06/08/2018
Mortgage rates hit their highest point in seven years last month, and home prices have jumped 6.5% since mid-2017. On the West Coast, many cities are seeing double-digit gains in home appreciation. But somehow, home buying isn’t slowing down.
In fact, according to the most recent Ellie Mae Origination Insight Report, purchase loans were at their highest share since 2014 in April, and builder confidence is strong, with most feeling good about new home sales for the next six months.
So what gives? With rates high, prices rising and affordability seemingly on the downslope, what’s keeping today’s home buyers in the game? According to experts, there are lots of factors at work.
Buyers Want to Lock in Rates … Before They Rise Again
Rising mortgage rates worry would-be homebuyers, spurring them to lock in the current ones—even though they’re less than ideal.
According to Mark Fleming, chief economist at First American, “The fact that rates are rising actually causes demand—particularly first-time homebuyer demand—as they try to crowd into the market and lock in a mortgage rate and price before both go even higher.”
Increasing rates also push uncertain buyers into the market, ones who may have been on the fence about buying in the first place.
“As rates initially move up, there is an impetus for people that are thinking about buying a home to get off of the sidelines,” said Daniel Beckerman, founder of Beckerman Institutional. “If people anticipate higher interest rates in the future, there is an incentive to buy a property and lock in today’s interest rate.”
Apparently, these proactive moves are founded.
According to the Housing and Mortgage Market Review from Arch Mortgage Insurance, interest rates are only expected to increase as the year goes on. In fact, projected monthly payments to buy the same-priced home could jump 10 to 15% over the next year.
As Arch’s global chief economist Ralph DeFranco bluntly puts it, “Interest rates may not be this low again for decades.”
It’s the American Dream—and Renting’s Not Much Better
At the end of the day, owning a home is still the American Dream, and some people just want to buy a house. As Gina Ko, agent at Triplemint Real Estate explains, “Overall, people always want to buy a home to start a family, build a legacy and move forward in their life.”
Buying a house is expensive, there’s no other way around it, However, rent prices have been relentlessly rising year after year. Plus, there is the added benefit of putting money into something tangible, rather than seeing rent money disappear into the abyss of some landlord’s bank account each month.
According to the recent Rental Affordability Report from ATTOM Data Solutions, renting a three-bedroom property is more expensive than buying a median-priced home in 54% of major markets. The average three-bedroom costs renters 38.8% of their annual income.
“Even if the percent of income that goes to payments on a home you own is on par with that number, it’s still money you’re putting toward building equity in the home, rather than going into someone else’s pocket,” said Sean Black, cofounder at Knock.com and founding team member at Trulia. “And as a homeowner, you benefit come tax time when you make some of that money back. As a renter, once that money is gone, it’s gone forever.”
Rates Actually Aren’t That High—and Buying Power’s Still Strong
Though nominal rates and home prices might be higher than in past years, in the grand scheme of things, experts agree they’re not as bad as it seems on paper.
“I would say that there is a certain degree of sensationalism when you’re looking at and discussing these numbers, and how certain cities like those on the West Coast inflate overall national numbers,” Black said. “Everything is relative—yes, affordability is low compared to where it was following '08, but that does not mean that every home in every market is unaffordable.”
Thanks to improving incomes, employment and the economy, housing is actually still affordable in much of the U.S. In fact, according to the recent Real House Price Index from First American, consumer-home buying power is up 14.3% since 2011, and “real” home prices—which are adjusted for changes in incomes and rates—are 32.5% lower than their housing boom peak.
If they did reach that peak, Fleming says people would still continue buying homes.
“Even when both mortgage rates and real, consumer house-buying power-adjusted house prices were significantly higher than they are today, people still bought homes,” he said. “Our home purchase decisions are often less financially motivated than personal preference driven."
Home Buying Has Other Benefits, Too
No matter where rates or prices go, when a fixed-rate mortgage is involved, homeownership always offers more consistency than renting—and that’s not going to change. Even Tourville, who’s closing on his Boston home later this month, said that reliability was a big reason he and his wife decided to buy in today’s hot market.
“We almost saw buying as a way to lock in our monthly housing payment, even if it would be at a slight premium compared to our current rent,” he said.
Michael Micheletti, director of corporate communications at Unison Home Ownership Investors, said this consistency is one of the biggest benefits homeownership can offer today’s consumers—especially amidst rising costs elsewhere.
“To me, the biggest benefit is the ability to control housing costs—a major component in the household budget—giving you an ability to take care of rising healthcare costs, saving for a kid's education, transportation, food and other quality of life issues that the average American faces,” Micheletti said.
According to Laura Conry, executive vice president of consumer originations at FirstBank, homeownership also cuts out all the relocation costs that renters deal with on a regular basis.
“Not only can owning be more affordable, but it allows people to control their housing costs and ensure they are not forced to relocate as opposed to choosing to relocate,” she said. “Rising rent costs cause tenants to move often, which can be difficult, costly, and causes instability for families.”
Millennials are Finally Buying in
According to experts, Millennials are behind much of today’s price-resistant housing demand as they finally reach the point where they can both afford a home and desire one.
“The majority of first-time buyers/Millennials have been waiting to enter the marketplace to purchase a home,” Micheletti said. “They have saved enough over the past few years to qualify, and when they do the math on renting versus buying, in most cases, it makes sense for them to buy now.”
Data from the National Association of Realtors shows that Millennials currently account for 36% of all home purchases. And though student loans have long been holding this cohort back from buying, Brendan McKay, owner of McKay Mortgage Company, said improving jobs and income have helped alleviate some of the financial pressure.
“The job market has improved, “McKay said. “There was a dearth of young people buying homes over the last five years. They were buried in student loans, and their income allowed for little in the way of savings. This is less the case now than it was then. Those same people are a little older, have better jobs, and feel stable enough to take on a mortgage payment in addition to their student loans.”
