Homebuyers in today’s market definitely face some shifting conditions. The improving economy is bringing mortgage rates up from some of the lowest levels ever observed in the housing market, and more buyers are creating increased competition for a limited inventory, driving prices up as well. However, declining affordability might, in some ways, may actually be good news for buyers because it will encourage a major change among lenders.
It’s worth noting that the trend of declining affordability began well before last November’s presidential election, the results of which are a big part of the reason why mortgage rates have surged since, according to the latest housing market data from First American Financial Corporation. However, home prices have been rising slowly but steadily for some time, and the combined effect of these new market conditions may not always be easy for buyers to navigate.
How is that helpful?
The good news for buyers is that as rates rise, it becomes more difficult for current homeowners to justify refinancing their mortgages. When rates were low – and they hovered in the 3 percent range for almost all of last year – it encouraged owners to cut their rates, keeping lenders in a steady mortgage environment without broadly making home loans more available to new buyers. But as rates rise, lenders will necessarily see their origination numbers drop off, and experts have long predicted that this will lead to an increase in mortgage credit availability for buyers.
And with the stronger economy bringing more buyers to the fore, it’s also important to note that even with higher rates and prices, today’s affordability is still competitive with pre-recession norms.
“Rising rates and nominal home price growth are outpacing the influence of strong income growth, leading to declining affordability for first-time home buyers,” said Mark Fleming, chief economist at First American. “However, housing remains as affordable as it was in late 2009.”
Loosening credit in action
The latest industry data shows that mortgage credit is becoming more widely available, in a way that it largely hadn’t before, according to the Mortgage Credit Availability Index from the Mortgage Bankers Association. In January – the most recent month for which data is available – the MCAI rose to a reading of 177.1, up from 176 in December. That was the fifth straight month with an increase in the overall number.
In the recent past, credit access for jumbo loans (those much bigger than the national median home price) has been the biggest driver of these increases, which leaves many average Americans on the outside looking in. And while lenders continue to cater to more affluent consumers by easing that kind of credit access, availability for conventional loans is now creeping back upward on a consistent basis as well.
While mortgage credit availability will likely never return to the free and easy days before the recession (nor should they), continual easing of access will allow more buyers to come into the market and, potentially, encourage more real estate sales.
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