Lower Loan Rates Spur Home Sales
Put aside the uncertainties and implications from whatever tax reform might have in store for real estate.
You find that the housing industry is in a familiar niche, one which occurs regularly in its cyclical history of ups and downs, good times and bad.
With ‘born-again,’ long-term fixed-rates, evolved from stabilization of the all-important affordable/acceptable interest rate, sales activity is at a lively pace, both for new and existing homes.
Realtors and home builders, truthfully, can say “now” is a great time to buy--before rates go up again.
Historically, buyers have had a tendency to hesitate when interest rates start to drop. Smarter to wait and get a better rate? Maybe. It’s a gamble. But the day the rate goes up, the rush to buy resumes--and costs you at least % more.
To forestall that tendency, in preceding sales cycles, builders deliberately posted higher prices for the next batch or phase of new homes and the psychology worked well. The new price tag, higher by several thousand dollars, proved to be pretty convincing and resulted in a sell-out of the initial phase.
While experiencing a good year, builders exhibited some caution during May by slowing their construction of new homes. A Bank of America report attributed the statewide slowdown to concerns about creating an overbuilt market. The start rate of new homes dropped by 19.2% from the April mark of 252,500 units on an annual basis but that rate had topped the 1977 peak level.
On the plus side, May sales of existing homes throughout California rose to the second highest activity level since late 1980, California Assn. of Realtors data shows. The seasonally adjusted annual rate was 460,696 resale units, down only 1.3% from a year ago when the sales level was the best in five years.
From Washington, the CAR’s parent organization, the National Assn. of Realtors happily reports that with interest rates at relatively low levels, the traditional fixed-rate mortgage is making a big comeback.
Such mortgages currently make up more than two-thirds of all first mortgages issued, NAR reported, and 85% of all homes purchased were financed by a single mortgage.
Availability of funds at 12.5% to 13% resulted in a “more affordable interest-rate environment.” Hence, the current lending surge.
Indicating the changing lending pattern, NAR said fixed-rate loans accounted for 68% of all first mortgages in April, 55% six months earlier, and 54% in June, 1984.
As to the affordability gap for new and resale housing, the steadying of interest rates and home prices have narrowed that gap today to its smallest margin since 1979.
The affordability gap measures the difference between the price tag of a home and a typical family’s wherewithal to buy it. The formula used by the U .S. League of Savings Institutions includes the median price of a home, the median income family, the prevailing mortgage rate, a 25% down payment and it limits mortgage payments to 25% of income.
But the gap might as well be a chasm for most families. At the end of the second quarter, it was $17,000 for new homes and $8,400 for resale housing. Conversely, it had been $32,223 and $29,528, respectively, during the second half of 1981, and in 1979 the gap was lower, $14,885 and $7,518.
California’s existing homes appreciated in value by 4%, on a May-to-May basis, according to the CAR, putting the median price of a single-family dwelling at $115,011.
The association’s vice president of planning, research and economics, Joel Singer, also notes that the median time needed to sell a single-family home is now 68.2 days after its listing, and that the unsold inventory index in May decreased--for the third consecutive month--to 9.2 months.
Condominium sales increased in May by 11.2% over April but were down 10.6% from May, 1984. Singer reasoned that buyer preference favors single-family housing over condos when there is a price choice. The median price in May for a condo was $115,459, up 12.8% from a year ago, and it takes 20 days longer to sell a condo unit than a single-family house.
The nation’s savings institutions, which provide about 56% of all home loans, recorded $165 billion in such loans last year. That was their new high.
With the revival of the long-term fixed-rate home loan, and ample lending coffers, it’s a good bet that there will be a new record at the end of this year.