Tight Housing Market Leaving Mortgage Buyers Out in the Cold
Due to a sizzling real estate market driven by low supply and strong demand, prospective homebuyers who want to pay cash (not needing a mortgage) and those who are able to put down a hefty down payment are squeezing the buyers who need a mortgage with little money down out of the market.
Remember, sellers are more comfortable dealing with all cash buyers and those who will put down a strong down payment. This is because sellers generally believe that at least one hurdle has been removed from the buying process – the mortgage lender. Sellers fear that banks can be fickle when the buyer wants to deposit a small amount. Those who can’t afford an all-cash purchases or big down payments are often left on the sidelines. Of course, all cash offers also speeds up the process.
Half of all mortgage borrowers put down at least 20% in April 2021 (according to the National Association of Realtors - NAR), locking out many potential buyers out of home ownership. Additionally, an impressive 25% of homebuyers paid cash – the highest level since 2017.
To exemplify what is occurring, The Wall Street Journal (WSJ) interviewed prospective homebuyer, Oscar Reyes Santana, who has been looking for a home for his family “for more than a year in California’s San Fernando Valley. They are first-time buyers and budgeted a 5% down payment. The family bid on at least five homes, each time offering at least $30,000 above the asking price, but they lost out every time.”
In this surging market (median existing home prices rose 19% from a year earlier to $341,600 in April according to NAR – a record high), sellers can often choose among multiple offers. Sellers fear that offers with small down payments are likelier to fall through during the loan-closing process.
Additionally, many borrowers who can afford only small down payments get loans from the Federal Housing Administration or the Department of Veterans Affairs. An NAR survey in April of real estate agents found that 27% of sellers were unlikely to accept an offer with an FHA or VA loan, and another 6% would outright refuse such an offer. In a hot market where sellers are entertaining multiple offers, these government loans are less attractive to a seller due to their stricter closing conditions.
Indeed, last year FHA and VA loans lost market share to conventional loans. In the first quarter of 2021, FHA loans accounted for 10% of home purchases, the second lowest level since 2008.
The WSJ adds, “Bigger down payments can cushion the housing market in a downturn. In the 2007-09 recession, homebuyers who had made tiny down payments were quickly underwater as home prices started to fall.”
The entire market is putting pressure on would be buyers who cannot afford at least a 20% down payment. Remember, as home prices skyrocket, that 20% becomes a much higher dollar number.
Another issue in a hot real estate market is appraisals. Appraisals are heavily based recent sale prices for comparable homes in a given area. When home prices rise very quickly, appraisal estimates don’t always keep up. Lenders will usually lend only enough to meet the appraised value of the home. If an appraisal comes in low, the buyer will need to fund the difference, or the deal will fall through.
The WSJ offers us a clear, graphic example: A buyer who plans to put down 20% on a $500,000 purchase expects to pay $100,000. But if the home is appraised at $450,000, the cash payment goes up to $140,000 – the sum of the $50,000 shortfall plus a $90,000 down payment.
But there is some hope: CoreLogic reports that first time buyers who used mortgages paid 9.1% down on average year-to -date. So, there is hope for buyers with only small down payments to get a deal. Although that statistic is up from 8.4% for last year.
I’d like to wish all my readers a joyful, meaningful, and hearty Independence Day.
We sure deserve it after the pandemic year of 2020!
See you next month.