The mortgage industry experienced a very good year in 2020, and 2021 proved to be better than expected. As the saying goes, all good things must come to an end, and it is looking more likely that the end is on its way.
Economists from both Freddie Mac and the Mortgage Bankers Association (MBA) forecast a slight increase in mortgage interest rates in 2022, thus signaling the end of the heavy refinance activity that has driven a significant portion of recent record sales volumes. Rates are expected to remain fairly competitive, however, with estimates ranging from 3.7% (Freddie Mac) to 4% (MBA).
What’s more, the MBA predicts purchase loan originations will surpass $1.7 trillion in 2022 despite rates being higher than the record lows of late. As MBA economists noted recently, home sales are expected to rise, but it’s dependent on the ability of builders to increase production and the willingness of current owners to list their homes for sale. If enough homes are available, economic growth, job market recovery and demographic drivers should fuel the purchase market.
For many consumers, making a monthly morgage payment poses relatively little difficulty, even at the higher rates expected for 2022, as some are paying more in rent than what their mortgage payment would be. Still, saving up for a downpayment while continuing to cover rent and other monthly expenses is quite challenging.
According to a recent LendingTree survey, while 76% of renters would like to own a home, 48% worry that they will never be able to do so. And 54% cite their ability to afford a downpayment as the biggest barrier to homeownership. Furthermore, misinformation about minimum downpayments is rampant. NerdWallet’s 2020 Home Buyer Report found that 62% of survey respondents believed they needed to put at least 20% down to purchase a home.
The truth is, the salad days of a 20% downpayment are waning as rising rents, significant student loan debt, stagnating wages and underemployment coming out of college have made it nearly impossible for many first-time buyers to attain this coveted savings status. While the overall share of homebuyers making a downpayment of at least 20% increased to 52% in May 2021, the share of first-time buyers able to achieve this feat was only 32%, according to a survey from the National Association of Realtors (NAR).
What’s more, today’s home prices have put this watermark even further out of reach for first-time buyers. According to data compiled by the Federal Reserve Bank of St. Louis, the median price of homes sold in the U.S. in second-quarter 2011 was $228,100. Five years later, this figure increased to $306,000. As of Q2 2021, the median sales price had jumped to $382,600. Using this median price, a 20% downpayment today tops $75,000. For comparison’s sake, this could cover the cost of the top-tier packages for two of Tesla’s four current models while leaving $10,000 or more to spare.
As such, many renters have chosen to put off the homebuying process until much later in life compared to previous generations. According to NAR’s 2020 Profile of Home Buyers and Sellers, the median age of a first-time buyer last year was 33 while the median age of all buyers was 47. With refinance volumes on the decline, the market for purchase transactions will only grow more competitive, especially if first-time buyers remain unable to enter the market due to affordability constraints.
Of all the components that determine how much home a borrower can afford to purchase, the downpayment is the one that lenders are in the best position to address. Downpayment-assistance (DPA) programs have helped countless mortgage-ready consumers make their dreams of homeownership a reality.
What has typically held lenders back from offering these programs is the perception that borrowers who utilize downpayment-assistance programs to help fund their home purchase are more likely to default on their mortgage. But an October 2019 analysis conducted by the St. Louis Fed has found this theory to be inaccurate.
The analysis indicated that downpayment assistance is not significantly associated with default risk. While grant assistance from a government or community organization is marginally significant as a predictor of default risk in one of the Fed’s model specifications, this effect disappears altogether when racial controls are incorporated in the model.
These programs ease the financial burden that prevents many homebuyers from entering the market, and they also enable lenders to help borrowers and their real estate agents craft more attractive bids. This provides a key advantage to both buyers and lenders in today’s competitive market.
Furthermore, it stands to reason that as consumers feel more confident about purchasing a home, prospective sellers will respond accordingly by adding inventory to the market and making it easier for renters to purchase. Thus, improving the ability of consumers to enter the market via DPA programs addresses the affordability and inventory challenges posed by today’s market.
And make no mistake, these challenges must be addressed if the mortgage industry hopes to make 2022 sales-volume predictions a reality. While the transition from a refinance-driven market to one propelled by purchases often results in a decline in overall origination volume, this particular shift is unique in that the economic conditions surrounding it serve to encourage homebuying rather than stifle it.
Mortgage lenders and originators must be cognizant of the affordability challenges plaguing today’s borrowers. They also must be prepared to address them through programs like DPA to ensure every potential homebuyer can participate in the market. ●