In this week’s Real Estate News in Brief… more buyers are opting for ARMs, the government expands “sweat equity” down payment program, and more buildings are going green.
It was a short week thanks to the Thanksgiving holiday, but we did get several new reports on the housing market.
The National Association of Realtors reported a 1.4% increase in existing home sales. That’s the first increase in six months, although the sales pace was still more than 5% slower than October of last year.
At this current sales pace, it would take 4.3 months to sell all homes currently on the market. 6 months is considered a normal, balanced market.
The median sales price was $255,400, which is up 3.8% from last year, but is also one of the lowest yearly increases in years.
It took an average of 33 days for homes to sell. The number of first time home buyers is still low, representing just 31% of the purchases, versus the average of 40%.
Jennifer Lee, senior economist for BMO Capital Markets, told Market Watch that “Prices are not rising as quickly as they once were, but they are still rising 4% year over year, and coupled with climbing interest rates, are hurting affordabiltiy.” (1)
Will there be more supply on the market to meet demand?
According to the Commerce Department, housing starts were also up 1.5% last month. That’s about 3% lower than a year ago. Building permits were slightly down. Economists don’t place a lot of weight on these figures since the government numbers are often heavily revised.
Home builders are showing their discontent with the market. The National Association of Home Builders says its monthly confidence index dipped eight points in November. That’s the steepest decline in confidence since 2014. According to MarketWatch, discontent is growing because of higher construction costs, higher development fees, and higher interest rates, which is putting downward pressure on the sales market.
What does all this housing news mean to real estate investors? More people looking for rental property.
The recent dip in stock prices is taking a bite out of consumer confidence, at least among wealthier families. The University of Michigan’s consumer confidence index is down about a point to 97.5.
Homebuyers looking for a break in mortgage rates have a window of opportunity. They dropped 13 basis points to an average of 4.81% this last week. Freddie Mac blames it on stock market volatility, along with a drop in oil prices.
In other news making headlines…
More Buyers Opting for ARMs
Higher mortgage rates are pushing more and more buyers to choose adjustable-rate mortgages, especially in expensive markets. ARMs usually have a slightly lower interest rate at the beginning of the loan, and then adjust higher after a number of years.
Real estate data firm CoreLogic says that ARMs account for about 51% of the total value of mortgages for homes worth more than $1 million. That figure drops to 21% for homes worth $400,001 to $1 million, and to just 7% for homes worth $400,000 or less. The region with the highest percentage of ARMs is San Jose, California, where the average sales price is also the highest.
ARMS caused a lot of problems during the housing crisis. That’s when underwriting requirements were more lenient, and many homeowners discovered they couldn’t afford the monthly payments after the loans reset.
Using “Sweat Equity” for Down Payment
Freddie Mac is expanding its “sweat equity” down payment program. Borrowers have been able to pay some of the down payment with sweat equity for quite some time. It’s part of the “Home Possible” program. But, Freddie Mac announced that it will now let borrowers use sweat equity for the entire amount.
Freddie Mac said in a news release, “Borrowers can use sweat equity with no limits on the amount that can be applied to the down payment, provided the labor performed is completed in a skillful manner to support the appraised value–and is certified by an appraiser.”
That means that borrowers can use sweat equity to cover the minimum 3% down payment, or much more than that if they do a major renovation. Freddie Mac says homebuyers can use their construction skills instead of cash to get their loans. (2)
Household Debt Shoots Higher
Americans are accumulating more debt. According to the Federal Reserve Bank of New York, total debt hit a record high of $13.5 trillion dollars in the third quarter. A little more than $9 trillion of that amount was for mortgages. The amount of money that Americans owe is now 21% higher than it was in 2013.
Economists say that borrowers are more creditworthy than they were before, and lenders are more strict about who they lend money to, but there are a growing number of delinquencies, especially for student loan debt. Those delinquencies are now at 9.1%. That’s up from 8.6% in the previous quarter.
Higher student debt delinquencies have helped inflate delinquencies for all debt. The New York Fed says that 4.7% of debt was in some stage of delinquency in the third quarter.
How does this affect landlords? Consumers saddled with debt are not likely able to qualify for a mortgage due. If they are delinquent on their loans, it may be years before they can qualify. They will be forced to rent for years to come. (3)
Green Building Projects
Building projects are getting greener around the world. According to a new World Green Building Trends report, by Dodge Data & Analytics, the people surveyed expect more than 60% of their projects to be green by the year 2021.
Among the top reasons for going green is client demand at 34%. Environmental regulations account for 33% and social motivators, such as the desire to do “what’s right,” account for 27%. But the most important “specific” social motivator is a concern for the occupant’s health and wellbeing.
(3) News Max Article