Will Low Rates Spur the Housing Market?
A podcast listener writes: “For the past nine months, there have been five houses for sale on my block. As a nosy neighbor, I have attended an open house for each and have learned from the agents that while there have been a few nibbles, essentially there has been no action. Is this the case across the country? What’s the outlook for housing this fall?”
The most recent reports showed that seasonally adjusted New Homes Sales jumped by a larger than expected 20 percent in August from July, a three-year high. I don’t want to pour cold water on this great result, but it is important to stress that the new home sales are a smaller part of the housing market than existing homes and also, they can be revised substantially in later releases. It looks like the big jump in sales can largely be attributed to builder incentives and the drop-off in mortgage rates.
Separately, the National Association of Realtors (NAR) reported that Existing Home Sales, which account for about 80 percent of all housing transactions, dipped slightly from the previous month to a seasonally adjusted annual rate of 4.0 million. “Home sales have been sluggish over the past few years due to elevated mortgage rates and limited inventory,” said NAR Chief Economist Lawrence Yun.
Given that mortgage rates for 30–year loans have dropped even more since these reports were released (they were at 7 percent in January and stood at 6.3 percent last week), will it be enough to stimulate the housing market from its recent doldrums? Probably not just yet. A Bankrate survey found that 5 percent is the magic number where buyers would be enticed to enter the market and sellers would be willing to list. Remember that the percentage of outstanding home loans under 5 percent is more than 70 percent, so even a 6 percent loan makes it difficult for homeowners to sell their homes and buy a new home since their monthly payments would increase sharply.
The combination of high prices and elevated mortgage rates, not to mention increased homeowners insurance premiums, explains why homeownership affordability continues to weigh on the real estate market. Redfin defines affordability as a buyer who assumes a mortgage and spends no more than 30 percent of their income on their monthly housing payment. In addition to attempting to comply with that ratio, another way to think about homeownership is to ask: if you were to buy, would you be able to afford your monthly costs, and could you continue funding retirement or other obligations and financial goals? If the answer is NO, then you may be overextending.
Even if would-be buyers are able to afford the monthly nut of carrying a home with a 5 percent loan, it is still hard for many to come up with the necessary money to put down to get a mortgage. Consider that the median home price is nearly $440,000, according to Redfin, which means that to qualify for the best rates, a buyer would need to accumulate $88,000 (20 percent of the purchase price) as a down payment. Even 10 percent of the purchase price amounts to $44,000.
If that’s just too high of a hurdle, buyers should know that there are over 2,000 down payment assistance programs, according to the company Down Payment Resource, which tracks them nationwide. For those who are seeking help from their families, be clear about whether they are gifting you the money or lending you money and make sure to put everything in writing to avoid future conflicts.
Finally, if you are trying to buy your first home, don't beat yourself up if it feels impossible, the math really is working against you. To know if you are ready, run the numbers. If you're an older homeowner with significant equity, stop waiting for the highest price, sell that house and move on to your next adventure.