Home buying conditions are great, so why aren’t consumers buying? Mortgage rates remain historically low; house prices appear to have bottomed, making home prices more affordable than ever; and jobs are coming back. The NAHB recently asked builders why some consumers remain reluctant to pull the purchase trigger. Past responses to the same questions also allow a look at changes in the reasons for delay.
The leading reason (82 percent) for skittish buyers was and continues to be the inability to sell current homes. Seven in 10 new-home buyers are home sellers, and their equity is the principal source of a down payment. Sales of existing homes have increased recently, especially in response to the home buyer credit. But the decline in existing-home sales from more than 6 million in 2005 to 4.5 million in 2009 and the greater share of those sales that are distressed further reflect the challenge.
About two-thirds of the builders think a cause for delay is buyers’ difficulty in getting a mortgage, and that level of concern has not changed significantly in the past year. While interest rates remain low, credit qualification standards have tightened, and this can be particularly tough for mortgages above the conforming loan limits and for first-time home buyers with little cash for a down payment. Some relief for nonconforming loans appears to be on the horizon as the large differential in interest rates for jumbo loans has narrowed considerably since late 2008, and there are recent efforts to restart private securitization of nonconforming mortgages.
The FHA remains the backstop for borrowers with some credit blemish or a small down payment. HUD has proposed some changes to the FHA program in light of the fund’s value falling below the legislatively required level of 2 percent of insurance-in-force. However, the changes will have only a very modest impact on most borrowers’ ability to obtain FHA mortgage insurance. The FHA raised the up-front insurance premium from 1.75 percent to 2.25 percent, but it can be financed, and proposed legislation would allow the agency to shift the increased costs to a monthly premium. Probably more important to home builders is a proposed reduction in the amount of seller concessions (for example, help with closing costs) allowed, from 6 percent to 3 percent. Currently, about two-thirds of new-home sales use the FHA and provide concessions greater than 3 percent, so this proposal will remove an important builder program for assisting FHA buyers if the rule is finalized as described. The NAHB will oppose significant restrictions in seller concessions when the rule is publicized.
Negative media is a concern for about two-thirds of the builders, but the importance has diminished from a year ago. Concerns about jobs and employment have also fallen as a leading concern, although more than half the builders still report employment as a reason for consumers’ reluctance. The employment picture continues to improve, and, as hiring continues, this reason for delay should continue to diminish.
The next-most frequently cited reasons for buyer concern have declined in importance over the past year—and with good reason. Less than half the builders cited fear of falling house prices, and that share is down from more than 70 percent in early 2009 and 2008. Home price indexes have shown much more stability in the past six months than this time last year. The Case-Shiller indexes are above their spring 2009 levels in 14 of the 20 metro areas covered and in the 10- and 20-city combined indexes. The Federal Housing Finance Agency index remains below levels in mid-2009, but the declines continue to be smaller. This trend is expected to continue and help remove declining house prices as a concern.
Buyer hesitation from waiting for lower interest rates has virtually disappeared as a concern. Mortgage rates have increased recently, as all long-term rates rise with economic recovery. However, the slow economic expansion will allow rates to remain relatively low and provide additional support to the recovering housing market.
