The landscape of home financing and real estate has undergone a transformation like no other. It’s imperative that mortgage and homebuilding professionals deploy innovative strategies to adapt and thrive.
While inflation has risen slightly in recent months after falling to its lowest two-year level last October, the increase has not been unexpected, keeping open the possibility for rate cuts later this year. The unemployment rate stood at 3.8% as of March 2024, reflecting the overall strength of the labor market. Higher interest rates might continue to dampen activity in interest rate sensitive sectors such as housing.
This dynamic environment has significant implications for both homebuyers and homebuilders. Existing homeowners, 80% of whom have a mortgage interest rate of less than 5%, are likely to continue holding onto their homes. This trend has slowed down the availability of resale homes in the market, further contributing to the current housing inventory shortage.
Psychological shock
In 2023, existing home sales dropped to their lowest level in almost 30 years, a direct result of an historic shortage of resale inventory, according to the National Association of Realtors (NAR). Simultaneously, the new home market has expanded its market share, with the National Association of Home Builders (NAHB) stating that newly constructed homes now represent 33% of inventory, compared to the typical 13%.
The Fed’s rapid rate hikes that started in 2022 may have been a psychological shock for homebuyers, but consumers seem to have adjusted to the new normal rates that stand at approximately 7.1% in mid-April for an average conventional 30-year fixed-rate. Despite the adjustment, this environment creates a need for more adaptable financing solutions, as buyers are compelled to explore the options available to them when it comes to securing affordable financing.
Even with the challenges, long-term housing market fundamentals remain promising due to a severe shortage of supply. According to Freddie Mac, the country is short of approximately 3.8 million units to meet demand. With millennials and Gen Z reaching prime homebuying age, this shortage is expected to increase even further. In a higher-for-longer rate environment, adapting to capture these buyers becomes imperative.
Daunting terrain
A 2023 John Burns Research & Consulting survey revealed that 71% of respondents said they would not accept an interest rate of more than 5.5% and over half of homebuyers believe interest rates will eventually decrease, despite the recent upward trend. This belief runs contrary to where many experts predict rates will move in 2024. Before the deflating inflation numbers, Fannie Mae forecasted that 30-year mortgage rates would only decrease to as low as 6.4% in 2024, while NAR believed rates would fall closer to 6%.
It is essential to inform homebuyers about the realities of interest rates and the benefits of locking in a rate in a market characterized by uncertainty. Homebuyer education plays a crucial role in this process, as many homebuyers do not currently understand the opportunities available. It can be argued that the psychological impact surrounding the speed of rate hikes has been more daunting for homebuyers than the higher rates themselves. The pace confronts clients with an unknown and uncertain terrain that they don’t feel confident navigating.
Homebuyers have a desire to leverage everything at their disposal in today’s environment to achieve their homeownership dreams. As opposed to the resale market, new home builders offer a range of financing options, including permanent and temporary mortgage interest rate buydowns to attract homebuyers to their communities. These rate buydowns can be up to 2% lower than prevailing market rates. Many homebuyers aren’t aware of these possibilities.
Moreover, there’s a misperception about the downpayment needed to purchase a home. A survey in 2022 by NAR reported that conventional wisdom has persuaded many homebuyers to believe a 16% to 20% downpayment is mandatory, and 10% think they need to put more than 20% down. This is a myth, as the survey explains that the typical downpayment for first-time homebuyers has ranged between 6% to 7% since 2018.
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It appears that the housing market may be poised for continued growth, at least for new homebuilders. The shortage of resale homes and the expanding market share of newly constructed homes indicate favorable conditions for homebuilders. Nevertheless, the success hinges on homebuyers becoming more educated — and thus, feeling more confident — about the financing options available to them.
As interest rates remain elevated, the advantages of homeownership, along with accessible financing, become more critical to explain. It is generally believed that owning a home remains a sound investment, offering not only the potential for financial stability but also the opportunity to create cherished memories in a place to call their own. ●
