According to Black Knight, 4.44% of residential mortgages were delinquent in October, up from 4.35% in October 2016. 0.68% of mortgages were in the foreclosure process, down from 0.99% a year ago. This gives a total of only 5.12% delinquent or in foreclosure in the midst of tight credit spreads and low down payment (down payment % is the inverse of leverage so a 5% down payment is 20x leverage).
Most regular homebuyers think 5% or 10% down payment (10% is the median down payment % right now in 2017), is a sign of affordability but it would be also mindful to remember than a 5% or 10% down payment translates to 20x and 10x in leverage on your investment, pairing this with inflation (if you are buying rental properties and/or personal home) is good when the trend is generally positive but when it’s not…
Leverage is just one of the mainly things regular homebuyers and rental property investors will and should take into consideration along with inflation in rental price, maintenance fee but also the future growth of the region (i.e. study the government official blueprints of approved residential and commercial properties for future construction as it will have impact on supply/availability and demand/drive further financial/social/commerce capital to a given zip code i.e. looking at properties around The Domain – Austin in 2002 and 2017).
I did a quick analysis to show the impact and return of just a 5% or 20x leverage. As you can see a 5% down payment can easily deliver triple digit return in just a few years or just a 2.75% yearly appreciation in property value (hedged on inflation), but also bear in mind this followed by 3 years of -2%, -5% and -5% depreciation in property valuation will cut your face value return on the 5% to just 40% (from 205% in Year 3). Leverage is your friend when everything is good but the gravity will pull you down to earth with just a small % drop in forecast.
The House of Representatives’ tax reform plan proposes doubling the standard deduction while capping the mortgage interest deduction (MID) to the first $500K of mortgage debt could further constrict the mainly inventory-driven price appreciation of US residential property since the GFC. The plan is a decent channel to drive real estate capital from the coastal to the Midwest/in-land areas.
http://www.bkfs.com/CorporateInformation/NewsRoom/Pages/20171204.aspx
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