By Douglas Katz – 06/09/2022
The National Association of Realtors reported recently that the rise in home prices and higher mortgage rates adversely impacted housing affordability by 29% over the last year. This is the worst point in housing affordability in decades. While generally this impacted present homeowners save a likely bump in their real estate taxes, for prospective buyers or those needing needing to move, this is a huge issue as buying a home and in some cases, like divorce where there could be a required equity buyout refinance. There has been a ton written about the former, so I want to address the latter scenario.
The main issue to be cognizant of in the divorce scenario is a requirement to to do something based on court order. In short, you need to act. While if done correctly, this does take into account the market conditions at the time of the divorce, they provide a required timeline under which the transaction needs to occur and many do not take into account market changes. These market changes can come fast and they can cause significant headaches for the homeowner and yet a lot of people choose to ignore the possibility which costs the time, money or worse.
While I have not seen any studies on this topic, I attribute this to a combination of cognitive bias and confirmation bias. Basically when I talk to clients, divorcing or otherwise, they are fixated on what they want to believe. I used to think of it in terms of a hyper-connectivity to the present market conditions, which is true but that short memory phenomenon it is just part of it. They truth is that they hyper-connect to the positive aspects of the market, i.e. low rates, possible dropping rates, etc. They also tend to evaluate in the context of having more time. It does not seem to matter if it is a year, a month or a week, people always seem to feel that they will have enough time to react instead of consistently and constantly evaluating and selecting a good time to move forward with a transaction. If time runs out they are forced to react regardless of the market.
How does this apply to the current divorcing or recently divorced homeowners? Well, as I earlier stated, we are in a market with the lowest level of affordability in the last 30 years and a market that is continuing to deteriorate. Everything is pointing at two things – lower values and higher rates. In short the signs are all pointing to tomorrow, next week and next year being a WORSE time to do anything than the present.
- Do not wait to determine your current options.
- Work with a seasoned and experienced professional, optimally a Certified Divorce Lending Professional or similarly credentialed lender.
- If you cannot qualify now, determine what you need to do to qualify or, if it looks to far out of reach, consider selling. The latter should apply if your income is insufficient and you are struggling. If the reason that you cannot qualify is related to something that can be remedied like time in a job or documentation of alimony/child support, set a deliberate timeline for re-evaluation once you can meet the requirements.
- If you can qualify but decide not to proceed, you should stress test the assumptions of any pre-approval to see how adverse market conditions alter your loan viability and how they impacts your personal budget. I am able to and have gotten loans approved with over 50% debt ratio, but this means 50% of a borrower’s GROSS income is going toward housing. After taxes and other deductions, this can be a problem.
The real key takeaway is that you are a participant and, in fact, you are the captain of the ship. You need to actively steer to get to your destination or the winds and currents of the markets may take you to somewhere that you do not want to go. Based on data that we are seeing, the headwinds are strong and the waters look to be bumpy. Lower home values, higher rates, inflation are just a few of the things being forecasted. If you are not steering you definitely should be because affordability may get worse and it could cost you.