Lately, I probably haven’t been winning many friends with my somewhat pessimistic view on the real estate market.
A couple weeks back, I warned that affordability was set to take a major blow, as a result of higher home loan interest rates and surging home prices.
And just last week, I cautioned readers that the >housing market might be cooling, at least in some parts of the country.
Interest Still High, Quality Perhaps Not
The issue I see materializing is a lack of qualified buyers, not necessarily a lack of interest from prospective home buyers.
In other words, properties that are listed at seemingly astronomical prices will continue to receive bids, but if the buyers aren’t actually able to obtain financing at those sky-high prices, it all means nothing.
There are a few different issues at hand. For one, there is the prospective buyer who got pre-qualified to buy a home two months ago, when both interest rates and home prices were significantly lower.
For this individual, they may find that they can no longer actually afford what they thought they could, once their lender says their mortgage rate is no longer 3.5%.
This is especially true for those who were just squeaking by in the affordability department, as many often are.
It’s simple math really. If a borrower’s DTI ratio is now too high, the lender won’t be able to offer them a loan. And with rates and prices higher, there’s no easy way around a higher monthly housing payment.
That is, unless you buy down your rate, or bring more money in at closing to reduce your loan amount.
[Watch Out for the Adjustable-Rate Mortgage Pitch!]
Down Payment Dilemmas
Unfortunately, that brings us to another issue. Most homeowners probably don’t have a surplus amount of cash to put down on a home, especially seeing that prices have risen dramatically nationwide.
For example, cash set aside for a 20% down payment may only go as far as 10% nowadays, or even less, based on markedly higher listing prices.
This creates an issue when making a big offer for several reasons. For one, it means you’ll need to find a lender willing to offer a loan with a LTV ratio greater than 80%, or secondary financing to arrange a combo loan. There’s also mortgage insurance to contend with.
In any case, financing can get chancy if the loan is no longer straight-up vanilla.
Secondly, those who are already putting down less than 20% will have few places to turn if (and when) the appraisal comes in low.
Let’s face it – some of these properties are listed for way too much these days, and without supporting comparable sales, lenders won’t be able to assign sufficient appraised values. So when the properties don’t appraise, these offers will fall through.
For the market to hold up, it will need sustained interest from qualified buyers, not just any old buyer. I’m talking a buyer with plenty of assets and income who can adapt when things go awry.
This will be especially important as investor interest wanes.
The alternative, of course, is looser underwriting guidelines, creative financing, inflated appraisals, and another housing crisis.