The most recent real estate cycle (build-up, bubble, crash, recovery) has brought to light the major impact on the market made by the availability of financing. Easy, wide-spread access to sub-prime loans led to an unprecedented run-up in home prices. Sub-prime went away, home values dropped, and now we are several years into the recovery.
So how important is the availability of good financing to a real estate market? Absolutely crucial.
For example, a house in Yuma today for $122,000 costs about $775 per month on an FHA loan with only $4,270 down. That down payment is attainable for most people, and the monthly payment is lower than comparable rent.
That payment is based on a 30 year fixed rate at 3.75%. Let’s say rates went to 18%. Guess what that makes the payment? Same house, $2,025. Not a realistic payment for our average home buyer. They will have to rent.
Let’s say FHA loans went away, and private mortgage insurance went away, so the only option was a 20% minimum down payment. On $122,000, that is $24,400. Our average home buyer in Yuma doesn’t have that kind of money. They will have to rent.
In Yuma county, 2016 has brought an unexpected 2nd look at the impact of financing options on our local market.
I’m talking about the Pathway 2 Purchase program. This is a down payment assistance program that offers 10%, up to $20,000 toward the purchase of a home. With an affordable fixed rate and reduced mortgage insurance fees, the existence of this program has put homeownership within reach of more people. Fence-sitters get motivated fast when offered $20,000 to buy a home with zero down out of their own pockets. Not only that, this program has offered lower monthly payments on higher priced homes with $0 down.
The effect? Well, for starters, the average sales price is trending about 6% higher since the program came out in March. There is no way to tell if that is a direct impact of the program, or just the market continuing its positive trend. However, we are also on track to sell around 7% more homes in 2016 than in 2016.
Has the program actually made a difference? It’s hard to say! If you compare the number of homes sold in various price categories in 2015 vs. so far in 2016, you will notice there is not much difference.
However, let’s take a look at the new construction market. One of the quirks of the Pathway 2 Purchase guidelines is that only “existing homes” are eligible for financing. That means new homes are out. What does this mean for the average first time buyer? It means a lower monthly payment on a used home vs. a new one; even if the new home is a lower price. According to the City of Yuma, permits for new residences have been declining for the last 3 months in a row.
It’s only 3 months, not enough time to see a real trend, but I have talked to a few home builders, and they all say it does “feel” like construction has slowed recently.
One more quirk of the Pathway To Purchase program is the fact that it is only available in certain cities. There are 17 cities approved for the program. In Yuma county, only Yuma itself is eligible. That leaves Wellton, Somerton and San Luis out of the picture.
As the program gets close to winding down and running out of funds, it will be interesting to see what comes next. There is no set end date, but the funds are “first come first serve.” Once they are gone, they are gone! I will update the numbers and run some figures on the program duration once it is over.