As we know by now, a strong purchase market for housing is forecasted for the next few years. After such a long period of refinances, this presents some real challenges for Realtors, lenders, and consumers.
The recent onslaught of refi’s has removed many homes from the market. This results in a rise in home prices leaving fewer affordable homes for sale. Those that are out there are smaller and of lower quality than comparable homes available in prior years.
As we enter the spring season, the housing inventory shortage will make it difficult for all potential homebuyers to find homes. The first-timers will be the ones hardest hit.
According to a recent Trulia report, affordable home inventories continue to decline while their price has increased by about 9.5% over last year. The more consumers looking for them, the more the price will rise.
Across all segments, as a result of rising home prices and mortgage rates, the share of income needed to purchase a home has reached its highest level. In fact, the portion needed to buy a starter home jumped by over 4%, up to about a little more than 40%. That’s a big chunk of income.
This increase, coupled with higher maintenance cost and the condition of some starter homes, make it difficult for first-time buyers to qualify for a home if they can find one.
This also presents challenges for lenders. Even move up buyers, who realize additional equity gains when they sell, are finding it difficult to find homes in their price range. To qualify, buyers and lenders need to stretch the envelope a little taking on additional risk.
Because of the shortage, price increases, and higher equity, some homeowners are not spending money to repair or upgrade their home prior to sale. The results in additional costs to the buyers once they own.
Some have turned to rehab mortgages to get the money they need for such repairs or upgrades which effectively increases their cost to acquire the home.
Lenders need to be very careful when qualifying buyers, at any level, for their mortgage. Appraisals become more valuable in detecting needed minor repairs which may cost the buyer after the closing. It’s as important to ensure the borrower can maintain the home after purchase.
Things may get a little bumpy. With fewer affordable homes it will be difficult for first-time buyers to enter the market. Fewer first-timers means fewer move up buyers, and so on. This translates into fewer sales and fewer loan opportunities.
Every cloud has its silver lining. Fewer buyers mean reduced demand. Reduced demand helps to increase supply. An increase in supply tends to reduce prices making more homes affordable for first-time buyers.
Now, it depends on those rates…