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The New American Homebuyer

This piece originally appeared in the August 2021 edition of MReport magazine.

Even with the massive gains of the last year, mortgage industry experts say that any plateau for the residential real estate market is nowhere in sight.

Due to a persistent short supply of homes, low interest rates, and readily available credit, single-family homes are commanding multiple offers replete with various sweeteners, such as inspection waivers, offers to cover any appraisal shortfall, etc.

However, homeowners who get too greedy and list their homes at too high a price can still run up against issues of appraisals coming in too low and buyers recognizing the house is overpriced to start with. That’s according to Brian Koss, EVP, Mortgage Network.

Housing affordability declined in May (the latest figures available as of this writing) compared to a year ago, according to National Association of Realtors (NAR) Housing Affordability Index. Median family incomes rose modestly by 1.2%, while the monthly mortgage payment increased 20%. The effective 30-year fixed mortgage rate was 3.01% this May compared to 3.29% one year ago, but the median existing home sales price rose 24.4% year over year.

Compared to the prior month, affordability also worsened as the monthly mortgage payment rose by 1.7% while the median family income declined by 1%.

With all these factors in play, what does the face of the modern American homebuyer look like in 2021? MReport spoke to the experts for insights into the qualities, priorities, and needs of those on the road to the American Dream.

The State of the Market
The adage about the critical importance of location still applies to this current market, said Yvette Clermont, Branch Manager, Inlanta Mortgage. Where homes are available, buyers want to be in good school districts, near shopping, and so forth.

“It’s a little bit of getting whatever you can get your hands on right now,” Clermont said.

Kea Blevins, a Homespire Mortgage Branch Manager from Clayton, North Carolina, agreed, “I find people compromising on what they’re looking for, because they start to get desperate for finding that home to move into due to the due to the low inventory.”

Part of that compromise means moving out from central cities and even nearby suburbs to more rural areas, according to Blevins, who added that many native North Carolinians are getting priced out of the market because people are coming in from other states to bid on any homes for sale.

Sellers of move-in-ready homes primarily look for clean, non-contingent cash offers, said Jim Bopp, VP of National Renovation Lending, Planet Home Lending. “If you don’t come in with a clean, non-contingent offer, and agree to pay at least a little over listing price, you may not get the house.”

Borrowers can choose from newer as well as traditional financing funding sources for home purchases. One of the newer sources, Sivert said, is iFunding companies, which provide funds up front to provide full or partial cash offers. These companies may provide the financing for homeowners planning to sell a current home to buy a new one. These funds provide the move-up buyer with funds for a cash offer on the new home. Sivert likened such funding to a bridge loan, which the borrower pays off once the home is purchased and a traditional mortgage is obtained.

Such companies may also offer shared equity programs, which enable the buyer and the equity partner to share in any home price appreciation. The borrower gives up some of the potential gain in exchange the shared-equity lender (or investor), providing part of the down payment. The borrower and lender share in the home’s upside value or downside value at the time of the sale of the property.

The above programs notwithstanding, there are still many prospective homebuyers who will look to mortgage lenders for home-purchasing funds.

The 30-year, fixed-rate mortgage is hands-down the most popular product among borrowers, according to mortgage industry experts. Fifteen-year, fixed-rate mortgages only offer a slight interest rate discount, so borrowers are trending toward smaller payments over a longer period.

Though sellers prefer cash offers, if they do accept a mortgage, they also prefer the conventional, fixed-rate loan. So, borrowers who qualify for VA or FHA loans tend to get little consideration.

“Cash is king, which is a shame, because there are a lot of good programs out there,” Blevins said. “I have had multiple conversations with real estate agents when I’m pre-qualifying clients. If the agent finds out the client is coming in with an FHA or VA loan, the first question always is if they can qualify for a conventional loan, or they are going to the bottom of the pile.”

Adjustable-rate mortgages have lost any popularity they once had, added Steve Adamo, President of National Retail Production, Embrace Home Loans. “In the years leading up to the Great Recession of 2008, ARMs were being made with higher lifetime caps and many were made with no money down. When borrowers’ interest rates adjusted upward, many had a difficult time making their loan payments as they could not afford the loan to begin with.

In 2008, the Board of Governors of the Federal Reserve System adopted a rule under the Truth in Lending Act, prohibiting creditors from making higher-priced mortgage loans without assessing consumers’ ability to repay the loans. Creditors have had to follow these requirements since October 2009. For example, when borrowers request an application for an adjustable-rate mortgage, they must be provided with information on how their loan payments could rise in the future under different interest rate scenarios.

With interest rates on conventional, fixed-rate loans as low as they are, there is little, if any, advantage for most borrowers to opt for an adjustable-rate loan, Adamo added. “Most are sticking with the 30-year, fixed-rate product. It’s safe, it’s sound, it’s predictable. It’s not that other borrowers don’t use the plethora of products that are available, because some do. But most are sticking with that long term fixed-rate instrument.”

Adamo added: “The credit profile of the entire industry, certainly, has changed post-crisis, for the betterment of the entire housing finance industry. The underpinnings are much stronger for housing finance today than they were pre-crisis.”

Due to the preference for cash or conventional mortgages, real estate agents advise sellers against accepting VA loans, Bopp noted.

Another increasingly popular product in this market, Bopp said, is the Fannie Mae HomeStyle Renovation mortgage, which provides funds for a wide range of renovation projects, ranging from repairs and energy updates to landscaping and luxury upgrades.

According to Fannie Mae, the funds provide the borrow the option to renovate and rehab a new or existing home by including financing in their conventional purchase or refinanced home loan. LTV is calculated taking the proposed project into account, giving the borrower more purchasing power and more options to make their home their own.

By using the Fannie Mae funds or a home equity loan, the prospective homebuyer who already has a property has the option of trying to convert that property to a move-up home without needing to move, Bopp said.

Speed to Close Tops Rate Differential
Regardless of the type of mortgage, speed is of the essence, Clermont said. “Everything is condensed, everything is urgent. When a seller gets an offer, if it’s not a strong offer, it won’t be successful.”

Higher down payments, offering to cover any appraisal shortfalls, and similar contingencies will help get approval for an offer, Clermont said.

“We’re seeing anything from $10,000 to $50,000 or more being put down in nonrefundable due diligence deposits,” Blevins said. “We have people signing appraisal addendums, agreeing to pay above and beyond fair market value; [others] are waiving any sort of repairs and looking for ways to qualify to buy a home without needing to sell their existing home first.”

Buyers and sellers also want quick closes, but that’s not always the best idea, Clermont said. “When you have a quick close time, that’s when things can kind of go awry or things get missed. It does help to be working with a local lender.”

Rising home prices mean that purchases will be challenging for first-time homebuyers, Clermont admitted. While Inlanta and several other lenders have programs designed for first-time buyers, most of those programs involved low down payments, and sellers are looking for cash offers or for larger down payments.

“If you’re a first-time homebuyer and you don’t have a large down payment, it’s tough to be heard,” Koss said.

Becoming the Lender of Choice
Borrowers have many options to choose from when it comes to a mortgage lender. There are few, if any, differences in rates, types of loans available, etc.

“What [borrowers] care about is how quickly that mortgage company can close,” Sivert said. “The emotion of being able to guarantee that you can get in this home, get it funded and closed, is worth more money than shopping around and saving 25 basis points on a mortgage. Companies that have the reputation that they can close a purchase in under 30 days is a game changer.”

Koss recommends building good partnerships with real estate agents, who will come to the table with relationships with prospective buyers already in place.

Koss stressed the need for strong, active communications with real estate agents in order to build good relationships with them.

Once a loan is approved, Mortgage Network offers the borrower a cover letter from the CEO to be presented to the seller, offering $1,000 if, for any reason, Mortgage Network doesn’t perform as promised, Koss said. “In the areas that we are known, we have a very good history, and we have good originators who do their homework up front.”

If a seller will accept a mortgage rather than an all-cash offer, he or she wants assurances the deal will close, Adamo said. “I think Embrace Home Loans has something special. With our Guaranteed On Time Closing program, if we miss the closing date and it’s our fault, we’ll pay the borrower $2,500 within 30 days of closing. For a buyer, that is as good as cash in this market. We also have a trademarked product, Approved to MoveTM, which has full approval and is completely underwritten, so that a buyer and seller know the amount the mortgage is approved for when an offer is put on a property. So, we have a lot of [prospective buyers] who are ready to go in this market.”

Popular Amenities
With the ongoing shortage of housing inventory, buyers aren’t being too picky about the type of house they buy, experts agree. But homes offering open floor plans, in move-in-ready condition, and with a combination of good living, play (backyards, pools), and work (home offices) spaces, are the ones that will go the fastest and fetch the best prices, experts said.

“People want a house that’s a blank slate—something that they can modify to their own style, rather than being pigeon-holed into a certain style,” Koss said. The “blank slate” enables people to picture their own furniture, etc., in the space, unlike with an overly embellished property.

Even though some people are starting to return to the office, homes with home offices or rooms that are easily convertible into home offices are also popular, according to Koss.

Though some people are looking to move out of cities, there are still plenty of buyers who want to stay in a municipality. They primarily want to move into a home that offers a new and better lifestyle, said Brad Sivert, Head of Proptech and Marketing, Tavant. “Lifestyle can mean more of a yard and other child-friendly home features,” he added.

Sivert cited a recent Zillow blog post that found the following:

  • Listing keywords indicating nearby parks, bonus space, and pools are some of the hottest for attracting home-shopping families.
  • Families should expect to pay more for kid-friendly features, with listings that mention “treehouse” or “garage” associated with a 2.2% sale premium.
  • Child-friendly homes are also selling quicker than expected. Homes with a backyard mentioned in the listing description are selling more than five days faster.

These outdoor features boost home selling prices. The feature with the highest price premium is “treehouse,” which contributed to a home selling for 2.2% more than expected. Other backyard features associated with selling for a premium include jacuzzi (1.6%), swing set (0.8%), and pool (0.5%).

Beyond those features, Sivert agreed with others who pointed to the still growing popularity of a home office. Additionally, pools have changed from being a liability when selling a property to being an advantage.

“About five years ago, having a pool in your backyard was deemed a luxury, but also a very expensive cost, and did not help your property value,” Sivert said. “Having a pool did not dramatically help. Now, having a pool when you list a home increases the demand. It’s the concept of having everything your family wants to do within one property.”

“The biggest challenge we see for homebuyers is actually knowing when to find the right house at the right time,” Sivert said. “You need to look at the propensity to list model—the likelihood of a home or neighborhood having a home go for sale.”

There are a few different “propensity to sell” models with similar attributes, Sivert noted. CoreLogic’s Realist offers a model showing a sell score, with ratings from 0-1,000 to predict the relative likelihood that a home will be sold in the next six months.

By knowing a home is likely to be sold, a buyer can make an offer prior to any listing, and, therefore, stymie bidding competition that will drive up a property’s price.

Looking Ahead
Experts agree that, at some point, the run up in housing prices will have to level off. A decline—at least a slight one—at some point is inevitable. However, they also agree they don’t know when that might happen.

Clermont expects mortgage rates to stay low for at least the next year. Even if rates move up slightly, they will still remain historically low. Inventory of homes for sale, however, will continue to be an issue.

Bopp pointed out that with the combination of high lumber prices, carrying costs, and other expenses, builders see no profit in starter homes and are slowing down construction of other single-family houses until the prices for building supplies levels off.

“A lot of people say that prices have to start coming down,” Blevins said. “But they’ve been saying that for a year, and I’m not seeing it. As long as you have these wealthy buyers coming in and buying homes at about fair market value, that’s increasing what the next person is going to have to pay. And we have a relatively strong local economy. So, people continue to put their money into housing. We may hit a bubble, but I’m not sure that it’s ‘just around the corner,’ because there are still many things factoring into having a continued positive housing market.”

With rates expected to move up only slightly, if at all for the next year or so, and housing inventory expected to remain constrained, the seller’s market for homes should continue for at least the next year, Adamo says.

Sivert added, “Everyone says we’re on the cusp of a bubble, but no one thinks the bubble is going to burst soon.”

About Author: Phil Britt

Britt started covering mortgages and other financial services matters for a suburban Chicago newspaper in the mid-1980s before joining Savings Institutions magazine in 1992. When the publication moved its offices to Washington, D.C., in 1993, he started his own editorial services room and continued to cover mortgages, other financial services subjects, and technology for a variety of websites and publications. 

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