For a few weeks to come, anyway, the needle of builder anxiety over whether a potential buyer can get approved, processed, and financed for an FHA or VA-backed mortgage will move back into a normal range, and worries can focus instead on normal everyday challenges.
Like what's happening to affordability right at the moment people start seeing more cash in their paychecks as a result of newly effective lower tax rates?
As mortgage rates go up, monthly payments exert stress on household incomes that have only now begun to move in a positive direction after years of inertia.
Dirt cheap borrowed money is a soon-to-be fading memory, and now both rising home prices and mortgage rates nudging upward are a real impact on the "low monthly payments" appeal new-home builders have been leveraging to bring interested-but-hesitant buyers off the sidelines.
Home buyers who secure financing with today's rates, or who have variable rates that tie to mortage rate movement are paying up to 12% more this year on their monthly payments vs. a year ago, research analyst Andrew LePage observes in a new CoreLogic analysis.
LePage's analysis notes that--mostly thanks to low, low interest rates--monthly payments in October 2017 still had a lot of headroom--36.2%--compared with peak inflation-adjusted typical mortgage payments in June 2006. Some of that is due to house prices--which were an inflation-adjusted median price of $244,318, compared with Oct. 2017's median price of $212,680.
But mortgage interest rates were averaging 6.7% compared with last year's average rate of 3.9%, and that's where LePage sees material pressure on home buyers' pocket books, especially when you move the discussion into the new-home price spectrum, which is about $100,000 or more higher than resales these days. LePage writes:
An IHS Markit forecast calls for inflation and incomes to rise gradually over the next year, while a consensus forecast[1] suggests mortgage rates will gradually rise by about 60 basis points between October 2017 and October 2018. The CoreLogic Home Price Index forecast suggests the median sale price will rise 3.2 percent in real terms over the same period. Based on these projections, the inflation-adjusted typical mortgage payment would rise from $803 in October 2017 to $891 by October 2018, an 11 percent year-over-year gain (Figure 2). (In nominal terms the typical mortgage payment would rise 12.9 percent over the next year.) Real disposable income is projected to rise by around 3 percent over the same period, meaning homebuyers would see a larger chunk of their incomes devoted to mortgage payments.
As materials costs, land costs, and labor costs add up and together exert more and more pressure on builders' expenses, all builders are looking for levers that can help them remove expenses from their homes to keep average selling prices within a golden mean of attainability for buyers.
Already, some geographical markets in the U.S. have fallen outside that golden mean, converting more and more would-be willing and able buyers into would-be wishful thinking buyers priced out of the market.
Here, New Geography demographer Wendell Cox looks through a more global filter at affordability, noting that 30 out of 75 United States markets in his analysis qualify as "severely unaffordable" based on median income to median house price ratios. Cox writes:
The number of severely unaffordable housing is growing, particularly in markets close to ultra-expensive areas like Vancouver, Toronto, San Francisco and San Jose in the Bay Area. Victoria, Kelowna and Nanaimo have followed nearby Vancouver into severe unaffordability. Hamilton, Kitchener-Waterloo, Oshawa, St. Catharines-Niagara, Guelph, Barrie and Cambridge have followed Toronto. In recent years, Sacramento, Fresno, Merced and Modesto in California's Central Valley --- despite their severe economic troubles --- have become severely unaffordable, as some leave the San Francisco Bay Area to find cheaper housing. California continues to be in a serious housing crisis, with its major market Median Multiple having risen more than 7.5 times that of liberally regulated US markets.
Cox's viewpoint is that planners and developers need to work productively with local municipal officials and communities on overly restrictive land-use policies that effectively suppress housing development that could normalize house prices and rents.
Many residential builders and developers don't hold out much hope in that option, but should continue to look for case examples of creative, new, mutually beneficial land-use approaches that begin to address the increasing number of markets in a housing crisis.
