Are we finally going to see more single-family homes hit the market, after years of slim pickings?
Perhaps, if a new survey from Zillow turns out to be reality, and not just, well, a survey.
A new finding from Zillow Group’s Quarterly Survey of Homeowner Intentions and Preferences (QSHIP) revealed a big jump in home selling intent.
While surprising, given the current mortgage rate lock-in narrative, it could help alleviate a housing market desperate for new listings.
Are Homeowners Finally Gearing Up to Sell?
The survey in question found that 23% of homeowners surveyed in June 2023 expressed a willingness to sell their homes.
This includes both those who say they are listing their home for sale or at least considering selling in the next three years.
While the number is a relatively low 23%, it’s up from 19% in the first quarter and 15% a year ago.
It was as low as 14% in the first quarter of 2021 and never higher than 19% since that time.
If we look at it from the percentage standpoint, that’s a near-65% increase in selling sentiment.
Granted, it’s been a few weird years (and I’d like to see data from pre-COVID years), but it’s still encouraging if you’re a prospective home buyer.
Among the 23% who said selling was on the horizon, four in 10 said they are considering listing their property in the next year.
And for mortgage holders who have a mortgage rate above 5%, a home sale is even more likely. Some 38% of these homeowners say they would at least consider selling their property in the next three years.
So there’s a chance we might see a meaningful uptick in housing supply, at a time when it’s rarely been lower.
Why Are Homeowners Thinking About Selling Now?
So why the sudden uptick in home selling sentiment? Did something change lately? Not as far as I can tell.
Per Zillow’s survey, the homeowners who are pondering a sale in the next three years simply want better digs. Isn’t this always the case?
The most cited response (at 66%) was the desire to move into an upgraded home with better features.
That was followed by about half (~50%) saying they expect to get more money for their home now than in the future. Makes sense to fetch a higher sales price while existing home inventory is in such short supply.
Lastly, 45% pointed to a growing household as an influencing decision to sell their property and move elsewhere.
Nothing too groundbreaking here, or materially different than what you’d expect to see in any given year.
As for the large percentage not considering a home sale in the next three years, a whopping 79% said they’re staying put because they love their home.
So maybe the mortgage rate lock-in effect isn’t golden handcuffs at all, but rather the icing on the cake for those who are happy where they are at the moment.
Can’t really beat a home you love and a 2-3% 30-year fixed mortgage rate, can you?
In any case, this is something to watch as low inventory continues to plague the housing market and prop up the stocks of publicly-traded home builders.
Zillow recently reported that home values hit an all-time record high in June, surpassing the $350,000 mark for the first time ever.
Meanwhile, there were only about one million unsold existing homes, per the National Association of Realtors (NAR).
This represents about a 3.1-month supply, well below a healthy market that should have at least 4-5 months’ supply or more.
As we enter the second quarter of 2021, it’s time for the mortgage industry to reflect on the past 12 months and think about how to plan for the same period ahead. After all, it was mid-March of last year that the president declared a national emergency leading to school closures, the wearing of masks, and the emptying of office buildings across the country. A little over a year ago, we could have never imagined the actual implications of COVID’s impact to come on this nation, our communities, families and our business.
Take working remotely for example. In early 2020, Zoom was barely a known company in America. The impact of COVID made it a household name. By October, the market value of Zoom exceeded that of Exxon-Mobile, reflecting the dichotomy of an intransigent society staying at home and working remote. The stock value of Zoom grew 650% during this one year as many other aspects of the economy slowed or shuttered as a result of the shutdown.
But housing was the true bright spot in the economy. Low mortgage rates, driven by quantitative easing by the Federal Reserve helped fuel a boom in both mortgage refinancing and purchases, making 2020 the second-best year in U.S. history for mortgage origination volume. Augmenting the low rates was an increase in demand driven by the sudden surge of the millennials, finally now out to buy a home.
In fact, as reported in the Wall Street Journal in late August of 2020, “Millennials reached a housing milestone in 2020 when the group first accounted for more than half of all new home loans, and they consistently held above that level in the first months of 2021, the most recent period for which data are available, according to Realtor.com. The generation made up 38% of home buyers in the year that ended July 2019, up from 32% in 2015, according to the National Association of Realtors.”
Now, with the economy looking toward life past COVID, the focus is beginning to shift to a recovering economy, perhaps hotter than expected, driven by an excess in stimulus provided, and a likely end to the low single-digit mortgage rates seen over the previous year.
But a reminder to all is relevant now. Low rates are often the sign of a poor economy. As Bankrate’s Chief Economist Greg McBride, recently highlighted: “Bad economic news is often good news for mortgage rates. When concern about the economy is high, investors gravitate toward safe-haven investments like Treasury bonds and mortgage bonds, pushing bond prices higher but the yields on those bonds lower.”
So, the good news is that the economy will survive COVID and may actually catch on fire in the rebound with GDP forecasted to grow by 6.5% this year. Job growth will be the result of increased spending across every sector — from travel to goods and services. In fact, the pent-up demand can be reflected by the growth in retained savings after expenses during COVID, as Economist Mark Zandi of Moody’s Analytics highlights.
With 916,000 jobs created in March, many economists are bracing for what might be a spending spree from a nation that has been locked away for far too long and now recovering at a record pace. With summer on the horizon, look for the pace of spending to only grow with tourism augmenting what would already be a robust growth spree.
In fact, the recovery from the COVID pandemic is in stark contrast to that of the 2008 Great Recession. The fact that this recession was brought on by a virus versus weakening economic variables is key to the distinction. If you compare the employment growth between the two recessions there is truly no comparison.
Low interest rates, the demand surge from the millennials that are now reaching peak buying years, significant stimulus brought on by three large recovery bills, not to mention a potential infrastructure package, and massive pent-up demand from the lack of spending over the past year should have everyone simply bracing for lift off from the U.S. economic engine as it fires up.
So mortgage rates will likely continue to rise modestly as the Fed tapers from its intervention in the MBS (mortgage backed security) supply, which will slow refinancing and thus reduce mortgage volume overall in the market. Clearly, mortgage forecasts from the MBA and others reflect the expectation that overall volume will slow, but purchase activity will continue to grow.
For those that have focused on purchase lending, they will see less of a drop in total volume. But for those that have overly depended on refinancing, the impact will be more severe. Fortunately for lenders that were already more purchase-focused, the impact will be far less than many other refinance dependent operations given the strong purchase to refinance mix.
And one last perspective is important for everyone. The graph below from the Federal Reserve of St. Louis is the most important point about perspective. Look at 30-year mortgage rates as they stand today compared with any time going back decades when these rates were even captured on an aggregate basis. Rising mortgage rates will certainly be tolerated by the market.
In fact, small hikes in mortgage rates can lead to panic-buying periods which can drive small volume surges. Mortgage rates have never been this low and yet through previous cycles home sales have continued. In fact, the largest home purchase year in this nation’s history was 2005 when rates were near 7.5%.
The nation’s greatest obstacles ahead will come from the shortages in available single family home inventory across the county. But as America returns to work, supplies for builders will return to needed production levels, new home construction will continue to rise, and ultimately the supply-demand imbalance will rectify itself. The current proposed infrastructure bill includes funding for over 100,000 affordable housing units among many other housing initiatives, reflecting the recognition of the need to address access and supply to affordable homes.
For those in the mortgage banking industry, market corrections are part of the business. But in the year ahead, while having less mortgage volume overall, it will be met with a strengthening economy, a healthier nation, and enormous demand for home ownership. How lenders re-tool for this shift to a stronger economy and a purchase-dominated mortgage market will be the most important variables in long-term success. For companies that prepare for this, the market shift will be far less impactful compared to so many others.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Dave Stevens at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
A multiple listing service settled a lawsuit challenging Realtor commission rules for $3 million, a possible harbinger for several ongoing actions by home sellers alleging listing requirements are anticompetitive.
The case, Nosalek v. MLS Property Information Network, had class action status and was filed in the U.S. District Court for Massachusetts. Only the MLS agreed to a settlement, according to a June 30 legal filing. Other defendants in the case, both franchisors and brokerages, were not part of the agreement.
Sellers, along with the Department of Justice, are pushing for a major change to the real estate industry’s compensation structure that both its proponents and opponents agree will affect every party involved in home buying.
“Life after all of this is gonna be quite different,” Dennis Norman, a real estate broker and owner of More, Realtors, said. “And I don’t know if NAR survives because we’re talking about massive, massive amounts of money.”
Rules by the National Association of Realtors and associated multiple listing services, which are databases real estate brokers use to list and search for properties, are at the crux of all three major lawsuits — Nosalek v. MLS PIN, Sitzer v. NAR and Moehrl v. NAR. All three cases cite the Sherman Antitrust Act.
The Nosalek plaintiffs didn’t sue NAR, although they did go after realty companies like Century 21, HomeServices of America and Keller Williams. Their initial complaint, filed in December 2020, cites MLS PIN rules on Realtor commissions that say listing brokers must include a fee for the buyer’s representation on each property.
This is because of a coupled compensation structure: most home sellers pay for both the buy-side and sell-side broker fees.
Sellers who don’t offer a fee on the MLS PIN can’t list their home on the service. The lawsuit says this complicates the selling process because buyer agents use the MLS to search for their clients and popular websites like Zillow also use it for their home listings.
Another complaint in the lawsuit says if sellers offer a lower-than-normal fee, buyer agents can see this on the MLS and will likely steer their clients away from the listing.
As part of the settlement, MLS PIN agreed to change its rules on the topic, eliminating the compensation listing requirement. They will also require brokers to inform buyers that they can negotiate the buyer-broker fee and inform sellers that they can elect not to pay it.
HomeServices of America and its affiliates recently filed for summary judgment on the case, arguing there’s no evidence the company conspired with the MLS PIN to inflate commissions.
Both the Sitzer and Moehrl cases contain similar complaints, but are focusing on the NAR as well because of its strong influence on listing service rules: 97% of regional MLSs are affiliated with the NAR and follow its code of ethics, according to by T3 Sixty, a real estate consultant firm.
If the Sitzer and Moehrl lawsuits compel NAR to uncouple with MLSs as some industry voices like Norman are expecting, on top of large damages, the organization and its local chapters would lose their major draw: member-only access.
“I think that’s almost the last bullet for the associations,” Norman said. “MLSs are gonna have their challenges too… but they still have what everybody wants and they’re good for the consumer.”
How Realtors get paid Coupled commissions have been around for a long time. With this system, home sellers pay their listing broker 5% to 6% of the final sale price after closing. That commission is then divvied up evenly between sell-side and buy-side agents, who interact with the customers, and their broker agencies. The majority of each half goes to the agent.
For example, after selling a $300,000 house, a seller pays $15,000 in Realtor fees. Agents receive $6,000 each and their brokers $1,500 each for the sale. The buyer doesn’t pay any fees.
“The whole compensation system doesn’t make a lot of sense,” Steve Brobeck, a senior fellow at the Consumer Federation of America and a self-described public interest advocate, said.
Why are Realtors compensated this way? It evolved from the original system used in 1908 when the first iteration of NAR, the National Association of Real Estate Exchanges, was founded, according to a report by T3 Sixty.
Back then, the industry relied on an exclusive representation system: sellers hired a single listing broker for a fee. Buying brokers were sub-agents of listing brokers, and both sides had a fiduciary duty to sellers. When property sold, listing agents gave their sub-agents a portion of the commission fee.
Eventually, the industry moved away from the subagency model to properly align fiduciary duties, but it didn’t move away from coupled compensations.
“It’s a weird system,” Ann Schnare, a former Freddie Mac executive who ran a study on the compensation structure, said. “Admittedly, it wouldn’t be the first to come to mind, but the fact is that’s what exists… changing it, I think, would be unnecessarily disruptive.”
The NAR has a similar outlook: it resists the lawsuits’ efforts to outlaw shared commissions because they say it’s optional and the rate is negotiable.
Critics of the system like Brobeck point to uniform commission rates despite this negotiability. Brobeck found that in 24 cities across the country, 88% or more of home sales had buy-side commission rates between 2.5% and 3% in a CFA report.
“This rate uniformity is striking evidence of the lack of price competition in the residential real estate industry,” Brobeck said in the report.
Other antitrust lawsuits Legal action over commission fees began in 2018, when a 10-year settlement between the DOJ and the NAR expired. Before crafting a new agreement, the DOJ and Federal Trade Commission held a joint workshop about competition in the real estate industry.
In 2020, the DOJ filed a new lawsuit against the NAR under the Sherman Antitrust Act and simultaneously settled with the association. The settlement required several changes to NAR’s code of ethics to provide “greater transparency to consumers about broker fees.”
The settlement banned buyer brokers from advertising their services as free unless they receive zero compensation from any source. It also prohibited these brokers from searching MLSs by filtering out properties with low commission fees and pushed for greater transparency on those sites.
Because of the settlement, many MLSs began to publicly post commission fees for each property. Redfin and Zillow followed suit. For the first time, homebuyers saw how much their agent would earn from each listing.
But then, the DOJ pulled out of the settlement in 2021 because it prevented them from investigating the association’s rules further.
The Moehrl and Sitzer lawsuits popped up around the same time as the DOJ’s initial workshop.
On March 6, 2019, Christopher Moehrl sued Realtor companies “for conspiring to require home sellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount, in violation of federal antitrust law.”
Then, in April 2019, Joshua Sitzer and Amy Winger, Scott and Rhonda Burnett and Ryan Hendrickson filed a similar lawsuit in Missouri.
Both plaintiffs sued the NAR along with large national broker franchisors: Realogy (now Anywhere Real Estate), HomeServices of America, RE/MAX Holdings, and Keller Williams Realty, as well as HomeServices affiliates BHH Affiliates, HSF Affiliates and The Long & Foster Companies.
Real Estate Exchange, a real estate brokerage, also filed an antitrust lawsuit in 2021 against the NAR, Zillow and Trulia. The lawsuit alleges that Zillow’s search features prevent “transparent access to home inventory.”
Will cash-constrained homebuyers suffer? NAR argues in press releases about the lawsuits that the coupled compensation system fosters market competition because it frees up cash for buyers, allowing them to make a larger down payment.
A study funded by HomeServices of America, a defendant in all three suits, supports the claim. It declares that unless lending changes come in tandem with revisions to this commission structure, it would hurt “minorities, lower income households, and first-time home buyers” the most.
Consumer advocates argue that agent fees won’t hurt buyers because their cost is currently built into home prices. If sellers no longer pay both agent commissions, home prices will fall, and buyers will have the same net cost.
Schnare, one of the study’s authors, said because most finance their home with a mortgage, that’s not true.
“If everything was cash, it wouldn’t make a difference,” Schnare said. “What seems like a small adjustment can make a big adjustment on what they can afford to pay and, you know, potentially hurt the lower end of the market, but with ripple effects upwards.”
Brobeck says this concern is exaggerated, and that lenders will adapt accordingly: “the only reason that argument has any force at all is because the industry supports buyers not being able to finance their commission on the mortgage.”
But Schnare’s study found it’s not that simple.
In order to avoid hurting cash-constrained buyers, lenders would need to change underwriting standards, specifically the loan to value ratio, which represents the borrower’s equity position in the property. This is the most powerful measure of default, the study says, and including an “extraneous factor” like buyer agent fees in the ratio could decrease its predictive accuracy. Schnare says government-sponsored enterprises, the Federal Housing Administration and the Department of Veterans Affairs are unlikely to approve of this change.
Even if they did, it would “require regulatory approval and coordination across multiple parties along the mortgage supply chain,” so Schnare expects it to be a lengthy, expensive process. In the meantime, first time homebuyers would struggle to pay broker fees out of pocket.
“We have what we have, we’re not starting from scratch,” she said. “That’s a big ask for something where the benefits are not entirely certain.”
But the CFA and REX both dismissed the study, citing its funding and accusing it of a faulty premise.
Either way, the industry might be forced to change — both the Sitzer and Moehrl lawsuits are going to trial and many expect the plaintiffs to win. The Sitzer trial is scheduled for Oct. 16, and the Moehrl trial will likely begin early 2024.
“I would not be surprised if there was a settlement before them in both cases,” Brobeck said. “And then the question is, will this settlement really lead to effective price competition?”
Compass CEO Robert Reffkin revealed on CNBC how volatile mortgage rates are sidelining homesellers and why a boost in existing-home inventory could happen as early as December.
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Volatile mortgage rate increases have brought the housing market to a creep, as would-be homesellers desperately hold onto the savings they secured during 2020 and 2021’s historic interest rate drop. Since the federal government averted a disastrous June 2 debt default, rates have retreated to the mid-six-percent range — a drop that’s resulted in three consecutive weeks of increasing homebuyer mortgage demand.
So, what will it take to bring homesellers out of hiding and bring the housing market back to life? A five-percent mortgage rate, according to Compass CEO Robert Reffkin.
Robert Reffkin
“Across the board, there are more buyers than sellers,” Reffkin said during a CNBC appearance on Wednesday. “Buyers that have accepted six or seven percentage mortgage rates as a new normal. The issue that we have is there’s just not enough inventory, and that’s because 30 percent of homeowners are locked into mortgage rates at 3 percent or below, and 70 percent of homeowners are locked in a 4 percent or below.”
“We need to have an unlock [of] inventory. It’s probably going to happen when mortgage rates get to 5 to 5.5 percent in a sustainable level,” he added. “At that point, I would expect there to be a flood of inventory in the market. And we’ll feel like the pandemic craze all over again.”
Reffkin said some homebuyers are already bringing their rates down to the five-percent range through buydowns. There are two common ways to complete a buydown: paying a one-time discount point fee at closing to bring the rate down for the lifetime of the loan or using funds escrowed by the seller to temporarily drop the rate for the beginning of the loan.
“There are definitely incentives and buydowns bringing mortgage rates down by two points in a number of our markets,” he said.
While some homebuyers are waiting for the existing-home market to recover, Reffkin said a greater segment of homebuyers are simply turning their attention to the new-home market, which experienced a 20 percent year-over-year increase in May sales.
“[It’s a] great time to be a homebuilder because they’re benefiting from the price increases that are a result of low inventory,” he said. “Homebuilders are meeting [buyer] demand. Last month, we saw the largest amount of housing starts since 2016, and that’s because homebuilders, their sentiment index improved for the first time in over a year.”
Reffkin said it’ll likely be another year before rates drop to the five-percent range; however, the market could still experience a boost in existing-home inventory earlier as homeowners with adjustable-rate mortgages reevaluate the value of their current loans.
“The topic around adjustable rates, which I think people don’t fully appreciate, is that around 30 percent of the people that are locked in at three or four percent mortgage rates had adjustable rate mortgages that are five years, seven years or 10 years,” he said. “So the value of a 5-percent ARM they got in 2022, in six months is not that valuable anymore.”
The lock-in effect is the financial disincentive for existing homeowners to give up the low rate on their existing mortgage.
“You only have another year or year and a half” before ARM borrowers don’t feel locked in by the rate on their existing mortgage, he added. “So I think there’s going to be some new inventory entering the market, even if rates don’t come down because of those ARMs that are getting less value over time.”
Watch the full interview below:
[embedded content]
Editor’s note: This story has been updated to correct that Reffkin said around 30 percent of the people that are “locked in” to mortgages at lower rates have ARM loans, rather than 30 percent were “wanting” mortgages at lower rates.
Fickle mortgage rates rose once again last week, this time four basis points to an average of 2.99%, according to Thursday data from Freddie Mac‘s PMMS. However, despite fluctuating sub-3% mortgage rates, borrowers are still competing in a supply strained and overheated market.
“Home prices continue to accelerate while inventory remains low and new home construction cannot happen fast enough,” said Sam Khater, Freddie Mac’s chief economist. “There are many potential homebuyers who would like to take advantage of low mortgage rates, but competition is strong. For homeowners however, continued low rates make refinancing an option worth considering.”
The overall housing index hit its lowest point since February, said Joel Kan, the Mortgage Bankers Association’s associate vice president of economic and industry forecasting. Even though rates have been below 3.2% over the past month, they are still around 20 to 30 basis points higher than the record lows in late 2020, he said.
“Tight housing inventory, obstacles to a faster rate of new construction, and rapidly rising home prices continue to hold back purchase activity,” said Kan.
While the COVID-19 crisis has kept mortgage rates lower and suppressed inventory, these two factors have also facilitated higher levels of price growth as COVID-19 happened amid a housing market sweet spot.
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“We have an increase in the number of buyers and a total collapse of inventory driving home-price growth,” said Logan Mohtashami, lead analyst at HousingWire. “In the last expansion, the only thing that kept home-price growth from taking off was the higher mortgage rates of 4% to 5%. We are currently enjoying the lowest mortgage rates ever, so we don’t have that to dampen the market.”
According to Mohtashami, the new home sales marketplace is unhealthy, but when mortgage rates rise, this sector will get hit harder than the existing home market, like it always does. This won’t result in an epic housing crash, but it will impact future construction.
April’s existing home sales painted a familiar picture of a market still grappling with low supply as sales dropped for the third month in a row, down 2.7% from March to 5.85 million. Last week’s data on pending home sales proved that like new and existing sales, pending home sales also felt the strain of exhausted home inventory in April ― dropping 4.4% from the previous month to an index of 106.2, according to the National Association of Realtors.
Mortgage rates dropped to 6.78% this week, the biggest weekly decline since mid-March, as investors digested a raft of mixed incoming economic data.
Freddie Mac’s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 6.78% as of July 20, down from last week’s 6.96%. By contrast, the 30-year was at 5.54% a year ago at this time.
“As inflation slows, mortgage rates decreased this week,” said Sam Khater, Freddie Mac’s chief economist in a statement. “Still, the ongoing shortage of previously owned homes for sale has been a detriment to homebuyers looking to take advantage of declining rates. On the other hand, homebuilders have an edge in today’s market, and incoming data shows that homebuilder sentiment continues to rise.”
Homebuilder sentiment rose for the seventh consecutive month and new construction activity slightly pulled back as the cost of materials picked up. Simultaneously, retail sales improved modestly and industrial production declined on waning demand.
Other mortgage rate indexes showed mixed results:
HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.74% on Wednesday, compared to 6.85% the previous week. However, the 30-year fixed rate for conventional loans was at 7% at Mortgage News Daily on Thursday, up 13 basis points from the previous week.
After June’s relatively positive inflation data, the market’s attention has turned to the upcoming FOMC meeting.
“Though inflation has slowed, the level remains well above the 2% target and investors expect the Fed to hike interest rates in pursuit of this target,” said Hannah Jones, economist at Realtor.com, in a statement. “While the Federal Funds rate does not directly impact mortgage rates, it installs a floor beneath the cost of borrowing, meaning mortgage rates are likely to remain elevated for the time being.”
George Ratiu, chief economist at Keeping Current Matters, on the other hand, stressed that the spread between the 30-year fixed-rate mortgage and the 10-year Treasury remains north of 300 basis points. To Ratiu, it is a clear signal that investors are still pricing a premium for the higher macro risk.
This ongoing uncertainty permeating financial markets has a direct impact on mortgage rates.
As expected from the traditional vacation season, consumers are more focused on services and travel experiences this summer rather than buying products, added Ratiu.
At today’s rate, the mortgage payment for a median-priced home is about $2,300, a 13% premium compared to last year’s peak-price period. Ironically, the elevated mortgage rates are not making a dent on home prices, which remain high because of a depleted inventory. Hence, the lower mortgage rates bring little relief to hopeful homebuyers.
“Many home owners feel ‘locked-in’ by their current mortgage rate and are therefore choosing to hold off on listing their home for sale,” said Realtor.com’s Jones. “As a result, after more than a year of new listings lagging behind the previous year’s pace, the number of homes for sale has tracked lower than last year’s levels for the past four weeks. In light of limited home inventory, buyers are turning to new construction and builders are picking up the pace of construction to fill the gap.”
Economists largely agreed that current market dynamics are likely to persist until affordability and inventory gains are made.
U.S. single-family homebuilding fell in June, but permits for future construction rose to a 12-month high on the weakness of the existing home sales market. The decline in housing starts came after a massive 18.7% surge in May, which propelled the number of starts on single-family projects to an 11-month high.
Housing starts in June dropped to a seasonally adjusted annual rate of 1.43 million, under economists’ expectations for 1.48 million, according to the U.S. Census Bureau. That was down 8.1% from a year ago.
In June, only 600,000 existing homes were listed for sale across the U.S., noted Bright MLS Chief Economist Lisa Sturtevant.
“While new construction will not immediately solve the supply problem in the housing market, the recovery in the homebuilding industry and the delivery of more new homes is essential for meeting the nation’s housing needs and easing housing affordability challenges for prospective home buyers,” she said in a statement.
Overall, single‐family housing starts in June came in at a rate of 935,000, 7% below the revised May figure of 1,005,000. The June rate for units in buildings with five units or more was 482,000.
Issued permits, an indicator for future completions, also decreased 3.7% overall from May, and they were 15.3% lower from a year ago. But single-family permits increased (+2.2%) while the more volatile multifamily permits declined (-12.8%). June permits increased in the Midwest (+5.9%) and declined in South (-2.6%), West (-4.0%), and Northeast (-23.4%).
Completed homes fell 3.3% from the prior month, but were 5.5% above the May 2022 level.
The number of single-family homes under construction remains high. Meanwhile, a record number of multifamily units are under construction even if the pace is slowing.
“When these units are completed, it should put some downward pressure on prices,” said First American Deputy Chief Economist Odeta Kushi.
Homebuilder sentiment regarding single-family sales in the next six months dropped slightly in June, pointing to more uncertainty. This comes at a time when increasing new home inventory is critically important as existing homeowners aren’t moving, handcuffed to their low mortgage rates, noted Nicole Bachaud, a senior economist at Zillow.
Stubbornly high mortgage rates might pose a threat to builders’ ability to bring more homes on the market. Reduced affordability alongside ongoing supply-side challenges and tighter lending standards for acquisition, development and construction (AD&C) loans could also throttle builder momentum, added Kushi.
Along with closing costs, the down payment on a house can be a substantial upfront expense. Find out how much is required for a down payment on a house, why you might want to make a larger down payment and which options you have for obtaining the necessary funds.
What is a down payment on a house?
A house down payment is the upfront cash you put down toward the home’s purchase price. The minimum down payment percentage depends on factors such as the mortgage program, your credit score and the lender. The down payment is usually paid at the closing meeting.
Since this initial money helps offset some of the mortgage lender’s risk, it can improve your chances of mortgage loan approval. Additionally, the amount you put down contributes to your home’s equity.
How much is required for a down payment on a house?
Like many homebuyers, you may think you need to put a hefty 20% down on a home. But based on data from the National Association of Realtors, the average down payment on a house actually stands between 6% and 7% for first-time homebuyers and 13% for repeat homebuyers.
Your minimum down payment percentage ultimately depends on your financial situation, the property, your lender and the specific loan program. The lowest down payment on a house is none at all, and some government-backed mortgage programs offer this for primary residence purchases. Other loans require down payments ranging from 1% to 20%.
0% down mortgage loans
If you’re trying to find out how to buy a house with no money down, your options include U.S. Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans. These loans target specific types of borrowers.
VA loans
VA loans involve no down payment requirement when the home you choose costs no more than its actual value. However, you can only apply for one if you or your spouse has an approved military affiliation, since the organization requires a Certificate of Eligibility. These loans offer additional benefits such as competitive interest rates, no mortgage insurance premiums and flexible use options. You would need to pay a VA funding fee based on the down payment amount, your military affiliation and the number of VA loans already taken out.
USDA Loans
USDA loans also have no minimum down payment, but you’ll need to pick a property in an approved rural location. Your options include USDA Single Family Direct Home Loans and the USDA Single Family Housing Guarantee Program, both of which have income, asset and property restrictions. You’ll also need to show that you don’t already have a suitable home.
USDA Single Family Direct Home Loans have the lowest income limits and most restrictive property requirements. But if you qualify, you can also get temporarily reduced mortgage payments. The USDA Single Family Housing Guarantee Program provides more options for buying or building a property, sets no property price limit and admits applicants who earn up to 115% of their area’s median income. However, it requires a loan guarantee fee.
1-3% down mortgage loans
Backed by either Freddie Mac or Fannie Mae, conventional mortgage programs for primary residences can allow for down payments as low as 3%, and they usually require good credit. The Fannie Mae HomeReady and Freddie Mac Home Possible programs don’t have a first-time homebuyer requirement and can help you get a mortgage even with a low income. The income limits for these programs are 80% and 100% of your area’s median income for HomeReady and Home Possible, respectively.
Some lenders such as Rocket Mortgage and Riverbank Finance offer programs that give you 2% toward the minimum down payment so that you only need to come up with 1%. While these offers can come with restrictions on the down payment amount allowed, they can make homeownership more accessible. Plus, lenders may offer other perks such as waiving the private mortgage insurance (PMI) which usually applies to conventional mortgages.
If you don’t meet the HomeReady or Home Possible income limits, 3% down conventional programs exist, too. These include Fannie Mae’s 97% Loan-to-Value (LTV) Standard program and Freddie Mac’s HomeOne program. You’ll need to be a first-time homebuyer to qualify.
3.5% down mortgage loans
Backed by the government, Federal Housing Administration (FHA) loans require a 3.5% minimum down payment for a house as long as you have a credit score of at least 580. The minimum rises to 10% with a credit score of 500 to 579.
While these loans have lenient credit requirements and no income restrictions, they require upfront and ongoing mortgage insurance premiums. You can also only use an FHA loan for a primary residence.
10-20% down mortgage loans
You might make a 10% or higher down payment to make yourself more appealing to the lender or to qualify for a larger loan amount than a smaller down payment allows. And if you’re buying something other than a primary residence, the lender will likely want 10% down for vacation homes and 15% down for investment properties.
You may also need a larger down payment — up to 20% — if you plan to take out a conventional loan that exceeds the conforming loan limits that the Federal Housing Finance Agency has set. Depending on the location, these usually range from $726,200 to $1,089,300. In that case, you would need to seek a jumbo loan to borrow enough funds. These loans also require good credit and sufficient cash reserves.
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The pros of larger home down payments
If you can afford it, making more than the minimum down payment on a house has its advantages. You can have more manageable monthly payments, pay less in the long run and benefit from having more immediate equity in your home.
More affordable monthly mortgage payments
Since the down payment reduces the mortgage amount needed, you’ll have a lower monthly mortgage payment if you put more money down.
For example, if you buy a $250,000 home and take out a 30-year mortgage with a 7% interest rate, a sample monthly payment — excluding PMI, taxes and insurance, which can all vary widely — may look like the following:
3% down: $1,613.36
5% down: $1,580.09
10% down: $1,496.93
20% down: $1,330.60
Not only does a smaller payment mean more room in your budget for other expenses, but it could also help reduce the risk of defaulting on your mortgage and losing the home. You may also find it easier to pay off your mortgage early.
Less interest paid
Mortgage lenders consider the down payment amount as one factor for determining mortgage interest rates. By putting more money down, you reduce the risk to the lender, who may reward you with a lower interest rate. While these interest savings especially add up over time, the lower rate matters for your closing costs, as well, since they include some prepaid interest.
Higher upfront home equity
Your home’s equity equals its value minus the money you owe on it. Meeting only the minimum down payment requirements could mean no immediate equity at all. But by putting down a significant amount, you can reduce the risk of going underwater on your home loan, where you owe more than your house’s value. If you try to sell a home with an underwater mortgage, you may not make enough money off the sale to pay off your lender.
Having more equity also helps if you need home equity financing later for home improvements.
Lower fees
Some mortgage programs require upfront or ongoing fees that you can reduce or eliminate with a sufficient down payment. For example, the VA funding fee goes down as long as you make a 5% minimum down payment. You can also avoid having to pay private mortgage insurance for conventional loans if you put down 20%.
The cons of larger home down payments
While making the ideal down payment for a house offers financial benefits, having the cash tied to the home comes with drawbacks, including:
Lower cash reserves for emergencies
By using much of your savings for your down payment, you can experience financial struggles if a job loss or other emergency occurs. You may end up needing to borrow money to cover unexpected expenses, and you could even default on your mortgage if you run out of cash for payments. To reduce the risk, make sure you have a sufficient emergency fund before purchasing a home.
Potential delays for home shopping
If you use a house down payment calculator, you’ll see how large the target amount can be. Obtaining this lump sum may require delaying your home-buying plans for a long time.
In the meantime, property prices or interest rates could rise, or the home inventory could fall so you can’t find what you want. If you currently rent, delaying buying a home means not reaping the benefits of owning such as building up equity and having more stability and control over your home.
Risk of your home losing value
While putting down the best down payment for a house helps build equity right away, declining property values could cut into it quickly. This can happen due to economic changes or local factors in your neighborhood. If this happens, you may feel uneasy knowing you put so much cash in the home and can’t get it back.
Less cash for other goals
Making a high down payment comes at the cost of not having the money to use for other goals. This could mean having to wait to pay down other debts or not having enough to save for your retirement or make home renovations. A lower down payment could allow you to accomplish multiple goals.
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How to come up with a down payment for a house fast
You could get a second job, sell unneeded items or cut expenses and put the money toward your down payment. You might also borrow or withdraw from a retirement account, but you should first consider potential penalties. In addition to asking for down payment gifts from people you know, check into state and local down payment assistance programs that offer grants or loan you the funds.
Can you buy a house without a down payment?
If you’re wondering how to buy your first home without a down payment, you could accomplish this if you qualify for a VA or USDA loan. Otherwise, research down payment assistance programs that may cover the minimum down payment for your mortgage type. Just keep in mind that you’ll still need funds to cover your closing costs or else roll them into the loan.
How to buy a house with low income and no down payment
USDA mortgages target homebuyers with no down payment funds and low incomes. If you don’t qualify for one, you could consider a co-borrower with sufficient income.
As long as you don’t need to purchase a home immediately, you can get more loan options if you work on your finances. Actions could include reducing other debts, raising your income, improving your credit and seeking potential down payment sources. You can also seek advice from the best mortgage lenders about how to get the down payment needed for a house and qualify with a low income.
Who gets the down payment on a house?
At the time of closing, you’ll use a cashier’s check or wire transfer to provide the down payment to your loan officer or settlement agent. The home’s seller eventually gets the down payment and other money left over from the home’s sale price after reductions for costs such as their past mortgage payoff, real estate agent’s commission and other fees.
Summary of Money’s how much is required for a down payment on a house
If you plan on buying a house with no down payment or a very small one, carefully explore your mortgage options and understand the ongoing costs. While the low down payment may get you a home faster, it can also mean ongoing fees such as private mortgage insurance or a higher upfront fee for certain mortgage programs. A large down payment can offer long-term savings and lower payments, but it leaves less money available if you experience any hardship. Work with your lender to explore the pros and cons of your options and determine what works best for you.
For the seventh consecutive month, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report rose month-over-month, gaining one-point to a reading of 56, according to a report released Tuesday.
This is the index’s highest reading since June 2022.
The NAHB/HMI report is based on a monthly survey of NAHB members, in which homebuilders are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the homebuilder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.
The NAHB attributes the continued rise in builder confidence to low existing home inventory.
“The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers,” Alicia Huey, the chairman of the NAHB, said in a statement. “At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.”
With shelter inflation accounting for 40% of the Consumer Price Index, the NAHB says the best way to combat this is to build additional for-rent and for-sale housing.
“There’s been some commentary linking gains for housing construction with increased concerns for additional inflation, but this has the economics backwards,” Robert Dietz, the NAHB chief economist, said in a statement. “More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and developing lots.”
Despite the rising interest rates and continued shelter inflation, builders have cut back their use of sales incentives, with just 22% of builders reporting that they cut prices in July, down from 25% in June and 27% in May.
The NAHB reported that homebuilders’ gauge of current sales conditions rose one point to 62. The gauge measuring traffic of prospective buyers increased three points to 40, the highest reading since June of 2022, but the component charting sales expectations over the next six months, fell two points to 60. According to the NAHB, this serves as a reminder that housing affordability continues to be challenged by elevated interest rates.
“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” Dietz said.
Regionally, the three-month moving averages for HMI rose in all four regions, with the West gaining five points to a reading of 51, the South increasing three points to 58, the Midwest rising two points to a reading of 45, and the Northeast rose five points to 52.
Home prices rose to record levels in May thanks to a lack of supply of existing houses for sale.
Home prices rose 0.7% nationally compared with April at a seasonally adjusted rate — hitting a record, according to a report from Black Knight released on Monday. Additionally, home prices in May were 0.1% higher than the year before.
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Even as the spring homebuying season comes to an end and mortgage rates push to multimonth highs, there are signs that the housing market is reheating following a slump last year. Black Knight’s vice president of enterprise research, Andy Walden, noted that five back-to-back months of price increases have now reversed the pullback that began last July.
“There is no doubt that the housing market has reignited from a home price perspective,” he said. “Firming prices have now fully erased the pullback we tracked through the last half of 2022 and lifted the seasonally adjusted Black Knight HPI to a new record high in May.”
More than half of the 50 biggest U.S. housing markets are seeing prices at or above their 2022 peaks. A mere eight of the top 50 markets are still down more than 5% from their zeniths.
The Federal Reserve has been raising interest rates for more than a year and has penciled in further hikes after holding off last month.
As of this past week, the average rate on a 30-year fixed-rate mortgage was 6.81%, up a tenth of a percentage point from the week before, according to Freddie Mac. Mortgage rates are now the highest they have been since November when they skyrocketed to above 7%.
This most recent number is up from a recent trough of 6.08% registered in February. The rate on an average 15-year fixed-rate mortgage is now sitting at 6.24%.
During the outset of the pandemic, the Fed slashed rates to near-zero levels to ignite economic activity and stave off a recession. That caused mortgage rates to plunge to super low levels — during much of 2020 and 2021, homebuyers were able to lock in mortgages at below 3%.
Because mortgage rates have surged so much, owners of existing homes who have mortgages with rates locked in before 2022 are shying away from selling because they want to keep their historically low rates. That means less existing home inventory on the market, making new homes more of a hot commodity.
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As a result, sales of new homes have been ticking up to make up the slack. The most recent new home sales data for May showed that sales rose 12.2% to a seasonally adjusted annual rate of 763,000, according to the U.S. Census Bureau, far above the number expected by forecasters.
The lack of inventory has also had the effect of lifting home construction. In June, it was revealed that the number of multifamily units under construction hit a record in May — 994,000. That surge in supply should hopefully help lower rent pressures for families across the country.