The inventory shortage that plagued the market prior to the pandemic and subsequent pent up demand, especially given historically low interest rates, is expected to fuel the recovery. Lawrence Yun, Chief Economist, NAR
With a Little Help
The old adages: “Heaven helps those who help themselves,” “Stand on your own two feet,” and “Pull yourself up by your own bootstraps” are all fine and dandy. But, when it comes to buying a house, many homebuyers need considerable assistance in order to pull it off.
You may think such assistance is not available, at least not for you, but there is help out there – a lot of help. You have to know where to look for it and be diligent in your research. You also have to confront what may be your own misconceptions regarding homeownership.
Sean Becketti, a former chief economist at Freddie Mac, was a little obsessive about what he called the myths of howeownership. He had quite a collection of them, feeling they worked to sideline too many people, especially Millennials, from homeownership. Maybe such myths have convinced you that howeownership is not possible. Perhaps your credit is less than perfect, you are drowning in debt, or can’t imagine accruing enough cash for a down payment and closing costs. While you might be absolutely right and one or more of these are a significant hurdle, it is also possible that none of them actually apply. As Becketti might say, the only barriers to homeownership could be in your head.
Credit & Debt problems
For example, your credit profile might not be as awful as you think. Black marks do eventually fall off of credit reports, and some of the credit score companies have begun to include utility and rent payments in their algorithms which can raise scores, especially for those with little credit or short histories. FHA, the VA, and the Department of Agriculture’s mortgage programs accept much lower credit scores than do Fannie Mae and Freddie Mac, especially with compensating factors such as a co-borrower or large down payment. Freddie, in fact, now has a loan program for the many millions of Americans who have no credit score.
You might think you are carrying a lot of debt, but lenders have their own approach for computing a debt-to-in-come (DIT) ratio. Many types of monthly obligations don’t count and there are new rules for calculating student loan payments. Lenders are also realizing they need to rethink income and are exploring ways of documenting wages from self-employment and gig types of work. New research has found that a DTI is actually a poor measure of credit risk, and the limits are being slowly raised for many loan programs.
If, however, you are spot on about your own situation, remember that neither poor credit nor excessive debt are permanent conditions. There is help out there for resolving both.
We aren’t talking about those internet ads for credit cleaning or repair; most are scams in truth, about the only thing that will mend awful credit or reduce a heavy debt load are discipline and time. However, some approaches work better than others, and the hundreds of homebuyer education programs available nationwide usually tackle both problems. Many are free, some are on-line, and some have the additional benefit of granting their graduates eligibility for downpayment assistance. Look for a program that is approved by the Department of Housing and Urban Development (there are state specific lists at www.HUD.gov) or the GSEs Freddie Mac and Fannie Mae. The latter, in fact, recently waived the fees for enrolling in one of their programs.
The 20% Fairy Tale
The biggest myth about homebuying is as persistent as it is incorrect. Despite that FHA’s low down payment loans have been around for decades and the GSEs brought back their 3% programs a few years ago, many potential buyers seem not to have heard the news and cling to the idea that down payments must be 20% of the home purchase price. In fact, a recent survey found 40% of respondents had no idea how much cash they needed to buy a house.
Granted, 20% is the magic number for getting the best rates and terms, all else being equal, but Freddie Mac says most homebuyers are putting down between 5% and 10%. About a third of the 1.8 million loans that Freddie Mac made in 2019 had down payments under 20%.
You don’t have to be a first-time buyer to qualify for these reduced down payment programs. For example, Freddie Mac’s Home Possible Advantage mortgage has a minimum down payment of 3%. Borrowers do have to complete a homeowner education program and meet minimum credit requirements, but those are very flexible. Income is limited to 80% of Area Median Income (AMI). Most FHA programs have no income limits, fairly low credit score requirements, and require a minimum down payment of 3.5%.
Down payments aren’t an issue for those with Veterans’ eligibility; they are not required for a loan within current lending limits, up to $765,600 in high cost areas. The Department of Agriculture’s rural housing program which also has zero down payment options is another resource for those living outside of major urban areas. The definition of “rural” in Fed-speak might surprise you—it includes most of the country.
More Options for Down Payments
For those who go the GSE or FHA route, even the minimum 3% to 5% of the price of a typical home (plus closing costs) is still a lot of money. The low down payments also require an additional monthly premium for FHA or private mortgage insurance, an amount that gets included in the DTI. Even homebuyers who are aware of the low down payment programs may not know that a part of it, whether 5% or 20%, can be a gift from family or friends. For example, qualified borrowers can further reduce their 5% down payment coming out of their own pockets to 3% by lining up gifts from family. Even those just shy of having 20%, could eliminate the need for private mortgage insurance and ease back the DTI with a contribution from their extended family.
This is increasingly a fallback, especially for first-time buyers. With home prices rising more than wages, those buyers have been turning more and more to parents and family members for help. Among people with FHA loans geared to first-time buyers, more than a quarter got help from their family—a significant increase over 22% seven years earlier. Freddie Mac even coined a term for it, “the Bank of Mom and Dad.”
Mass timber buildings are the newest very old idea. While there are only 221 such structures built or underway in the U.S., it is a growing concept for everything from condo complexes to entire neighborhoods. And the environmental benefits are huge.
Mass timber buildings are framed entirely with solid laminated wood panels. Currently limited to six stories, taller structures will be allowed in 2021. A 23-story tower with 231 residences is being planned for Milwaukee.
A main argument for the use of the material is its power to mitigate climate change. Structures can have a lifespan of hundreds of years and have the ability to sequester or remove carbon from the atmosphere, which can reverse climate change effects at a large scale. Construction Dive
Finding Loan Assistance Programs
Not everyone has family or friends with that kind of extra cash laying around, but there are a surprising number of resources available to those lacking wealthy relatives or helpful friends. According to the Urban Institute there are 2,527 programs nationwide that provide grants or loans to potential homebuyers, at least one in every state. A study by RealtyTrac and Down Payment Resource found that, of the 78 million single-family units in the U.S., 68 million could qualify for assistance programs. That study also found the average assistance provided was over $11K.
The problem is locating these programs. The best place to start is with your state’s housing finance agency (HFA). These are state-charter authorities that were established to help meet affordable housing needs within their states and every state has one. In California go to CalFHA.CA.Gov. There are quality, and lack of financing, has driven their new home share from 50% 60 years ago, to 10% today. Upgrades in exterior design and improvements in resilience and durability are increasing their appeal. And with a cost of $50 per square foot, half that of building on site, they could still be a solution to providing homes at the lowest pricing level.
FIRST-TIME HOME BUYERS
Buying a home for the first time is an exciting and important milestone for many. Their purchases make up a sizable chunk of the market, too. In the 4th quarter of 2019, 39% of all U.S. single-family home purchases were made by first time buyers. This year Americans may be conflicted on whether it’s a good time to purchase a first home. While many people have been financially hurt by the COVID-19 pandemic, mortgage interest rates have also hit record lows.
For people willing to take the risk to invest in a house this year, the search for a first home requires careful consideration. Buyers must balance what they want and need with what they can afford. Wallethub.com
Financing: The Biggest Change
Manufactured homes have traditionally been financed with chattel loans, similar to auto loans, which are expensive and cover only the building, not the underlying land. This, along with restrictive zoning and their lack of compliance with many local building codes, means they are often relegated to “mobile home parks” which makes them difficult to sell and reduces their equity building potential.
Fannie Mae is attempting to solve the financing issue with its MH Advantage program, a product more closely resembling a traditional mortgage.
Lifting the Restrictions
This brings us to another reason that homebuilding has lagged; restrictive zoning, land use regulations and local covenants. Typical restrictions allow only single-family houses, mandate a minimum house size, lot size, side and front setbacks, or floor area ratios (total area of the building relative to lot size). These limitations not only increase building costs but make some land parcels totally unavailable for housing. Building codes can mitigate against using newer building materials and techniques even if they don’t sacrifice safety or quality.
States are eliminating or loosening controls on density, prohibiting single family zoning, or taking steps such as reducing or deferring upfront developer fees. Some of the biggest employers (Google, Apple, Microsoft) in areas with crippling affordability issues have stepped up to incentivize builders and/or make their own land parcels available for affordable homes.
The acceptance of modular construction in the United States is still sluggish, even as it has been accepted in other parts of the world, such as Japan and Scandinavia. But with construction labor in short supply and the need for housing at all-time highs in Boston, the time and cost efficiencies offered by digitally enhanced modular construction, or whatever it could be called in the future, would help overcome those problems.
Modular construction can reduce construction costs by as much as 20% and project time by as much as 50%, compared to standard construction methods, according to a 2019 McKinsey & Co. report.
California is Making Progress
California has made some of the most dramatic moves aimed at increasing inventory and holding the price line. In 2017 and again in 2019 the state legislature eased rules regarding infill construction, i.e. building on lots in existing neighborhoods. Such building reduces infrastructure costs; no need to dig up streets or lay new service lines and probably little need for clearing or grading. Previously, infill building has faced a lot of headwinds; zoning that prohibits multifamily usage, regulations on lot size or clearances that made many lots unbuildable; floor area ratios that mitigate against vertical construction.
The two waves of California revisions, as of January 1, 2020, facilitate construction not only on vacant lots, but on lots where housing already exists. It will be much easier for a homeowner to construct accessory dwelling units (ADUs), better known as in-law apartments or granny flats. They can add on to an existing structure, build a new one, or convert a garage, with as many as three units on a single lot. Under the new laws, none of the units must be owner-occupied.
Not only will this permit additional new housing (perhaps up to a million units in the Bay area), but rents from ADUs could subsidize homebuyers’ qualifying income.
The good news is that many solutions are being put forward to address the affordability crisis. The bad news is that no silver bullet seems to exist and, of course, there is the great unknown…the duration and effect of the pandemic on our economy and lives. Hopefully, the combined impact of the efforts will provide a holding action until inventories increase, people can get back to work, and the smaller Generation Z become the major homebuyers.