How to Play the New Real Estate Roulette

If you’re shopping for a house in Dallas-Fort Worth right now, you might as well face up to one inescapable fact: Your timing is terrible.

Four or five years ago, you might have been able to own the house of your dreams for less than half of what you’d pay today. Even 12 months ago, you could have saved tens of thousands of dollars in interest charges over the life of a 30-year mortgage. But in the spring of 1980, prices and interest rates are at an all-time high. Mortgage money is so tight it fairly squeaks. And consumer buying power is taking a severe beating. On the whole, you may never find a worse time to buy a house – unless you wait until next year.

As a buyer, however, you can console yourself with another inescapable fact: It’s also a bad time to sell a house. The average seller is being forced to give away thousands of dollars in “points” in order to consummate the sale, even as record-shattering inflation threatens to eradicate his profits almost before he can get them to the bank. As one savings and loan president says glumly, “It’s not a buyer’s market; it’s not a seller’s market; it’s just not a market, period. “

The thorniest problem is interest rates. They took off last winter like a hot-air balloon after Congress temporarily set aside all state-imposed usury limits (such as the Texas law that prohibited mortgage loan rates from exceeding 10 percent). By early April, rates on government-insured FHA and VA mortgage loans had hit 14 percent, and they could easily be higher by the time you read this. On conventional financing – provided one could find it – the rate was about 16 percent with no top in sight. “We’re not making real estate loans of any kind, ” admits the same S&L president, “but if we were, we’d need to be getting 19 to 20 percent to come out on them. It’s hard to say what’s going to happen next, because none of us has ever been through anything like this. We have no past experience to rely on. “

Despite all this, the National Association of Home Builders (NAHB) has predicted that Dallas-Fort Worth will be the nation’s hottest area for construction this year, with more than 42, 700 new housing units projected. Though that figure now seems overly optimistic, January sales of all homes in Dallas County, including new and pre-owned, ran 43 percent above sales for January 1979, seemingly in defiance of all logic. Barring some type of nationwide interest-rate disaster, many local observers expect this pace to continue more or less unabated. The major reason is the general economic boom that brought an average of 200 new residents per day into the 11-county Dallas-Fort Worth area between April 1979 and April 1980. This influx is likely to taper off slightly during the balance of the year, but it should keep demand for all types of housing strong.

Even if you aren’t faced with the necessity of putting a roof over your head, there are still legitimate reasons to press ahead with your home-buying plans. For one thing, as bad as matters are when it comes to high interest, tight money, and dwindling purchasing power, they may get a good deal worse before they get better; few experts hope for relief before 1981. Even then, there will be no return to those good old days of the mid-1970’s. “We’re probably going to have 12-to-14 percent interest rates with us for a long, long time, ” says Ron Ormsby, executive vice president of the Greater Dallas Board of Realtors, “and the chances are, we’ll never see home mortgage interest fall back into the single-digit range again. “

Home prices are leading the way locally in the inflationary spiral, and in all likelihood they will be higher a year from now. Should inflation continue at the 18-percent annual rate predicted by some authorities for this year, more and more potential home buyers will be forced out of the market. You may be one of them. Millions of middle-class American families are rapidly losing their ability to buy a traditional single-family home, and as the home-buying struggle grows more desperate, he who hesitates may be lost forever.

Yet another valid reason for buying now is that a greater variety and wider choice of housing is currently available in Dallas-Fort Worth than at any time in the past – and possibly the future, too. If you’re willing to pay the price, you can choose from historic homes in protected preservation districts, brand-new single-family residences in the inner city, zero-lot-line homes, a wide variety of condominiums, and, of course, those plots in suburbia that may one day be beyond the typical buyer’s means.

Finally, in spite of tight money and tough interest, you may have more financing options than you realize. An awareness of these options may make it possible for you to own a house that you now consider completely out of reach. It will also help you to avoid making costly mistakes – mistakes you could otherwise regret for years – when you sign on the dotted line. There is no best way to handle a home mortgage; what’s best for you will depend largely on your situation. But the following will tell you most of what you need to know about the most familiar -as well as some of the strangest – avenues of home financing.



FHA/VA Loans

These are still among the easiest and most painless methods of obtaining a home mortgage, and, even at 14 percent, the interest rate on FHA and VA loans is as good as you’re going to get anywhere. Down payments under the most commonly used FHA plan, 203b, are just 3 percent of the first $25, 000 and 5 percent of the rest of the purchase price. This figures out to just over $2500 on a $60, 000 house. For qualified veterans, of course, no down payment is required on a VA loan.

The principal drawback to these government-insured loans – besides considerable red tape – is that the mortgage amounts available are limited. The maximum mortgage that can be handled through FHA financing is $67, 500. There is no hard-and-fast limit under VA financing, but the maximum is left to the discretion of the mortgage banker or lending institution making the loan, and practicalities usually limit the amount to $100, 000 or less.

Traditionally, FHA and VA financing has been limited to tract housing developments, while more expensive custom houses have normally been financed through conventional means. But with today’s skyrocketing prices, $75, 000 and $80, 000 tract houses are not unheard of. What this means to the prospective buyer is a much larger down payment in order to obtain FHA financing.

Houses sold on FHA and VA loans must be built to FHA specifications and must be approved in advance of their construction. Most custom builders don’t bother to obtain this advance approval. An unapproved house can be financed by FHA or VA if it is at least one year old and has passed an FHA inspection. All pre-owned homes also must pass inspection before new FHA mortgages can be written on them.

When the interest on FHA or VA loans is below the market rate (as it often is in tight-money times), the government allows lenders to charge “points” on mortgages in order to bring FHA/VA loans in line with conventional loans. A point is simply a surcharge of one percentage point on the amount of the mortgage – $500 on a $50, 000 loan, in other words – that must be paid by the seller rather than the buyer. Up until late February, when FHA/VA interest rates jumped from 12 to 13 percent, sellers were having to pay a whopping 15 points – or $7500 on a $50, 000 loan. Once the interest rate went up, the number of points dropped; at the current 14 percent, sellers pay an average of seven points, or $3500 on a $50, 000 loan. Does this give you some inkling as to why the prices of tract houses have been climbing so steeply in recent months?



FHA Graduated Payment Plan

This is the federal government’s latest scheme to make new houses available to a wider segment of the population. And to give the devil his due, it appears to be a much more workable plan than the disastrous 235 loan program that cost the Department of Housing and Urban Development (HUD) many millions in the mid-Seventies. The new plan is called FHA 245: Graduated Payment Mortgages, and although some builders have given it a great deal more ballyhoo in their advertising than others (Fox & Jacobs, the area’s largest, calls it “superplan”), it is available on all FHA-approved new houses.

Under the plan, monthly payments are drastically reduced for the first five years of a 30-year mortgage, on the theory that younger families will increase their earning capacity during that period. Each year the monthly payments increase slightly until, by the sixth year, they are actually slightly higher than under regular FHA financing. On a $67, 500 FHA 203b loan, for example, monthly payments would be $900 per month for the 30-year term of the mortgage. Under the 245 plan, however, monthly payments would be $698 the first year, $737 the second, $779 the third, $824 the fourth, and $872 the fifth year. They would climb to $924 for the sixth and succeeding years. The plan, which also allows a purchaser to qualify with somewhat less income than would be required ordinarily, is enjoying widespread popularity in Dallas-Fort Worth, even though there is one important catch: a large down payment. Under the FHA 203b plan, $2900 would be needed as the down payment on that same $67, 500 house; under 245, a buyer would have to pay $7450 down. This may actually be a blessing in disguise, but it probably won’t seem so to the impatient, financially strapped aspiring home owner who is several thousand dollars short of the amount he needs.



Conventional Loans

These are much trickier to get these days than mortgage loans of the government-insured variety, and likely to cost you more. In early March, almost all savings and loans were temporarily out of the real estate loan business altogether, and when they will get back in is anybody’s guess. Some were still making a few loans – though often only to big depositors. Just a year or so ago, it was relatively simple for a buyer with good credit and income to walk into an S&L and obtain 90-percent financing on the house of his choice. Now, even those with some mortgage money available are lending no more than 75 to 80 percent. So if you have your eye on a $100, 000 house, better be prepared to plunk down anywhere from $20, 000 to $25, 000 as a down payment if you want to deal with an S&L.

Some of the largest S&L’s have become real estate developers in their own right, having acquired large blocks of property in choice residential areas, and, in effect, developed these tracts on a partnership basis with major custom builders. The S&L provides interim financing for the builder and guarantees long-term conventional mortgage financing on the individual houses as they are sold. The profit reaped on the land makes the overall transaction attractive to the S&L, even if the interest rates alone are not.

There are also some large mortgage bankers in Dallas-Fort Worth that still have limited amounts of money available for conventional loans, but the supply is dwindling rapidly. “We still have a few investors who are willing to gamble on the money market, ” says Jim Wooten, president of the Dallas branch of Lomas & Nettleton, one of the nation’s larger mortgage banking firms. “But most of them have fallen by the wayside. Nobody seems to have a grip on what’s happening with interest rates, and until somebody does, investment money for mortgages is going to be scarce. ” Obviously, it is the more expensive houses that would-be purchasers are having the most trouble financing. “You might be able to get a 65- to 75-percent loan on a house up to $200, 000, ” says Wooten, “but beyond that it’s extremely difficult. “

About the only recourse for the buyer in search of a $300, 000-or-more house is the “customer relations loan. ” “If you know somebody who’s a big depositor, or whose company conducts a lot of business with a particular financial institution, you may be able to use this as leverage to get a loan that would ordinarily be impossible, ” confides an S&L executive. “But don’t start counting your money until you’ve got your mortgage commitment right there in your hot little hands.”

With few exceptions, the conventional loan well has virtually run dry, at least until the interest mess can be unraveled. The vast majority of banks weren’t deeply into mortgage loans even when money was flowing freely, and credit unions, which had written more than $260 million in home mortgages in Texas by the summer of 1979, are totally out of the game today. “We haven’t written a mortgage loan in almost a year, ” says Jim Bryan, president of the Tex-Ins Credit Union, the area’s largest with $18 million of mortgage loans in force. “We’re not even making ’swing’ loans on members’ equities anymore, and there’s no way of knowing when we might start again. “



Equity Assumptions

If you have a chunk of cash from the sale of another house, a healthy savings account, or a company willing to subsidize your move from another city, buying someone else’s equity and assuming his existing loan may be your best course of action. But don’t expect to find a bargain: Most deeds of trust written after 1967 contain an escalation clause. Only older mortgages, FHA/VA-insured mortgages, or those owned by a governmental agency rank as real finds – about one in a hundred.

Still, even with the odds against you, it may be worthwhile to look around. It’s certainly one of the quickest ways to get into a house, and it makes the search for new loan sources unnecessary.



Owner Financing

The most hassle-free solution is to find an owner who is willing to sidestep all the rigamarole and finance the sale of his house himself. Until recently, most individual home owners were either unwilling or incapable of doing this, since they needed to get their money out of the property they were selling as quickly as possible. Now, however, it makes sense for an owner to carry the note, since by doing so, he avoids paying those costly points that a lending institution will charge for handling a mortgage on his house.

Owner financing is a good deal for buyers and sellers right now. It saves trouble and expense, and you can often arrange for a shorter-term mortgage – say 10 years – than is available elsewhere. Frequently, a seller will even give you a break on the interest, especially if you come up with a good-sized down payment. The beauty of it is that it takes what has become a very complicated procedure and reduces it to a simple transaction between two parties. Just make sure you get a warranty deed and title policy.

In searching for an owner-financed deal, these pointers may prove helpful: (1) Residential properties being disposed of as part of an estate are offered in this manner with reasonable frequency, since heirs are often reluctant to lay out cash to renovate rundown houses or to pay real estate brokerage fees, closing costs, etc. (2) In areas not yet “discovered” by the home-buying public, where home loans may be virtually nonexistent even in normal times, property owners may have little choice but to carry their own notes.

Even when a seller is unwilling to finance the entire transaction himself, he may agree to help bridge the gap between what a buyer can afford to pay down and what the mortgage company is willing to lend on the property by taking a second-lien note. If the house you want costs $100, 000, the lending agency will mortgage only $80, 000, and you have only $10, 000 in cash for a down payment, a $10, 000 second-lien note to the seller might be the answer. Needless to add, many lenders are too choosy these days toenter into such a deal.



Time-Buying Gimmicks

If you have found a house that you simply can’t live without, but are unable to arrange a mortgage loan on it in any of the above ways, your best bet may be to make some arrangement that will keep someone else from buying it and allow you to simultaneously buy time until financial conditions improve.

One way to accomplish this is to lease with an option to buy. If you and the seller can agree upon a sales price and an interest rate, you can make a small down payment to demonstrate serious intent and then lease the property with the understanding that the purchase will be consummated within a specified time, usually six to 12 months.

Still another alternative – and a risky procedure for both buyer and seller – is the “wraparound mortgage. ” To understand this complex arrangement, picture the seller of the house as having bought it several years ago for, say, $45, 000 at 8 percent. Now introduce a buyer willing to pay $75, 000 at 13 percent. Without informing the original mortgage holder, the seller may execute a “wraparound mortgage” – that is, accept a down payment from the buyer and turn the property over to him. The seller continues to pay on the original mortgage each month, while the buyer, in turn, makes higher mortgage payments at a higher interest rate to the seller, with the seller pocketing the difference between his own mortgage obligations and what he receives from the buyer.

The situation is rife with problems for all concerned. At any time, the original mortgage holder can call the original loan, demanding full payment immediately (foreclosure is usually triggered by something as simple as a check of homeowners’ insurance titles). This can leave both parties to the wraparound in a terrific bind. Before involving yourself in such a scheme, the advice of a competent real estate attorney is essential.



Future Shocks

Obtaining a 30-year mortgage at a fixed rate of interest may soon be a thing of the past, regardless of how high the rate. Many observers feel that mortgage interest must be allowed to fluctuate with economic conditions if the present dilemma is ever to be resolved. “We could easily be lending money at 10 percent right now, ” says an S&L official, “if we were drawing 10 percent on all the mortgages on the books. The trouble is, we’re still holding a lot of 6 1/2 – and 7-percent paper, and we lose our tails on it. “

One plan that is currently receiving favorable consideration in the industry is the “Canadian rollover, ” whereby interest rates on home mortgages would be renegotiated every three to five years for the life of the mortgage. If interest rates should rise, the rates on existing mortgages would be increased accordingly; if rates went down, they would be reduced accordingly. The chaos that has gripped investor money markets and the home-mortgage industry during the first quarter of 1980 has led to widespread endorsement of the rollover concept that’s been used successfully in Canada for some time. In early April, the Federal Home Loan Bank Board adopted a regulation permitting a variation of the Canadian rollover, but only time will tell whether it will catch on.

All of which brings us back to your problem if you’re out there house-hunting in these difficult times. Even though the timing may be terrible with prices and interest at an all-time high, you can still take two important steps to save yourself huge sums of money no matter how much interest you end up paying: (1) Make as large a down payment as you can afford without borrowing or endangering your financial security. Every dollar you mortgage can end up costing you $3, $4, $5, or even more over the life of the mortgage; every dollar paid “up front” will be paid only once. Not only that, but larger down payments can reduce interest rates by a percentage point or more. (2) Keep the term of your mortgage as short as humanly possible. The longer you take to pay off your house, the more money you will throw away in interest. The resulting tax benefits will come nowhere near offsetting your loss.

One day soon, it may be routine to obtain a 40-year loan on a new home. Under federal law, lending insitutions could be writing 40-year mortgages right now. Fortunately, however, few have started the practice yet, and it would be a blessing for the average consumer – to whom compound interest is as great a puzzle as nuclear fission – if they never did.

Suppose, for example, that you decided to buy a home with a $50, 000 mortgage at 14 1/2 percent on a 40-year term. Your monthly payments would be $606, which doesn’t sound bad by present standards. The rub is that your total payout 480 months later would be $290, 913, or close to six times the amount you originally borrowed. Suppose, instead, that you took on a $100, 000 mortgage at the same 14 1/2-percent interest rate, but this time limited yourself to a 20-year term. You might have to scrimp to make the $1280-per-month payments, but after 240 months you would have spent $307, 200 in principal and interest. In other words, you would have bought twice the house for just $16, 286 more, just by halving the term of your mortgage. You’ll have trouble Finding shorter-term mortgages these days, but the lesson is clear: the shorter the better.

Most of us don’t have the luxury of choosing the time and circumstances in which wego shopping for a home. And none of us hasthe power to turn back the clock and reclaimthat gorgeous palace we could have boughtfor $30, 000 in 1971. But in the final analysis,poor logic is more costly than bad timing -and more avoidable.