Homebuyer Hurdles

A surprising star has emerged from the pandemic-induced recession: the housing market. After freezing up in March and April, realtors, buyers and sellers began adapting to a new reality: we are spending a lot more time in our dwellings, and some of us are not happy with where we currently live. Add to that fact, that there are not enough houses for sale, and that mortgage interest rates have cratered, and you may notice that there is a full-fledged frenzy going on in some housing markets around the country.

While that’s great news for sellers, buyers are encountering hurdles in the race to fulfill their home sweet home dreams. The most pressing issue is that there is not a large enough supply of homes to meet demand. At the end of August, there were just 1.49 million single-family existing homes for sale, the lowest count for August in decades.

Limited inventory has caused prices to rise (the median price for all existing homes in August was $310,600, up 11.4 percent from a year ago), and spurred a resurgence in mid-2000’s-like bidding wars. Real estate firm Redfin, has seen four consecutive months where over half (54.5 percent) of home offers faced a bidding war. “The competition remained fierce in coastal areas, including San Diego, which saw 64.5 percent in bidding wars, and San Francisco and San Jose, which both had 65.2 percent in bidding wars.”

If you have run your numbers and know what you can afford, a bidding war isn’t the worst thing in the world. That said, emotions and desires can lead you to overpay, not to mention stretch your finances in ways that could haunt you in the future. Economist Teresa Ghilarducci notes that prices in many markets are overvalued, based on the rule of thumb that “suggests if a home costs more than 20 times the annual rent the home could fetch, the house is probably overvalued — a $400,000 home should rent for $1,667 per month or more.”

To address the lack of housing inventory, builders have been playing catch up. Single-family housing starts in August hit one million for the second time this year, and for only the third time since July 2007. Those numbers explain why your friends in the homebuilding business are feeling upbeat: Builder sentiment hit an all-time high in September, since the series began 35 years ago.

Meanwhile, plunging interest rates have extended to housing loans. In mid-September, the 30-year fixed-rate mortgage averaged 2.87 percent, according to Freddie Mac, while the 15-year fixed-rate mortgage hovered to an average of 2.35 percent. Low rates have induced many more would-be buyers to start their house hunting adventures.

But be aware that lenders learned a lesson from the 2000’s boom and boost: it’s not wise to lend to just any would-be buyer with a heartbeat. Lending standards have gotten much tougher in the current housing mini-boom. The Mortgage Bankers Association found that mortgage credit availability has dropped to the lowest level since March 2014. That means that unless you have solid credit, the mortgage rates that scream across your screens may not be available to you. 

Research from the Federal Reserve Bank of New York found that the median credit score on mortgages originated in the second quarter, surged to a 21-year high of 784, up 11 points from the previous quarter and 25 points from a year ago, “as lenders tightened standards in response to uncertainty over the labor market”. That was the highest median score since they have been keeping records over the past two decades.

Bottom line: If you are in the market to buy a house, run the numbers, do you research, and be patient, the process could take some time.