BLOG VIEW: Despite mortgage interest rates remaining at all-time lows through the first half of this year, first-time home buyers (FTHBs) have not been able to take advantage of them.Â
Ask anyone in lending and he will tell you that ‘rates are good.’ Although rates crept higher through the end of June, anything near 4% is still significantly lower than the rates of the past 30 years. In fact, 4% is only slightly higher than the all-time low of 3.4% hit in late 2012.
The low rates the industry has seen over the past five years have helped inject life into a struggling housing market that bottomed out following the 2008 economic meltdown.Â
So far this year, we have seen growth in total home sales and median home prices. Although higher home prices are great news for sellers, they are, unfortunately, impacting affordability for FTHBs.
The real estate owned (REO) market has seen a drop in inventory as homeowners are fighting for foreclosure alternatives and not just walking away, as they did at the beginning of the economic crisis. With homeowners resolving their debt, there are fewer affordable homes in the nation's REO inventory.
Here's the good news: In February, the number of new homes sold was 24.8% higher compared to a year earlier. In addition, existing-home sales were up 4.7% over the same period. Furthermore, the median existing home price rose more than 7%, year over year, to $203,000. These figures indicate that the housing market is growing stronger and will likely continue upward for the remainder of this year.
In addition to stimulating sales, low interest rates are also causing a boom in refinancing. In April, refinances accounted for 47% of home loans closed compared to 37% in April 2014. Thus, there was about 10% growth in the past year.Â
According to Freddie Mac, more than 1 million homeowners have a mortgage rate that's 1.5% higher than current rates. With higher values, there is sufficient home equity to qualify for a refinance, meaning there could be even more growth in the refinance market in the coming months. A refinance in the first quarter saved homeowners an average of 31% on their monthly mortgage payment.
So, with all of this positive news, why aren't FTHBs coming out in droves? Historically, FTHBs have accounted for about 40% of home sales, but in 2014, this number dropped to a surprisingly low 33%. The lagging numbers are largely due to the economic struggles of millennials, who had an all-time homeownership low of 13.2% in 2014. Many millennials cite a slow job market and heavy student loan debt as major contributing factors.
But there are other factors that have adversely impacted FTHBs, including new lending standards that have been adopted over the years to address the subprime mortgage crisis. These new lending requirements were needed to regain the nation's confidence in lenders and specifically, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which basically serve as the backbone of the mortgage industry. In many respects, the GSEs and their policies led the way in helping regulators lay down the new rules of the road.
With stated loans and high loan-to-value loans no longer available, FTHBs must document their income and come up with higher down payments. The days where a FTHB with a FICO score of 620 could be approved for a purchase mortgage may be a thing of the past. (That is to say, loans to a FTHB with a 620 score are out there, just not stated with high LTV and seller carry back.)
To understand why a FTHB is not bouncing back as the rest of borrowing world has, consider that a FTHB now has to have assets and reserves verified – and further that verification of rent for cash payments to Mom and Dad does not fly anymore.
Acknowledging the issues that plague FTHB in today's lending environment, Fannie Mae recently launched the HomePath Ready Buyer program. This program allows qualifying FTHBs to receive up to 3% of the purchase price in closing cost assistance for HomePath properties. To receive the rebate, home buyers must complete an online home buyer education course and prove that they did not own a property in the last three years.
Providing further assistance, the Federal Housing Administration (FHA) recently allowed qualified FTHBs to close with local down payment assistance programs or gift funds. The FHA also considers borrowers with FICO scores as low as 580, those who went through bankruptcy more than two years ago, those who went through foreclosure more than three years ago, those who have liquidated a home through a short sale, and those with debt-to-income ratios of more than 43% (on certain programs).
FTHBs should further be benefiting from the construction of more no-frills entry-level homes. Firms such as D.R. Horton recently formed Express Homes, an organization that is building homes in the $120,000 to $150,000 range. This is approximately half of the price of the homes the parent company typically builds. Similarly, LGI Homes and KB Homes are targeting the FTHB market through reasonably priced entry-level homes.
Considering all of this, there seems to be a rainbow on the horizon for FTHBs. A recent survey conducted by Realtor.com shows that 65% of older millennials (ages 25 to 34) stated their intention to purchase a home within three months. That is a year-over-year increase of 12%. This is very, very positive news.
As the economy strengthens, experts predict interest rates will continue to rise, with some predicting they will reach 5% before the end of this year. For both FTHBs and existing homeowners who are looking to relocate, there are excellent opportunities to purchase a home at a significant cost savings.
Then again, stated loans are starting to show up on some lending guidelines�
Jimmy Alvarez is director of risk management for Financial Asset Services Inc., a national asset management company specializing in providing asset management, property disposition and valuation services to mortgage companies and financial institutions.
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