FHA, VA Loan Demand Drops on Higher Rates

First-time buyers and veterans may be facing increasing obstacles to affording homeownership. In response, mortgage applications for home purchases involving Federal Housing Administration and Veterans Affairs loans are falling. The loans tend to be popular with first-time buyers, veterans, and those with lower incomes less able to pay a large down payment for a home purchase.

“First-time home buyers who rely on these government programs are increasingly challenged by both the rapid increase in home prices and higher mortgage rates,” Mike Fratantoni, chief economist of the Mortgage Bankers Association, said in a statement.

A survey by the National Association of REALTORS® in the summer of 2021 showed house hunters using conventional financing were edging out buyers using government-backed loans. Eighty-nine percent of sellers would be more likely to accept an offer from a buyer with conventional financing. Only 30% said they would be willing to accept one using an FHA or a VA loan.

Buyers who are making an offer using FHA or VA financing are finding it difficult to compete against buyers who are offering cash or using conventional financing. Some real estate pros say it’s because VA and FHA loans tend to have low appraisals, problematic when home prices are rising fast and homes are selling quickly. Also, government-backed loans tend to be slower to close.

Nevertheless, mortgage demand softened across the board last week, regardless of loan type, with economists pointing to a sharp increase in mortgage rates.

Total mortgage application volume dropped 8.1% last week compared to the previous week, the MBA’s seasonally adjusted index shows. Also, the average contract interest rate on a 30-year fixed-rate mortgage with conforming loan balances rose to 4.50%, a significant jump from 4.27% the previous week and from the below-4% rates that were more common at the beginning of the year. Source: “Mortgage Refinance Demand Plunges 14%, as Interest Rates Spike Higher,” CNBC (March 23, 2022)

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Mortgage Rates Surge to 4.42%

Elevated inflation and the Federal Reserve’s monetary tightening policy drove the latest leap in mortgage rates this week. Since the beginning of this year, mortgage rates have jumped by 1.2%. The typical home buyer would need to spend $250 more every month to be able to purchase a home, Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the association’s blog.

The 30-year fixed-rate mortgage moved up to a 4.42% average this week, more than a quarter of a percentage point compared to last week, Freddie Mac reports in its latest mortgage market survey. Rates continued to rise across loan types. “Rising inflation, escalating geopolitical uncertainty, and the Federal Reserve’s actions are driving rates higher and weakening consumers’ purchasing power,” says Sam Khater, Freddie Mac’s chief economist. “In short, the rise in mortgage rates, combined with continued house price appreciation, is increasing monthly mortgage payments and quickly affecting home buyers’ ability to keep up with the market.”

Freddie Mac reports the following national averages with mortgage rates for the week ending March 24:

• 30-year fixed-rate mortgages: averaged 4.42%, with an average 0.8 point, rising from last week’s 4.16% average. Last year at this time, 30-year rates averaged 3.17%.
• 15-year fixed-rate mortgages: averaged 3.63%, with an average 0.8 point, increasing from last week’s 3.39% average. A year ago, 15-year rates averaged 2.45%.
• 5-year hybrid adjustable-rate mortgages: averaged 3.36%, with an average 0.3 point, increasing from last week’s 3.19% average. A year ago, 5-year ARMs averaged 2.84%.

Freddie Mac reports average commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage. Source: Freddie Mac and “Instant Reaction: Mortgage Rates, March 24, 2022,” National Association of REALTORS® Economists’ Outlook blog (March 24, 2022)

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New-Home Sales Softened in February

Material and labor shortages continue to constrain both new-home supply and sales, economists said as February saw another dip in new-home sales. Buyer demand remains high, but builders struggle to add greater inventory.

Sales of new single-family homes reached a seasonally adjusted annual rate of 772,000 in February, down 2% from January and down 6.2% compared to a year ago, the U.S. Census Bureau and the Department of Housing and Urban Development reported Wednesday. Still, sales remain above pre-pandemic levels. Also, new-home sales did post a significant increase in the Northeast, up 59.3% over last month. The Midwest also posted a 6.3% increase in February. But new-home sales fell 1.7% in the South and by 13% in the West.

Buyers may turn to the new-home market finding fewer and fewer selections in the existing-home market.

“With resale inventory so low and rental occupancy rates high, the new-home market is close to the only game in town,” Ali Wolf, chief economist at Zonda, told BUILDER. “The problem is, the new-home market is running into its own inventory shortages as well. Home sales would be higher if we had more homes for sale and more builders willing to sell them, but for now, the ongoing material and labor shortages are holding the market back from full potential.”

Higher home prices and rising mortgage rates also may start to sideline more potential buyers. The median sales price of a new home jumped 10.7% from a year ago, reaching $400,600 in February. The average sales price was $511,000. New-home prices have increased 31% compared to three years ago.

“We may be approaching a pivot point when higher home costs and higher mortgage rates cool both sales and price increases, but given the supply-and-demand imbalance, we may not hit that point this year,” Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia, told Reuters.

Builders also are facing an all-time high in a backlog of homes that are approved for construction but not yet started. They say delays are caused by higher prices and shortages of common construction materials like lumber for framing, cabinets, garage doors, countertops, and appliances. Source: “U.S. New Home Sales Drop Further as Mortgage Rates Rise; Prices Push Higher,” Reuters (March 23, 2022) and “New-Home Sales Continue to Soften in February,” BUILDER (March 23, 2022)

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In the competitive market, many aspiring home buyers continue to be priced out, according to a new study from the National Association of Home Builders.

About 87.5 million households are unable to afford a median-priced new home. If prices rise by just $1,000, an additional 117,932 people would be priced out, according to the NAHB’s 2022 Priced-Out Estimates report.

Higher home prices, the highest inflation in 40 years, and rising mortgage rates are affecting more household budgets.

The NAHB released the following pyramid that breaks down affordability. The pyramid shows that about 36 million households cannot afford a $150,000 home. The top of the pyramid shows that about 3 million households can buy a home priced above $1.55 million.

Source: “Pyramid Shows 36 Million Households Cannot Afford a $150,000 Home,” National Association of Home Builders’ Eye on Housing blog (March 14, 2022)

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All-Cash Buyers More Likely to Win Bidding Wars

Buyers who offered an all-cash transaction were four times more likely to win in a competitive offer situation than those who didn’t in 2021, according to a report from Redfin. All-cash offers were found to be significantly more successful than other strategies, such as waiving the financing contingency or a pre-inspection.

Bidding wars have grown more common in today’s marketplace as buyers rush to compete for a limited stock of homes for sale. There were about four offers for every home sold in January, according to the REALTORS® Confidence Index Survey from January 2022.

According to Redfin’s analysis, the strategies that were the most effective in competitive offer situations, and their rate of improvement in transactions, were:

• All cash: 334%
• Waiving financing contingency: 31%
• Pre-inspection: 25%
• Waiving inspection contingency: No significant improvement
• Escalation clause: No significant improvement

But, while cash is king, buyers using financing can succeed. Amanda Peterson, a Fort Worth, Texas, real estate professional with Redfin, says she advises her buyers to be financially prepared before submitting an offer and to know how much they’re willing to spend over their offer for a house they truly want.

“We have detailed conversations about how much over asking price they’re willing to go and which contingencies they can waive,” Peterson says. “If a buyer has a low down payment or another scenario that doesn’t typically win a bidding war, I’ve had success explaining buyers’ unique situations to the listing agent and making it clear that their finances are reliable and the deal will close.” Source: “All-Cash Homebuyers Are Four Times More Likely to Win a Bidding War,” Redfin (March 14, 2022)

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Russians Unloading Luxury Homes Across US

Wealthy Russians across the country are reportedly trying to sell hundreds of millions of dollars worth of U.S. property, the New York Post reports. The sales are being triggered by Russia’s invasion of Ukraine and growing sanctions that could put some oligarch’s fortunes in doubt.

The Post documents several recent listings, both on and off the market, by wealthy Russians in the U.S. For example, Alexei Kuzmichev, owner of Russia’s largest private bank, Alfa-Bank, is one of the Russian nationals who own U.S. property and faces sanctions. He has listed his $41 million quadruplex in Manhattan. The Post also reports that Valery Kogan, the billionaire owner of Moscow’s Domodedovo Airport, and his wife reportedly have an off-market listing for their $50 million Plaza Hotel home as well as their other New York City and Greenwich, Conn., properties.

“We have seen a significant number of ultra-high-end properties hit the market in an attempt to liquidate before accounts get shut down,” Erin Sykes, a broker and international chief economist at Nest Seekers International, told the Post.

A hot spot in Sunny Isles Beach, Fla.—known as “Little Moscow” for its Russian population—has seen active listings grow by 9% since Russia invaded Ukraine, Sykes notes.

“I’ve never had my phone blow up like this ever in my life. There is a feeling of potential panic,” Dolly Lenz with New York–based Dolly Lenz Real Estate, told the Post. She says she’s getting inquiries from potential sellers who want to know how much their property is worth, are interested in all-cash deals, and want to sell quietly. “The fear is there, like, where does this stop? Every day there is some senator saying LLCs must be further regulated and undressed. They are afraid of getting their assets seized, even if it is just guilt by association.” Another brokerage representative says they also are increasingly fielding phone calls from Americans looking to buy distressed Russian assets. Source: “Wealthy Russians Are Quietly Looking to Unload Trophy Homes Across the U.S.,” New York Post (March 11, 2022)

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