Rising Rent Prices Are Creating 1st Time Home Buyers
By Scott Westlotorn
Armed with more confidence in the economy, first time buyers are jumping into the housing market. Many are compensating for soaring entry level home prices with a Federal Housing Administration loan that became cheaper after insurance premiums were cut in January 2015 to make home buying more affordable.
Renters who have good paying jobs are calculating the cost of renting as about the same as paying a mortgage. With the help of a Federal Housing Administration loan, which requires as little as 3.5% down, first time buyers and those who lost homes in the great recession are getting into the market now and eliminating much of the time they would have to work and save in order to get the money for a conventional down payment of 20%.
This new wave of buyers is lifting the homeownership rate, which rose in the second half of 2015 after steadily declining for almost two years.
An increase in rents which rose 4.6% nationally in the fourth quarter from a year earlier, according to REIS, a national real estate market research firm in NY, is helping drive the first time buyer to purchase a home instead of renting one. These buyers are entering the market regardless of the low inventory of entry level homes currently available which is down nearly 40% from three years ago, according to Redfin, online real estate brokerage firm.
FHA-insured mortgages used by first-time buyers accounted for 22% of all loan originations nationally in December, up from 17% a year earlier, according to Ellie Mae, who processes 25% of U.S. mortgages.
The driver may also be attributed to the FHA insurance-premium being cut in January 2015 to about .85% of the loan amount. This allowed the first-time homebuyer to pull forward the day they could purchase a home and consequently turned around the homeownership rate, according to Mark Zandi, chief economist for Moody’s Analytics.
Many Americans from 2009 to 2014 wanting to become homeowners couldn’t because of tight credit standards that were implemented as a result of the recession. That left fewer families able to buy at an opportune time in the market cycle and build the wealth that often comes with homeownership, the Housing Finance Policy Center at the Urban Institute in Washington said in their January report. That translate into more than 250,000 first-time homebuyers added to the market.
The increase in FHA loans comes with risk that would surface the next time the U.S. economy tumbles. Rising prices have pushed borrowers toward these FHA loans that require smaller down payments and allow for high monthly payments relative to a borrower’s income. When the federal government guarantees these types of loans the market disciplines normally in place to prevent such risks are not there and consequently exposes tax payers. According to Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington, most loans originated in the last six years have the lowest default rates in almost two decades. FHA loans that are at least 90 days delinquent are up slightly to 0.05% in fiscal 2015 from a year earlier.
Lenders appear to be feeling more confident as the real estate market recovers. In the past year the minimum credit score for an FHA mortgage dropped from 640 to 580. Most lenders felt credit standards were too tight but they are now easing toward a more acceptable level allowing more buyers access to loans. For the time being defaults have decreased, the economy is doing better and the housing market has stabilized.
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