Although housing market conditions remain a challenge, there are still a number of things that homebuyers can be thankful for this year. Here are five of them to consider:
Housing market conditions turning a bit
While the so-called "seller's market" for homes continues apace, it's starting to look as though the issues of spiraling home prices amid ultra-thin inventories may be starting to ease just a little. After a pretty stable late spring and into summer selling season, existing home sales have picked up again in the last couple of months, indicating that more buyers are finding more homes to buy. Even with the pick up in sales, the time from a home's listing to its sale date increased by one day to 18 days in October, the first lengthening of time-on-market in recent months.
Although no metro home markets have seen year-over-year price declines, 12 of the 50 metro areas we track each quarter saw some softening in the median price of a existing home sold in the third quarter of 2021 compared to the second quarter. This is a return to a more seasonally-consistent pattern, and should that be the case, we'd expect to see more metros with quarter-to-quarter median price declines for the fourth quarter. That could mean some lower cost opportunities for homebuyers.
To be sure, home prices are still on the rise, but year-over-year percentage gains have started to ease; the 13.1% annual increase seen in October is still an outsized one, but at the same time does represent a deceleration from the 23% annual pace seen back in May and June.
It is also true that mortgage rates aren't quite as favorable this year than last, as they are about a third of a percentage point higher now than then. That said, they are only perhaps a half-percentage point above all-time record lows seen at the start of 2021, and don't appear to be causing any concerns among homebuyers as yet.
Affording a home remains a challenge, but it may be that rising wages, still-low mortgage rates and less-robust home price increases will start to rebalance the housing market as 2021 comes to a close.
A growing economy
To say that the pandemic upended the economy here in the U.S. and elsewhere would of course be an understatement. That said, waves of fiscal stimulus and interest rates at or near record low levels have fostered a solid (if still uneven) economic expansion. You might not know it, but the pandemic recession officially lasted only two months, according to the National Bureau of Economic Research. Still, the expansion that has followed has been at times one of record strength and sudden softness, and the economy is not yet back on the nice, reliable plane it was for the record-long economic expansion ended by COVID-19.
Out of a blast of fiscal spending and stimulus this has come a fairly robust job market, with record high levels of job openings and competition for workers that has sparked the fastest wage growth in at least 20 years. Rising incomes are helping potential homebuyers have a least a chance to catch up to surging home costs, and that's a good thing.
The flip side of a growing economy is that rising demand at a time of still-impaired supply is creating more inflation that we've seen in decades. Faster growth and inflation are the two factors that can put interest rates on a rising path, and there's no doubt that interest rates and mortgage rates have climbed up off of historic lows. That said, it's important to remember that the lowest mortgage rates often happen in the worst economic conditions, and it's a safe bet that no one wants to return to flaring COVID-19 infections and corresponding curtailments on freedoms and activity.
That job opportunities are plentiful and wages on the rise are at least two things to be thankful for, as these are the foundations on which the ability to buy a home is built.
HSH.com’s Two-Month Forecast for Mortgage Rates
The Fed's steady hand
While the political climate in the U.S. have been fractious and often dysfunctional at times, the Federal Reserve has mostly been quietly on point, maintaining policies aimed at keeping the financial markets liquid and functioning while the pandemic's effects intensify and slacken.
The short-term interest rates the Fed directly controls have been at emergency levels since March 2020, accompanied by purchases of Treasury bonds and Mortgage-Backed Securities. Given that the short recession ended more than a year ago, an argument could be made that the Fed has kept its foot on the throttle longer than was necessary, contributing to the spate of price increases we now see throughout the economy. That said, flares in infections last winter and this past summer blurred the economic picture, leaving the Fed little choice but to error on the side of caution in removing accommodation. The Fed has just begun trimming purchases of bonds this November, will do so again in December and there is a good chance that they will speed up their wind down early next year, a precursor to raising interest rates.
That the Fed has been consistent in its messaging and approach toward inflation and economic risks has mostly meant a slow, predictable change to monetary policy, and this reliable stance has helped keep financial markets on a mostly even keel. Despite reasons to rise, interest rates have remained low, and rising asset values have no doubt plumped up investment and retirement accounts for millions of Americans, some of whom will use these gains to fund downpayments to buy a home.
Slightly looser mortgage standards
No homebuyer in recent years would call the process of getting a mortgage anything but rigorous. That's not likely to change much, and certainly we're in no danger of seeing the kind of lending conditions that contributed to the last housing boom and bust. However, the pandemic's effects on homeowners has been less severe than feared, and lenders who once sharply tightened lending conditions in fear of loss are starting to open the credit spigots just a bit more, at least for some mortgage borrowers,
According to the most recent Survey Loan Officer Opinion Survey from the Federal Reserve covering the third quarter of 2021, better than 10% of the banks that participate in the survey reported "somewhat" or "considerably" easier standards for borrowers looking for mortgages backed by Fannie Mae or Freddie Mac. Slightly fewer also said they had lowered barriers for government-backed (FHA, VA, USDA) mortgages. Loans that otherwise met qualified mortgage standards but weren't sold to the GSEs saw 19% of respondents trimming qualifications, and other non-QM loans such as jumbo mortgages saw about 25% of banks easing underwriting standards.
This relaxation of rigidity comes on top of 4.6% (GSE-backed) and 7.9% (gov't-backed loans) who reported easing in the second quarter.
Overall, these changes are likely small, and are probably incremental. For example, it may be that lenders are lowering minimum credit score requirements, so a borrower with a FICO 750 might get the same jumbo rates now as someone with a FICO 760 did earlier this year. Or, it may be that some banks are accepting borrowers with higher debt-to-income ratios, or loosening may apply to loans made to certain self-employed borrowers, such as doctors or lawyers. Whatever the case, any incremental changes along the fringes of underwriting are good news for potential homebuyers who are pretty well qualified but may have otherwise had trouble finding financing (or who would pay a premium for it when they did).
What this ultimately means is that even though the majority of the mortgage market may be a homogenous place, you still need to shop around, since lenders don't all adhere to exactly the same set of underwriting specifications. That's especially true if your needs fall outside of the mainstream of borrowers, who should be thankful for improved opportunities to borrow or lowered mortgage costs.
Fast-growing equity stakes
Fast-rising home prices are a real problem for those looking to buy a home, but a great benefit to those who own them or are looking to sell.
There's a real advantage to becoming a successful homebuyer in this hot market: With home prices still rising by double-digit percentages, a new homebuyer will see their equity stake grow extraordinarily quickly. A larger equity stake provides a cushion against any softening or local downturn in home values, can make it possible to cancel Private Mortgage Insurance more quickly (saving money) or even offer a chance at refinancing to a lower interest rate should conditions prove favorable.
For example, a homebuyer who purchased a median-priced home in the Charlotte, NC metro area in the first quarter of 2021 at a cost of $320,700 would have seen its value rise by 13.35% to $363,500 by the end of the third quarter. Had the homebuyer made just a 10% down payment at the time -- a 90% loan-to-value (LTV) ratio -- the increase in value would have lowered that LTV to 79.4% (and six months of monthly payments would have improved that even a bit more). Many PMI policies can be canceled when the homeowner's LTV ratio falls below 80%, although there can be so-called "seasoning" requirements of making at least 24 payments before the policy can be terminated. A borrower with more than 20% equity stake can always refinance to eliminate PMI if they would rather not wait out the seasoning period to cancellation.
Regardless of PMI, having a stronger equity position is something for which to be thankful, and even a borrower who got in the second quarter at a median purchase price of $352,600 has seen a 3.09% increase in their equity stake in just three months time. You can track what's happening with home values in more than 40 metro areas using HSH's Home Value Tracker and estimate how much home equity you have using HSH's KnowEquitysm Home Equity Calculator and Projector.
