By Aryne + Dulcinea, December 11, 2018
By Aryne + Dulcinea, December 11, 2018
If you talk to Portland real estate agents these days, most will tell you we are seeing a sea change in the market. Buyers are pickier, listings are sitting longer and more transactions are terminating after inspections. Of course, some if this is completely normal – homes don’t typically sell in three days for full price. So what is the relationship between the cycle real estate and FHA Financing? With a rise in marketing times, inventory and FHA financing, the real estate cycle will likely experience a slowdown.
We’ve had an amazingly robust market, with Portland’s median price up over 45 percent from the bottom 8-10 years ago. It’s been a run fueled by strong economic growth, Portland’s livability and position as one of the more affordable west coast cities. The increased values were also supported by gradually loosening mortgage underwriting criteria that made it easier for homebuyers to get mortgages. Now, these looser criteria were nothing like what we saw in the early 2000’s. Income, assets and credit were all verified and loans originated from 2010 to today are performing very well.
What accounts for the market slowing, then? Is this a warning sign? Home prices have risen faster than incomes. In conjunction with higher interest rates, that makes homes less affordable. It’s just harder to buy a home with a comfortable monthly payment than it was 5 or 6 years ago. Much of the pool of well-qualified buyers already bought in the last eight years. There are fewer buyers, and those that remain often have higher debt to income ratios and lower credit scores. Overall credit quality is down and Fannie Mae and Freddie Mac are beginning to tighten up their guidelines to lower risk. Because it’s easier to qualify for an FHA mortgage, more buyers are using FHA financing. Here’s where there are some similarities with 2008; the rise in FHA loans was dramatic when the housing market cratered. Currently, FHA originations are 20% of new loans issued, vs the historical average of 9%.
Fannie Mae and Freddie Mac are chartered differently than FHA. They are tasked with providing liquidity, whereas FHA is chartered to raise the level of homeownership. That means FHA is supposed to do riskier loans. They are supposed to step in and make loans when other entities will not. Nowhere was this more evident than when the bubble burst. FHA mortgages went from 3% of new purchase loans issued in 2007 to 28% of the market in 2009. FHA did exactly what they were supposed to do – when lenders were reluctant to originate new mortgages, FHA provided the guarantee that kept the real estate market going. Of course, the dramatic rise in FHA loans occurred after the market had crashed, not before.
So – we have sales slowing, affordability declining and FHA’s market share rising. Does this mean that the market has peaked and that we’re looking at a repeat of 2009? It makes for exciting articles on the internet, but probably not. We are all subject to a preference for recency, and when it takes more than a week to sell a home, it’s easy to jump ahead and assume the market is ready for a “correction”. The likely answer is that sales and price activity are within a healthy band. Within that band there are mini peaks and valleys that do not necessarily represent the beginning of a long term trend. Watch inventory – we’re currently at 3.9 months, underneath the 4 month average in the “boom” years from 2000 – 2005. For perspective, inventories peaked at over 10% in 2008. When we see a rise in marketing times, an increase in inventory and a rise in FHA financing, it’s likely there’s a trough coming in the real estate cycle. For now, expect slow growth and some stagnancy as sellers adjust to a more balanced market. It’s a great time to get advice from a trusted realtor, as we see well-marketed homes still moving quickly.
Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.