The real estate market works in cycles. Ever since the market collapsed, some seven years ago, we have been waiting for a run of buyers to push the market forward. While there have been some good periods, the sustained push of buyers hasn’t yet materialized. This doesn’t mean that it won’t happen sooner rather than later, but it appears that there is a few significant hurdles that need to be dealt with first. Between tightening lender guidelines to increased amounts of debt, there are fewer buyers in the buying pool than in recent years. If the real estate market is ever going to truly take off, there are a few things that must change first.
The biggest complaint amongst “would-be” buyers is in regards to the current lending guidelines. Long gone are the days of 100% financing and no income verification loans for W2 employees. Today’s guidelines put an emphasis on down payment, income and assets. The problem is that many buyers do not have the required amount of down payment in relation to their credit score. If you do not have an excellent score (at least 720) you will be looking at putting anywhere from 10-20% down on the property. Most buyers do not have or do not want to put down $15,000 or more on a home. They would much rather rent and wait until guidelines changed or something changed with their income or employment.
The closest thing to a zero down loan product is an FHA loan, which requires a minimum of 3.5% down payment. The problem that many FHA buyers have is that recent changes to guidelines require the PMI to now be for the life of the loan, regardless of equity. Not only is this more expensive, but it is also not in the best long term interest of buyers who are concerned with where rates will go in the future. There are also issues with how FHA loans are appraised and the manner in which they are underwritten. No longer is this a viable option for homebuyers. Instead, they are now renting for as long as they can.
That leads us to our next issue: the buying market. Years ago, if you wanted to rent you were most likely forced to look at an apartment or some kind of duplex. Since the market collapsed, there are now many adequate single-family properties on the market available for rent. In many cases, these homes are as nice or nicer than any home they would buy. There is no sign that renter demand will slow down any time soon. If that remains the case, buyer demand will be slow.
In addition to a lack of down payment, the next most restrictive item for buyers currently is the amount of debt they are carrying. The first time homebuyer segment has long driven the real estate market over the years. In recent times, these buyers are fresh out of college and saddled with years of student debt. Coupled with an uncertain employment status, taking on a mortgage payment is something that new buyers can’t or don’t want to do at this time. Additionally, many buyers have been forced to lean on credit cards as a means of getting by from month to month. This will increase applicant’s debt to income ratios or simply make it unrealistic for buyers to think about a mortgage until they have some breathing room on their bills.
For as many financial experts clamoring for a change in guidelines in an effort to attract more buyers, many lenders are reminded of what happened with the market last decade. Right before the collapse there were programs for every buyer in almost every situation. If you have a 500 credit score and a job, there was probably something you can do. We all know what happened to many of these buyers who quickly become overextended and ended up losing their homes. Some tinkering with the guidelines could help, but if you go too far to the other side you can revisit recent history. The market will turn around and buyers will come out when they are ready. It may take a change in the economy, a reduction in available rental properties or some other event to help bring buyers back, but they always do.
The winter market is typically a slow buying period for many of the obvious reasons. Next spring should be another indicator as to whether or not buyers will take control of the market again. Whether this happens next year, or even a few years down the road, it will happen swiftly. The market always bounces back and home prices always seem to rise. Some cycles take longer than others, but if the past has taught us anything,it is that buyers will always buy. It may not have happened as fast as some investors and sellers would have liked, but it is coming probably sooner rather than later.