Helping homebuyers navigate a booming housing market


By John Hintze

The combination of relentlessly rising house prices and still historically low but likely rising mortgage rates has created a host of problems for borrowers and potentially their lenders, who continue to see a lot of business as borrowers need. evolve.

The most powerful trend in today’s mortgage market is the steadily rising home prices, causing borrowers to deal with larger mortgages and down payments, and possibly higher property taxes. raised in the future. In the most extreme cases, especially on the coasts, buyers bid on asking prices already high by double-digit percentages.

“Given the bidding wars, we find ourselves in situations where the contract or the selling price is much higher than the appraisals, but the buyers agree to pay these prices given the constraints of the market,” says Sonu Mittal. , responsible for mortgage loans. Origins in Providence, Rhode Island Citizens.

A variety of factors, including still historically low interest rates, an ongoing housing shortage and the pandemic prompting city dwellers to seek more spacious housing, indicate that price increases and market foam will continue. Such foam can lead to unexpected and problematic complications that mortgage lenders can alert customers to.

For example, some purchase contracts require a borrower to purchase the house even when their winning bid is well above the appraised value on which the bank will base the loan. A lender can base a mortgage loan of $ 160,000 on the appraised value of a house of $ 200,000. But if the price is offered up to $ 230,000, the loan will remain tied to the appraised value, forcing the buyer to provide an additional $ 30,000.

“Lenders should look for these covenants,” says Dale Baker, president of home loans at KeyBank, which has branches in the Northeast, Midwest and Pacific Northwest. “In some states they are quite common, but in others we see more of these clauses written and applied.”

Loan officers should also be careful to ensure that their clients complete their purchases within the contractually specified deadlines. Since in competitive markets, sellers can be less tolerant of delays and simply end the sale, even keeping what can be a large down payment representing the buyer’s good faith in buying the home.

“We’ve seen cases where this is applied because sellers can move right on to the next buyer,” Baker said. “So there is a lot less flexibility with the closing dates. “

Such clauses usually come into play in the most competitive markets, but home values ​​continue to rise across the country in light of low rates and a dramatic shortage of home inventory. Zillow’s May 2021 market report noted that the housing stock was taking a positive turn, up 3.9% from April, although down 31.2% from a year ago. a year.

The shortage, recently estimated by Freddie Mac at nearly 4 million homes, is not expected to be resolved soon, which is keeping house prices high. Matthew Speakman, economist at Zillow Group, says house prices are rising “pretty much everywhere” in the United States and especially in large and medium markets.

“Our forecasts indicate that price increases will continue to accelerate in the coming months, so lenders can be more confident in their ability to lend knowing that the asset is likely to increase in value in the near term,” he said. Speakman said.

He notes the general tendency of current homeowners who sell their homes to put higher down payments on larger homes, often in more affordable zip codes.

The interest rate hike this year, which is actually just an increase from record lows in 2020, appears to have had little effect on price hikes so far. In its latest monthly housing report, noted that May was the 10th consecutive month in which price growth has remained in double digits. The report points out that the lack of available-for-sale homes pushed the median US listing price up 15.2% in May from a year earlier, while the number of homes for sale ended the month. months down 50.9% from last year.

“Nationally, homes are selling more than a month faster than last year and 19 days faster than typical market time from 2017 to 2019,” the report points out. And large metropolitan areas “offer buyers lower price gains and greater growth in newly listed homes.”

The rapid turnover has resulted in significant new purchasing activity for lenders.

“We’ve seen an almost 30% increase in shopping app activity year over year,” says Mittal, despite inventory constraints.

Dan Shanahan, director of retail mortgage sales at Columbus, Ohio-based Huntington Bank, said a year ago the ratio of refinances to new purchase loans was 70 : 30, and now it’s closer to 50:50, with new purchase loans likely. to continue to increase.

Demand for mortgage refinancing remains relatively strong, however, as homeowners see their home equity increase as consolidating high-interest debt or withdrawing money to make renovations at historically low rates. stockings become more and more attractive.

Baker said the rewards in terms of refinancing have been reaped and the market is now tougher, requiring more awareness from mortgage lenders, although there are still many clients who could benefit from it. and have not yet considered their options. . He added that another reason for recent refinancings has been that customers have realized they can switch to a 15-year mortgage from a 30-year mortgage and maintain a similar monthly payment. Others are turning to variable rate mortgages with lower interest rates.

“A mortgage that becomes variable rate after seven or 10 years may be appropriate because the borrower plans to sell the house before that date, if he is considering downsizing because his children have graduated and left the home. house, ”Baker said.

In fact, according to Mittal, the prospect of higher mortgage rates – citizens anticipating a gradual increase in rates – could actually speed up mortgage refinances for clients who are “in the money and haven’t taken advantage of the rates.” historically low ”.

The anticipated increase in home values ​​could potentially exclude first-time homebuyers from the market, even if low rates persist, as they are typically younger and have less money saved for down payments and to cover costs. current monthly mortgages. Some borrowers can end up overburdened. However, lenders have expressed little concern about a 2007-type housing crisis, in light of today’s large down payments and repayment capacity documentation requirements.

Mortgage conditions have eased somewhat since they tightened considerably during the pandemic, but, says Speakman: “What is critical is that they are still relatively tight compared to before the pandemic.”

Mittal adds: “Everyone expects the home’s appreciation to slow down, but not drop like in the [2007] mortgage crisis.

John Hintze is a frequent contributor to the ABA Banking Journal.

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