Buyers Of New Homes Getting Access To Lower Mortgage Rates, But Forfeit Leverage Over U.S. Builders

Builders are maintaining their leverage over buyers.

According to the U.S. Department of Housing and Urban Development (HUD), sales of newly-built homes climbed in April as new construction buyers returned to the U.S. housing market.

The supply of available homes slipped, too, making it harder for today’s buyers find “great deals” on a new home. Thankfully, though, mortgage rates have dropped and many U.S. lenders now quote 30-year mortgage rates in the 3s.

Homes are more affordable today than during any point in the last 12 months.

New Home Supply Drops Into “Sellers Market”

The number of new homes sold climbed by twenty-six thousand units in April 2014, rising to 433,000 units on a seasonally-adjusted, annualized basis. The 6 percent month-over-month increase is the largest recorded jump since October of last year.

Different from months prior, however, the mix of April’s New Home Sales skewed toward the first-time buyer.

Both median and average home sales prices dropped in April as compared to March. More than half of all new homes sold last month were priced between $150,000 and $300,000.

That, too, hadn’t happened in six months; sales had recently clustered at higher price points typically manned by repeat and move-up buyers.

The biggest story, though, in the April New Home Sales report was the drop in available home supply.

Despite more new homes for sale at the end of April as compared to the end of March, the national New Home Supply dropped 0.3 months to 5.3 months. This means that, at the current pace of sales, the entire U.S. stock of new homes for sale would be “sold out” in less than six months.

This 6-month marker is an important one, too. It’s the purported balance point between a buyer’s market and a seller’s market.

When home supply exceeds six months, buyers tend to gain negotiation leverage over sellers. When home supply falls short of six months, it’s the sellers who have control.

April 2014 marks the 30th straight month, dating back to October 2011, that New Home Supply has favored U.S. builders over buyers. Not coincidentally, October 2011 is widely believed to be the month during which the housing market bottomed from last decade’s downturn.

Since 2011, new home prices are up more than 25 percent in some U.S. markets.

Low Mortgage Rates Boost Buyer Purchasing Power

As home prices rise, mortgage rates have dropped. Since the start of the year, 30-year mortgage rates have been on steady decline and are now at their lowest levels in more than 12 months.

Assuming a purchase price of $300,000, today’s homeowners with a VA loan mortgage rateof 3.75% can expect to pay $1,389 monthly to their lender — $135 less as compared to five months ago.

Savings are similarly large for buyers using other low- and no-downpayment mortgage options including the FHA mortgage, which requires just 3.5% down; USDA loans, which require nothing down; and, conventional financing via Fannie Mae and Freddie Mac with as little as 5% down.

Of all the low-downpayment programs, though, it’s the FHA-backed loan which is gaining traction among U.S. home buyers.

Recently, several large U.S. lenders relaxed their FHA minimum credit score requirements, lowering minimum FICO scores from 640 to as low as 580, which has put FHA financing within reach of prospective home buyers nationwide.

An estimated 14% of the U.S. population carries credit scores between 580-640.

Also, another reason FHA loans have been popular is because FHA loans are “assumable”. This means that a homeowner can transfer the home’s mortgage to a seller when the home is eventually sold.

With today’s mortgage rates sinking to the 3s, the FHA’s assumable feature can be attractive — especially if mortgage rates return to historical norms within the next half-decade.

Buying A New Home? “Deals” Are Disappearing

For today’s new home buyers, there’s a window to find great deals. Negotiation leverage remains firmly with the nation’s builders, but with mortgage rates low, your purchasing dollars are extended.


Realtor with Greg Garrett Realty, actively licensed in the state of Virginia

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