The path to homeownership has been littered of late with wild mortgage rate swings, an insufficient supply of homes, and record high prices being asked for the limited supply available.
After rates dipped below the 5% mark for the first time in four months just a few weeks ago, opening the door for many to jump back into the market, the 30-year fixed-rate mortgage leapt back upwards this week, averaging 5.22% according to Freddie Mac.
With rates swinging wildly up and down, the National Association of Realtors (NAR) reported last week that 148 of the top 185 metropolitan areas (80%) posted double-digit home price gains, up from 70% recorded during the first quarter of 2022, as the price of a median single-family home hit $400,000 for the first time on record—then surpassed it—finally ceasing its accent at $413,500 by the end of Q1 of 2022.
MReport had a chance to speak with Adam Mercado, Director of Operations for ClearPath Lending, on the current state of the housing market, including the issue of affordability faced my many first-time buyers and renters looking to achieve the American dream of homeownership.
Mercado has been employed by ClearPath since August 2016, and he began his financial services career in 2002 as an Operations Assistant at IndyMac. Since then, his career has grown and he has worked for organizations like Experian Consumer Direct, HomeBridge Wholesale, and People’s Choice Home loan.
Adam is also a military veteran, having served in the Marines from May 1998 through May 2002.
The housing affordability issue seems like a vicious cycle as inflation and a fluctuation in rates are forces acting against first-time buyers looking to purchase the home of their dreams. What needs to change in order to remedy this issue and break this cycle?
Mercado: There are root causes to soaring home prices that stem from the post-2008 financial crisis, and have been even more apparent over the past two years. The Federal Reserve has printed more than 40% of the money supply since the beginning of the pandemic, which has inflated asset prices such as the stock market and real estate. In other words, when money floods the system, people need to put it somewhere. Not only did all this money go into real estate, but interest rates were also anchored near zero which created more leverage in the system. Inflation is no longer transitory, and the prices of most things around us have risen as a result of the unlimited printing and debasing of our currency. The Fed has now been forced to raise rates and begin quantitative tightening in order to control the pace of inflation, especially with the mid-terms around the corner.
Another major factor is the limited real estate supply issue which is heating up competition and creating force-bidding. This is terrible for buyers because they either keep getting outbid, or it forces them to overpay. Many first-time homebuyers are leaving the cities and settling in rural towns which has become easier with remote work trending, post pandemic. The answer to this question is not a simple one, but what we need is balance. Ultimately, we need more supply in the market so that buyers have a choice and healthy interest rates that allow for affordability.
Do you foresee housing affordability issues lingering throughout the remainder of 2022, or do you think the issue will extend beyond?
Mercado: I believe the issue will extend beyond 2022. Rising interest rates may cause the housing market to soften a bit, which will be a positive for those looking to buy a home, but unless we can see an increase in supply, prices are unlikely to drop significantly in the near future.
Besides renting, what are some options you would suggest to a buyer currently shopping in this competitive marketplace?
Mercado: Get a TBD pre-approval so that you’re just as good on paper as an all-cash buyer. A TBD (to be determined) pre-approval is a fully underwritten file that is pending a purchase contract and address.
I also recommend hiring an experienced agent that is familiar with the area you’re looking to purchase and has a large network. They will be your advocate, and will be negotiating on your behalf, so hire wisely. Co-buying is also an interesting concept that is becoming more popular. Find a like-minded friend, and pool your assets and income to buy a property together. You can even consider a duplex, so you both have separate living spaces for privacy and comfort.
Are down payment assistance plans and first-time buyer plans feasible options to turn to in this market?
Mercado: Although these programs are a great benefit, they may not gain you an advantage when you’re up against conventional 20%-plus offers. If you want to be competitive and have your offer stand out, I’d recommend putting 20% or more down. If this is not an option, you can still get your offer accepted with these programs, but you’ll need to identify a home or area that is not so highly sought after to give yourself a good shot.
What advice would you give to a prospective buyer forced to sit on the sidelines due to affordability concerns?
Mercado: Timing is everything, so stay patient. If you’re renting and living a comfortable lifestyle, that’s completely okay! If you have the ability to work remotely or relocate your job, consider moving to a more affordable market. If this is not an option for you, control your expenses and continue to save to put yourself in a position to act when an opportunity presents itself in the market.