in. bahaha.
    In 5 years, I’ll be around to pick up the pieces.

  6. Ryan, I think you’re bang-on.
    As a renter waiting to buy my first home, I can only hope that this insanity doesn’t last much longer.

  7. You guys remind me of Chicken Little, running madly around screaming, “the sky is falling.” Good grief, even with high unemployment the vast majority of Canadians are working, and the relative cost of homes has not been lower for a long time.

  8. Hi Ryan,
    Thanks for the post.
    No. I definitely do not think “most people” feel times are better now (in general) than they were 8 months ago?
    But that wasn’t the jist of this post. What we were actually conveying was that, for most “new buyers” evaluating real estate, it is a much better market today than eight months ago. (Unemployment aside, as noted)
    That’s just a fact and observation. Now, what happens in five years is a different matter, and may be food for a different post.
    Will rates be materially higher in five years or just slightly higher? Will first-time home buyers annual income increases offset higher rates? How many first-time homebuyers are on the fringe to begin with? They’re all good questions.
    Regardless, for prudent first-timers who are financially sound, today is a much better time to buy than 8 months ago.

  9. Rob…one could just as easily argue that today is a worse time to buy. 8 mths ago while prices were higher it was clearly a buyers market and a prudent buyer could land a great deal from a distressed seller. But more importantly, we are now more than likely much closer to raising rates (see your posts on bond yields). I would guess that there are very few first time buyers who can actually afford this market given average wages. My guess is they are taking on huge mortgages with variable rates. When rates start raising even a little you will see some serious problems.

  10. Dave, I would completely agree with you too if this were the case. Unfortunately our government is leading the sheeple to the slaughter and then when the whole thing explodes we ALL will have to pay for their mistakes. If people had to pay for there mistakes we wouldn’t be seeing bailout after bailout both in the U.S. and here.
    It makes me angry that people are allowed to make huge financial mistakes and then we all pay for it when they cannot make ends meet…it’s worse than socialism…at least in a socialist world we share in the good and bad times…here all that is happening is we are all expected to share the bad times…what a crock!

  11. Hi Curt,
    Thanks for the note and sorry, but I’ve got to take the other side of that argument. Prices and rates are down and inventories in many markets are up. So in most cases it’s more economical to buy now than 8 months ago.
    Regarding variable rates, Blair makes a good point. More importantly, if there is any question on affordability, we rarely recommend a variable mortgage. Fixed rates are usually more prudent, especially for first-time home buyers with little equity. (This assumes it’s not simply better for them to rent.)

  12. Ryan,
    As a broker, w a 10% DP and MAX 25 yr amm., I think we would all be looking for new jobs. I would say that 75% or better of my purchase business, has a 5% or less DP. (and a 35 yr amm.) It’s just the way it is. Most people want to put as little as possible down, to keep some extra funds around “just incase”. As a first time homebuyer, I personally think this is a good idea.
    Maybe you work at a bank and have the stability of a guaranteed salary….I do not. It sure is easy to sit around and wait for the referrals to come in w a salary.
    As Rob said above, rates are low, inventory is high & prices are low(er) than 8 mnths ago…why not buy? One can’t tell what will happen in 5 years, live for the now! Yes rates probably WILL go up. Look at the trends from 5 years ago, where were rates then?

  13. I’ve got to say that as a first time home buyer, the reasons posted here are exactly why we’ve chosen to buy. I’m thankfully not directly affected by the increased unemployment and am therefore able to take advantage of the great deals out there.
    Having just moved to Vancouver last summer, it was all but impossible to get into a home due to the astronomical prices. The home we ended up purchasing was discounted over $100000 from when it was listed last summer and we got into a 5 year fixed mortgage at 3.59% For us, it equates to a dramatic savings over what we would have been paying if we continued to rent.
    Sure, things could be vastly different in 5 years, but I’ll probably be making double what I make now, too. I’m certainly not going to lose any sleep over it.

  14. Paul, Did you get your 3.59 at a bank? And when, in the last few days or last week? I get the feeling rates have moved in the fixed 5 year. I saw someone post 3.49 but am skeptical. I’ve got it down to 3.64 at this point. Being picky but had to pay a break fee to get out of another mortgage.

  15. Patrick – 3.49 is available, but with limitations…a better bet depending on your situation is their 3.59% 5 yr deal.
    Most brokers can get you the 3.59%
    [Edited – Appreciate the post Dan. However, we try not to plug specific brokers or the site would be overrun by spam. Thanks for the understanding]

  16. @Ryan – just curious, but why 10% down and a 25 yr amortization? Why not 9%, or 11%? Why not 20yrs, or 30?
    You have to draw the line somewhere, I agree, but what is the rationale for those numbers as opposed to others? Is there data behind it? Or is it just how things were traditionally done?
    Al R

  17. If house prices are low now, they’ll be lower later, right? That’s the trend right? And in 2006 prices were going up, right, and so they’d continue to go up, right? Wrong on all counts! What happened yesterday has little to do with what will happen tomorrow. We can only predict the future based on indicators. Jobs are vanishing, the world is in disarray. House prices decreasing was obvious as long as a year ago when the US suffered a decline. What we didn’t see that coming? RE declines in Canada aren’t over, they are just starting. Why do you think they wont decline further?
    My answer is math. 2.5 x income is about right to pay for housing. We’re a long ways off that historical trend. Wait for that, at least, then buy in. Patience…OR…JUMP IN NOW! DON’T WAIT! NOW IS THE TIME! lol
    RE newbs.

  18. LOL
    Chris L you say “What happened yesterday has little to do with what will happen tomorrow.”
    In other words, predictions won’t help us.
    Then you say “RE declines in Canada aren’t over, they are just starting….We’re a long ways off that historical trend. Wait for that, at least, then buy in.”
    These statements sound pretty contradictory to me.
    Point is, you Chris L don’t know any more than anyone else. Prices could go down or they could go up. Maybe there is more bad news coming or maybe we are near a bottom.
    Why waste time speculating? If you need to buy and you are getting a good deal today. Buy!
    It couldn’t be simpler.

  19. Patrick, the 3.59 was from a bank. We actually had one better offer on the rate (also from a bank) but other factors made the 3.59 a better choice for us.

  20. Vince, an investment doesn’t need to be right or wrong, it simply has to make sense at the time.
    Do you play poker?
    When you decide to stay in or fold has NOTHING to do with the next card, it only has to do with the percentage chance vs. payout that the next card will help or hurt you.
    Let’s say you have a small chance of winning, so you fold and lose all your chips. Out of curiousity, you get to see the next card. It would have produced the winning hand. Thus you made a poor decision? Wrong! You still made the proper call despite folding when you could have won. You had used all available information to read the pot odds. The chances of winning was much lower than the chances of losing.
    If you take your “pot odds” on RE today than you’ve got a greater chance of losing on your call than winning, so wait this hand out for more favourable conditions. If they don’t come, TOO BAD!
    You’ve lost nothing in not playing!!! To stay out of the “game” was the right move given the available information.
    It makes me laugh-loud when people think they’re going to miss out, or be “priced-out”! Wtf…if you’re getting priced-out so is everyone else and thankfully, everything in life works on supply and demand. Isn’t everyone watching the supply side increase or are ya blind? If you’re not seeing it, WAIT!
    Having a place to live is a necessity, but owning it is not.
    Very few people can actually afford a house, that is buying a house with NO debt, free and clear.
    If you have to borrow money to pay for it, YOU COULDN’T AFFORD IT!
    It’s the reverse mentality that screwed over thousands of homeowners in the US and now in Canada.
    If you think you can afford something just because you can make small principle payments with interest, I’ve got lots of stuff I’d be willing to “sell” you…or is it “lending” it?
    Borrow away, I’m sure ya’ll can afford it. Right up until interest rates rise and it’s value decreases and becomes unsellable.

  21. 2md…states:
    “I would say that 75% or better of my purchase business, has a 5% or less DP. (and a 35 yr amm.)”
    This is exactly my point…the only reason real estate has gained so much over the past 4 years is because we are allowing for these miniscule dp% and extending the amortization out far enough to allow buyers to pay these crazy prices.
    Al, no data behind the 10%/25yr. I just think that if people have a significant amount invested in the home they will be less eager to back out when times get tough and the lenders will not be as willing to stretch the potential buyers beyond their limit. Eventually this would drive prices back down to the 2.5 x income levels like Chris mentioned.
    For example, when we used to have the 0% down 40yr amortizations available and the buyer was paying the minimum payment…they were essentially renting the house for the first 5 years as none of the payments would be touching the principle. If times get tough it is very easy to walk away as you have no equity in the home anyways.
    Call me crazy, but if you cannot save for a down payment, what are the chances you can afford a home, taxes, utilities, repairs and all the other costs.
    …and no I am not a banker..not sure if I should be insulted or not ;)…just a lowly computer programmer :) who is looking forward to a long weekend!!

  22. When I bought my first place, I thought I should leverage more and buy a bigger house. My dad said that was foolish: buy the place you *need* and make sure you can afford it now and through the next few years.
    Great advice: the place you live in is NOT an investment, it is a *cost* … Buy what you need and what you can afford. And as Rob pointed out in the post, today more people can afford what they need than 8 months ago.

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