With 30-year mortgage rates remaining at levels not seen in 23 years, mortgage lenders, banks, and home buyers are increasingly concentrated on attempting to reduce the cost of home ownership.Thank you for reading this post, don't forget to subscribe!
This has resulted in the growing popularity of adjustable-rate mortgages, economical mortgages, and affordability boosters such as down payments as low as 1%. However, one economist believes that these solutions are addressing the wrong issue.
“This is a manifestation of a lack of affordability as opposed to a high supply,” stated Mark Fleming, chief economist at First American, in an interview with MarketWatch during the Mortgage Bankers Association’s annual conference in Philadelphia earlier this month.
“People are searching for ways, potentially safe or unsafe, sustainable or perhaps not, to obtain a lower monthly payment as opposed to a higher home price,” he mentioned.
“And that’s exactly what we did during the housing boom in 2006,” Fleming claimed, “with 2/28 and 3/27 and all those financial innovations. “We were keeping payments down due to ever-increasing loan balances and rising home prices.”
2/28 and 3/27 refer to adjustable-rate mortgages. With a 2/28 loan, the buyer has a fixed rate for the first two years, after which the mortgage rate is tied to the prevailing rate and adjusted every year or so. The 3/27 ARM is similar, but the initial fixed term is three years instead of two.
Today, home-lending standards have become much more stringent, according to the industry, with greater emphasis on the borrower’s ability to repay their loan.
Yet, despite 30-year fixed-rate mortgage rates reaching 8% and a decrease in home buying demand, lenders continue to explore more innovative ways to assist buyers. “The combination of rising prices and … rising mortgage rates has pushed affordability to its lowest level since July 1985,” said Andy Florence, CEO of real estate marketplace provider CoStar Group, during a call with analysts after the company’s earnings announcement this week.
Some real estate agents promote assumable mortgages, allowing buyers to take over the seller’s mortgage and its rate, which is much lower compared to the current average rates for many existing homes. Some home loans, backed by government agencies like the Federal Housing Administration, Veterans Affairs, and the US Department of Agriculture, permit homeowners to transfer their mortgage – along with the lower rate it comes with – to the subsequent owner, at least in theory. This will reduce the buyer’s monthly payment.
Other lenders are offering buyers mortgages that enable them to make only a 1% down payment on a home. Freddie Mac recently introduced a program to aid housing counselors and lenders in finding down-payment grants and assistance for their customers. Low down payments allow home buyers to enter into a home without having to spend thousands of dollars more.
Various other creative strategies to simplify the financial calculations for buyers are also emerging. For instance, a listing agent in Chicago recently advertised “seller financing,” where the homeowner pays a portion of the buyer’s mortgage for a fixed, short-term period. The owner will pay only a fraction of the total payment on a monthly basis.
However, Fleming maintains that these solutions, which address buyer affordability, fail to address the root issue.
He emphasized that instead of concentrating on increasing demand, the US should focus on constructing more homes, with an emphasis on zoning reform and density.
“The challenge lies in the fact that addressing it from a federal standpoint is very difficult,” he stated. “Neighborhoods are zoned based on land use, as well as how many units can be built on the same plot of land. Zoning regulations in many areas have historically limited builders from constructing more densely populated housing, such as apartments or townhomes.
“So, at the local government level, we need to find ways to make it easier to build more housing, and this doesn’t mean constructing more single-family homes,” Fleming recommended. “It means creating more density.”
Mortgage rates are at their highest level since 2000, with the 30-year fixed-rate mortgage averaging 7.9% as of October 20. “Global investors are concerned about the possibility of longer-term higher rates and rising fiscal deficits,” stated Joel Kahn, Vice President and Deputy Chief Economist of the Mortgage Bankers Association.