Here’s why 2024 will be 'the year of hunkering down'

Mikaela Arroyo of John Burns Research says homebuyers will prioritize affordability over 'bells and whistles' and accept smaller homes that meet their needs.

by AJ LaTrace for Real Estate News

Key points:

• Buyers are willing to give up extra space and fancy tech in order to purchase a house they can actually afford.

• New construction will likely keep getting smaller into next year as builders ramp up deliveries.

• The “sweet spot” for interest rates appears to be between 5.5% and 6%.

While interest rates have dropped significantly in just the last couple of weeks, it's still anyone's guess what kind of economic environment homebuyers and sellers will be facing next year. 

Despite the uncertainty, John Burns Research and Consulting has published a list of 24 trends they predict for 2024 in new construction, home design and consumer behavior.

The main theme is that 2024 will be "the year of hunkering down," Mikaela Arroyo, VP and chief of staff for the New Home Trends Institute at John Burns Consulting, told Real Estate News. "We think next year is going to be very cost-focused, with how unaffordable homes are, and then you add in the economic ups and downs and the fact that it's an election year."

'Bells and whistles' take a back seat

Unlike the pandemic era, when having extra space and state-of-the-art filtration systems was a top priority, 2024 will see buyers becoming much more pragmatic. "A lot of people are really focusing back on the basics … and talking a little bit less about some of those bells and whistles," Arroyo said.

This means forgoing a big yard, an extra room for fitness and the home automation that was so popular just a year or two ago. Instead, the typical buyer will be looking to trim the fat from their home search. 

"We have some people even dropping the garage and a lot of people removing formal dining," she explained. "So what spaces can you completely remove from the house to make it more affordable?"

Home sizes will keep shrinking

The size of the typical new home has been decreasing in the last year or so as builders try to keep prices down and keep inventory moving, and this will continue in 2024, Arroyo predicts. 

This is especially important for younger and first-time buyers without substantial cash savings or home equity.

"For younger consumers, they actually felt that new construction was a better value relative to resale, and their reasoning was with all of the incentives and rate buydowns that builders are offering, you can get a new home at a reasonable price to a resale home," Arroyo said. "Maybe it's on a slightly smaller lot size, but it has all the features they care about."

Cautious consumers seeking rates of 6% or lower

Right now, buyers are still cautious about making a home purchase, particularly as interest rates remain volatile. High rates have a big financial impact, but there's a psychological one too: Consumers are "afraid of buying at the wrong time," Arroyo said. 

Agents can help educate buyers and provide emotional guidance — "being a counselor has become a bigger part of the job," Arroyo said — but consumers still have deeply rooted perspectives on where rates should be, considering the lower interest rate environment of the last 20 years.

Arroyo said her team has surveyed consumers about the highest mortgage interest rate they'd be willing to accept and what they believe is the historically normal rate.

"The number that keeps bubbling to the top, it's about 5.5% to 6%," Arroyo said. "That's the number that they're willing to go to. That's the number they now think is historically normal. That seems to be the sweet spot for rates where the consumer is looking."

December chill could thaw out by Spring for a ‘boring’ year

If mortgage rates continue to decline, we could see a more normal spring selling season, according to a Zillow economist.

Key points:

• Home sales are starting to climb up, suggesting a more typical spring.

• The percentage of homes sold above list price dropped to the lowest level since 2020, a sign that buyers and sellers are more accurately gauging the market.

• Zillow’s December report estimates some markets are seeing year-over-year price declines.

One sign that the real estate market was unsustainably overheated in recent years was the large number of homes that sold for above the list price. The frenzy of bidding wars and multiple offers over asking may now be giving way to a “boring” — and more predictable — year ahead.

The latest monthly housing report from Zillow found that the share of homes sold above list price fell to just under 28% in December. That’s the lowest rate since June 2020, a time when the world was coming out of the most restrictive pandemic shutdowns.

Redfin reported similar findings, putting the share of homes selling above list price at 23% in December. By comparison, the share approached 60% at times last spring, according to Redfin data.

Sellers also seem to be adjusting. In October the percentage of homes with price reductions was around 23%; by December it was down to 14.6%, according to Redfin.

With sale prices now landing closer to the list price, it appears that active buyers and sellers are adapting to the current market, which could mean a less chaotic spring season is coming.

“The housing market ended 2022 in a deep freeze, but there are some green shoots pushing up,” said Jeff Tucker, senior economist at Zillow. “The recent thaw in mortgage rates has begun to attract some renewed interest from buyers, and home sales are climbing again compared to last year. If rates continue to march down this spring and sellers return in seasonal force, the housing market just might get to have a normal — maybe even boring — year.”

Another indicator of a more typical year ahead? The increase in days on market. In December, it took about 30 days to sell a home, up from 13 days in December 2021. Homes are still selling more quickly than they were in the pre-pandemic days of December 2019, when it took about 43 days for a house to sell, but buyers are getting some breathing room.

Tucker expects that days on market will drop down a bit from current levels, something that traditionally happens in the spring. He also expects sellers to be rolling out higher prices if they see the demand is back.

“I think sellers are cautiously optimistic that they can fetch a higher price this spring and that will bring out some more aggressive pricing,” Tucker said in an email. “A lot of sellers know the spring is the best time to sell, and so they’ve waited for this opportunity to get the best price when they sell. 

Historically, he said the share of homes sold above list price bottoms out in early February before bidding wars ramp up by March. 

“I expect something like that to play out this spring, and the main difference will likely just be a smaller ramp up in above-list sales — that is, some improvement for sellers compared to the current midwinter doldrums, but much less of a seller’s market than we saw in spring 2021 or 2022,” Tucker said.

Indeed, homes in the hottest markets in 2021 are now taking the longest to sell. That’s particularly true in western metros: In Austin, homes are selling in 68 days; Las Vegas is at 57 days, and Phoenix comes in at 55 days, according to the Zillow report. On the flip side, the most affordable markets have now become the hottest, with homes in the Hartford, Cincinnati, Kansas City and Columbus markets selling in two weeks or less.

The slowdown in days on market has come with cooling prices. Zillow estimates prices dropped 0.2% between November and December. Year-over-year, prices were up 8.4%, although the report noted some markets are starting to see year-over-year drops, including Austin (down 4.2%) and San Francisco (down 2%).

Subscribe to Real Estate News

---

Yes, your buyer can bid on that $1M home

For the first time ever, the baseline conforming loan limit topped $1 million in high-cost areas, giving buyers more purchase options.

Key points:

• For most of the country, the conforming loan limit is $726,200, up from $647,200 in 2022.

• Buyers can borrow above the limit through a jumbo loan, but that usually comes with additional fees and stricter qualifying standards.

• Zillow estimates the limit increase means more than two million homes across the country will no longer require a jumbo loan.

A big increase in the conforming loan limit is providing more flexibility for agents who work with buyers in high-priced areas.

For the first time ever, the baseline conforming loan limit topped $1 million in high-cost areas, which means that more than two million homes across the country no longer require a jumbo loan, according to a Zillow analysis.

Avoiding a jumbo loan can be important to buyers, as they can be harder to qualify for and often come with additional fees and larger down payments. The increased limit gives buyers more options in this sluggish market, particularly in areas where the homes for sale are often priced near jumbo loan territory, said Nicole Bachaud, a senior economist at Zillow.

“We have a way slower housing market than we saw a year ago,” Bachaud said. “We’re in a position now where buyers have more negotiating power. We’re seeing homes sitting on the market longer… This can be a time where buyers can make things work if they are right on that line.”

The Federal Housing Finance Agency announced the changes in November, and they went into effect in January. The conforming loan limit is now $1,089,300 in some high-cost markets. For the majority of the country, the conforming rate is $726,200 in 2023, an increase of $79,000 from last year.

The FHFA used its home price index to determine the new limits, noting that prices increased 12.2%, on average, between the third quarters of 2021 and 2022.

Bachaud said that for some buyers who wanted to avoid a jumbo loan, they’ll now have access to more potential inventory, which could mean more opportunities for agents to help get them across the finish line. 

“Getting a mortgage in December and getting a mortgage in January can really make it or break it for buyers,” Bachaud said. “This can certainly be a time to refresh that home buying search for agents and buyers.”

The high-cost markets are generally concentrated on the West and East Coasts. Typical home values around San Francisco, New York City and coastal Massachusetts already bump up against (or exceed) the new limit in some areas. According to Zillow’s analysis, nearly 85% of the homes in Nantucket County in Massachusetts, for example, would likely require a jumbo loan that starts at over $1 million. Other expensive regions that will benefit from the increased limit include resort towns in Wyoming and Colorado.

Across the country, particularly in the Midwest and the South, are many areas with home values well below the jumbo loan limit of $726,200, so the typical buyer in those regions will see little impact from the change.

Keep reading at Real Estate News.

---

The Red-Hot Housing Market

Re-Setting Expectations in 2023

The red-hot housing market of the past 2 ½ years was characterized by sub-three percent mortgage rates, fast-paced bidding wars and record-low inventory. But more recently, market conditions have done an about-face. Consumers — and real estate professionals — who have  been watching the pandemic-fueled housing market could be feeling distraught by the news about higher mortgage rates, slower sales activity and dampening price pressure.

However, instead of being dejected, now is the opportunity for everyone to become re-educated about what a “typical” housing market looks like. Now it’s important to pay attention to local market conditions, as the housing market correction underway is going to look very different depending on where you are located. 

The national median home price rose by more than 40% over the past three years, but in some local markets, prices increased even faster. The run-up in home prices was driven by rock-bottom mortgage rates and pandemic-fueled demand.

As the pandemic took hold  in the spring of 2020 and the Federal Reserve cut the federal funds rate to near zero, the average rate on a 30-year fixed-rate mortgage fell to below 3%, the lowest rate on record. But now, the Fed has shifted to raising rates to combat inflation and mortgage rates have set another record — this time for the fastest increase in more than 40 years. 

Average mortgage rates jumped above 7% in November and have settled around 6.5% at the end of 2022. Rates should continue to fall in 2023, but the decline in rates will be much slower than the run up. We are forecasting the rates will fall modestly, reaching 6% by the end of the year. This is much higher than during the pandemic, but it is still low relative to historic standards.

Bright MLS’ forecast suggests that there will only be 4.87 million home sales nationally in 2023, a decline of about 6% compared to 2021, and the lowest level of home sales in nine years. Some of the 2023 slowdown is a result of homebuyers pushing their home purchase forward to take advantage of low rates.

Six percent mortgage rates have also priced some buyers out of the market. But relatively low inventory will be the primary driver of subdued transactions. Inventory has been rising in recent months but there is still only three months of supply nationally. Typically, we would need four to five months of supply to have a so-called “balanced” market so it will remain a seller’s market in most places.

The national median home price is expected to be relatively flat in 2023 amidst rebounding demand and low inventory. But the national figures do not tell the whole story. Local markets that are more affordable, and where the local economy is strong, will see stronger price growth in the year ahead. Midwest metros like Minneapolis, St. Louis and Indianapolis provide opportunities for home shoppers who are mobile and looking for bargains. Prices could rise 5% or more in these more affordable markets in 2023. 

Higher-cost markets that lack affordable housing are at greater risk of price drops. California markets, including Los Angeles and Riverside-San Bernardino where the median home price is more than 10 times the median household income, could see the greatest price shocks in 2023. Las Vegas, Phoenix and Austin are also markets where the risk of more serious price corrections is higher.

So, what should consumers and real estate professionals think as we head into 2023? First, realize that the frenzied pace of home sales activity during the pandemic was not typical or sustainable, nor is it good for a healthy, stable housing market. Second, know that even as the housing market resets in 2023, there have been contractions on both the buyer and seller sides.

While buyers will have more leverage in 2023, it is still going to be a challenging environment. Home shoppers should have their financing and offer strategy in place so they are ready to  make a strong offer when they find the right home for them. Third, opportunities for both buyers and sellers will vary significantly across local markets.

Whether buying or selling, it is more important than ever to understand local housing market conditions. People should not let national media headlines tell them whether it is a good time to buy or sell. It is important to set expectations to reflect current, local market conditions rather than what the market has been doing during the very unusual past two to three years.

To contact the author of this story:
Dr. Lisa Sturtevant at lisa.sturtevant@brightmls.com

To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com

Subscribe to Housing Wire +

House passes bill to modernize VA appraisals

Companion bill awaits passage in the U.S. Senate

The U.S. House of Representatives this week passed a bill that streamlines the appraisal process for U.S. Department of Veterans Affairs mortgage loans.

With the passage of HR 7735, known as the “Improving access to the VA home loan benefit Act of 2022,” the VA is now permitting desktop appraisals and in some circumstances, waiving appraisals altogether. Critics have long complained VA appraisals had to be performed in-house, which has resulted in a costly and slow process for veterans and servicemembers.

The bill, introduced by Rep. Mike Bost of Illinois, should make veterans more competitive homebuyers, the Mortgage Bankers Association said.

“The bill will encourage important reforms to the agency’s requirements regarding when an appraisal is necessary, how appraisals are conducted, and who is eligible to conduct an appraisal,” said Bob Broeksmit, President and CEO of the MBA. “This legislation is an important first step towards broad modernization of VA appraisal processes and could make veterans’ home purchase offers more viable in today’s competitive housing market.”

A companion bill in the Senate, introduced by Sen. Dan Sullivan of Alaska, awaits passage.

“This bill will make sure that veterans are not unfairly disadvantaged during the home buying process and allow for a modern, digital appraisal process, which will get them into their new home faster,” Bost said in a statement.

In late July, the VA announced that it would accept desktop and exterior-only appraisals on some transactions. In a department memo, the VA said that the move was a response to “high demand for appraisal services and limited availability of appraisers in certain local market areas.”

However, the VA said that its “willingness to accept” alternative appraisals was not a substitute for an appraisers’ assessment of the appropriate scope of work, and whether a desktop or exterior-only appraisal could result in a “credible report.” The agency noted that there were caveats, including that the purchase price cannot exceed the Federal Housing Finance Agency‘s conforming loan limits, which are $970,800 for 2022. Lenders also have to be approved to participate in the VA’s Lender Appraisal Processing Program.

---

Read more in Housing Wire

An Old Type of Mortgage Is Back in Style. Is It Right for Your Clients?

It's not an easy time to buy a home. Interest and mortgage rates are rising, the number of listed houses is at an all-time low, and continued demand for homes means that prices continue to go up.

Cue the reemergence of the adjustable-rate mortgage. The proportion of mortgages that are adjustable-rate mortgages (ARMs) more than doubled to 10% in January 2022, up from only 4% in January 2021.

Increased interest in ARMs is no surprise, as they offer an initial rate that's significantly lower than a standard 30-year mortgage. But what's the catch for buyers? After all, ARMs were last this popular in the lead-up to the collapse of the housing market in the late 2000s. As an agent, when should you recommend an ARM, and when should you advise clients to stick to a traditional mortgage, even if it has a higher rate?

How Does an Adjustable-Rate Mortgage Work?

As ARMs occupy a larger share of approved mortgages, buyers are more likely to be familiar with them as a strategy to lower their initial rate. What buyers may not understand is that after the initial period – sometimes called a "teaser rate," which typically lasts between three and 10 years – their interest rate and monthly payments fluctuate.

ARM rates are tied to a major index, such as the maturity yield on a one-year Treasury bill or the Secured Overnight Financing Rate. After the initial rate expires, mortgage lenders take the index rate and add a pre-agreed number of percentage points, called the margin. The margin stays the same, but the index rate fluctuates, and is out of your and your client's control – though ARMs do come with a cap that insulates buyers from steep increases in monthly payments.

The most popular adjustable-rate mortgage is the 5/1 ARM – which means that the introductory rate lasts for five years, and the interest rate changes once every year thereafter. Let's see how one looks in practice.

Your buyer needs to take out a $400,000 loan to purchase a home, having put an $80,000 down payment on a $480,000 property. A standard 30-year mortgage, which is known as a "fixed rate," currently comes with about a 5% interest rate. Under this circumstance, your buyer would pay $2,147.29 every month for 30 years – adding up to $773,024.40 total over the course of the mortgage.

Under a 5/1 ARM, your buyer may be able to secure an initial, five year rate of about 3.5%. Over the first five years of the loan, they would pay $1,796.18 per month, which adds up to $107,770.80 – $21,067 less than the $128,837 they would pay with a fixed-rate mortgage.

After this, things get more complicated. While it's possible that interest rates could be lower in five years, most experts consider it unlikely, as the Federal Reserve has announced and begun to implement an aggressive rate hiking schedule to combat inflation.

Even with a relatively low first-time adjustment of 1% and a favorable interest rate cap of 8.5%, monthly payments on this 5/1 ARM rise to a maximum of $2,817.96 per month. Overall, total 30-year payments on the 5/1 ARM would be estimated at $928,320, a full $155,296 more than a traditional, fixed 30-year loan.

When Does an Adjustable-Rate Mortgage Make Sense?

Clearly, adjustable-rate mortgages combine short-term gain with long-term risk. Your buyers can save money in the early stages of a home loan, but could be stuck with unfavorable, or at least unpredictable, mortgage rates for the brunt of their mortgage.

Whether an ARM is a sensible, responsible option depends entirely on the buyer's circumstance. The first type of buyer most advantaged by an ARM is somebody who doesn't plan on living in their home for long. If your buyer indicates that they plan to purchase and then sell their home in five years or less, an ARM will allow them to bank savings without worrying about the fluctuations of mortgage indexes.

In this vein, ARMs are a more normal option for people purchasing a "starter" home, because it allows them to build equity and pocket cash in advance of a more expensive home purchase.

For buyers who feel squeezed out of the red-hot housing market, ARMs can be an avenue to qualifying for a larger home mortgage. Some of these buyers may anticipate having a higher income in the future, or believe they will be able to refinance their mortgage later on when interest rates drop. These buyers have a higher tolerance for risk, and as long as you explain the potential downsides, opting for an ARM can be a reasonable option.

An ARM does not make sense for buyers looking to secure their "forever" home. For example, consider a married couple in their 30s who tell you they are searching for the home in which they will raise their family. They inform you they do not plan to leave this home for decades, and have settled, stable lives and careers in your local area.

For such buyers, an ARM would be a resoundingly poor choice. Instead, encourage these clients to pursue a traditional 30-year fixed mortgage, because it will afford them security and clarity.

ARMs are a similarly poor fit for buyers who have a low down payment, because a market correction and decreasing home values could leave them with inflated debt on a less valuable investment. Also, buyers who are purchasing a modestly priced home, especially those under $200,000, will only yield $100 or less per month during their initial ARM rate. Those savings likely won't be worth the risk of rising mortgage payments in the future, making an ARM a questionable decision.

As with all aspects of being an agent, answering questions about adjustable-rate mortgages depends foremost on your ability to understand and respond to your clients' goals and objectives.

To view the original article, visit the Homesnap blog.

VA-like housing bill proposed for first responders, teachers

Legislation would axe downpayment and monthly mortgage insurance fee for firefighters, police officers, paramedics, teachers

New legislation would extend a benefit similar to Veterans Affairs (VA) loans to first responders and teachers who buy homes.

U.S. Representatives John Rutherford (R-Fla.), Al Lawson (D-Fla.), John Katko (R-N.Y.), and Bonnie Watson Coleman (D-N.J.) introduced the bill, dubbed the Homes for Every Local Protector Educator and Responder Act, on May 13.

The bill would allow borrowers to finance up to 100% of the acquisition price. Mortgages would be subject to FHA loan limits. Homebuyers would pay an up-front mortgage insurance premium of 3.6 percent of the principal, which could be financed, and would not pay a monthly insurance premium.

If passed, the new program would be administered by the Federal Housing Administration. The benefit is modeled on the widely used home loan program for veterans, which is administered by the Department of Veterans Affairs.

Police officers, prison guards, firefighters, paramedics, emergency medical technicians and public or private school teachers would all be eligible.

But before borrowers rush to take a job as a summer school teacher to get a break on a mortgage, the bill has a caveat. Eligible borrowers must have worked in one of those professions for at least four years.

They also must be in good standing at their job, and not subject to disciplinary action. They must also show that they intend to keep working in the same job for another year.

Like VA loans, which are popular with investors but not homesellers, the benefit would allow the borrower to skip the down payment altogether.

Samuel Royer, the national director for Heroes First Home Loans at Churchill Mortgage and a veteran, came up with the idea for the program, to acknowledge first responders’ sacrifices, he said. “I believe that American first responders deserve the same access to affordable housing benefits that I have as a veteran,” Royer said.

The bill looks to ease access to homeownership by lowering the upfront cost to borrowers. The anemic housing inventory, however, still poses a problem for any potential homebuyers who aren’t prepared to pay well over the asking price.

Homesellers, who now have many offers to choose from, are not likely to look favorably on anything that entails more complicated financing. Loan officers, too, sometimes have reservations about government-financed loans.

---

Related Links

• 5 Things You Should Get Rid of Right Now, According to Home Inspectors

• Millions will enter housing market in 2021

• Turnkey homes vs. fixer-uppers: The best home for your wallet

If there is a home that you would like more information about, if you are considering selling a property, or if you have questions about the housing market in your neighborhood, please reach out. We’re here to help.

Search Homes in Colorado

Search Homes in Oklahoma

FHFA extends multifamily forbearance through June 30

FHFA extends multifamily forbearance through June 30

Multifamily property owners who are struggling to make mortgage payments due to the coronavirus pandemic now have a reprieve through the end of June for mortgages backed by Fannie Mae and Freddie Mac, the Federal Housing Finance Agency announced on Friday.

Forbearance options for multifamily mortgages backed by the GSEs were set to expire on Mar. 31, but the FHFA has extended that till June 30, 2021, provided landlords are also extending benefits to their renters. Landlords must:

• Inform tenants in writing about tenant protections available during the property owner’s forbearance and repayment periods; and

• Agree not to evict tenants solely for the nonpayment of rent while the property is in forbearance.

Eligible landlords must also:

• Allow the tenant flexibility to repay back rent over time and not in a lump sum;

• Not charge the tenant late fees or penalties for non-payment of rent; and

• Give the tenant at least a 30-day notice to vacate

“COVID-19 continues to financially impact Americans across the country, thereby hindering many tenants’ ability to pay their rent,” said FHFA Director Mark Calabria. “To help tenants in financial distress and property owners, FHFA is extending the multifamily COVID-19 forbearance and tenant protections through the end of June 2021.”

The FHFA’s multifamily extension now aligns its expiration with its single-family housing forbearance request date also set to end June 30, 2021. However, single-family borrowers have the option to potentially forgo mortgage payments for up to 18 months.

As of Feb. 22, the Mortgage Bankers Association estimates 2.6 million homeowners are still in some form of forbearance. The MBA reported on Monday that the portfolios of Fannie Mae and Freddie Mac held at 2.97% forbearance volume and the GSEs have consistently seen lower forbearance rates than other owners of mortgages during the pandemic.

Based on the rate of improvement to date, Black Knight estimates there could be more than 2.5 million active forbearance plans remaining at the end of March 2021, when the first wave of plans reaches their 12-month expirations.

However, the limitations of survey data are particularly apparent in the rental market space, which lacks real-time data and has fewer data in general, the Urban Institute noted. According to the Washington D.C. based think-tank, the data sets available tend to show a higher share of renters missing rental payments than the administrative data show, suggesting that the survey results need to be interpreted with caution.

“It is unclear whether the Biden administration’s $25 billion of additional rental assistance is significant for renters, who have been hit harder by the pandemic than homeowners,” the institute said.

As for single-family borrowers, safety measures such as the loss mitigation waterfall and home equity buffer are expected to protect even the riskier homeowners in forbearance from foreclosure.

---