Despite widespread concern about the future, the housing market hasn’t taken a turn for the worse as was feared at the end of 2016. Many financial analysts predicted a hike in mortgage rates and a lapse in home sales in 2017. But we’ve yet to witness these events. Instead, the housing market continues to grown and thrive, due especially to affordable mortgage programs that are widely available to most applicants.
Instead of rising as predicted, the average thirty year mortgage loan actually fell 2 basis points in February 2017. A variety of factors are seemingly working against mortgage rates, including a hot job market with low unemployment and rising inflation, but we haven’t seen a rate jump. This is great for the consumer because they can still secure a good interest rate on a favorable loan.
Mortgage rates are determined by a number of factors, but the most influential is the going price of mortgage-backed securities. Many consumers believe mortgage rates are set by the Federal Reserve, but it’s actually investors who play the major role in setting rates. Most mortgage lenders don’t hold the loans they fund. Instead, they sell them to investors for a profit. This allows the lender to turn around and sell more loans to consumers. This practice is necessary to maintain a healthy housing market. Investors don’t buy individual mortgages, though. Instead they by shares in pools of mortgages which are called mortgage-backed securities.
The price of mortgage-backed securities varies depending on demand. The relationship between mortgage-backed securities and interest paid is called yield. Mortgage-backed securities are priced at $100 and the interest paid determines the rate percentage. When the investors are worried about the economy or inflation, they will adjust the yield to affect the rates. Other contributions determine the price of mortgage-backed securities, such as mortgages with lower credit scores and other risk factors.
Homeowners who were previously sold at a higher rate are refinancing their mortgages to lower their rate, adjust the terms of their loan, and/or take out cash against the equity they’ve bought. In a cash-out refinance, a homeowner can take out a new loan up to 80% of the home’s value. Since home values are up more than 40% since 2011, homeowners are realizing they can get low rates on a new, cash-out loan. Homeowners choose to do a cash-out refinance for a variety of reasons including paying off existing debt, financing home improvement projects, consolidating a second mortgage, and paying education expenses.
Not only are affordably rates holding fast, but new home sales are steadily increasing, as well. Home builders are very confident that 2017 will be another lucrative year for new home constructions. In fact, market confidence among home builders is the highest it’s been since 2005. February 2017 marks the 32nd month in a row for confidence scores above 50 which is considered optimistic among home builders.
Contributing to new construction success are easy, affordable new construction loans. Banks that offered new construction loans before required down payments in excess of 20%, but now there are government-backed construction loans that allow buyers to put down as little as 3.5%. The FHA One-Time Close loan, for example, allows a buyer to put down just 3.5% on a new home before construction even begins with no need for re-approval or payments made before construction is complete.
The success of the housing market depends on the availability of affordable mortgage loans with great terms and low rates to qualified applicants. Increasing home values also give buyers more confidence when choosing a new home.