In almost every conversation I have had about the housing market over the past 3 months, I have been asked in one form or another, “How is the housing market is going?”, “Do you see it cooling off anytime soon?”, or “How can anyone afford to buy a home today?”. Although I would love to be able to use a fortune teller like Zoltar from the movie Big with Tom Hanks, the truth is that the Utah housing market has not shown signs of slowing down.
The Utah Housing Market
In June 2021, demographer Emily Harris from the Kem C Gardner Policy Institute at the University of Utah published a report of the migration that Utah has experienced since 2018. Simply stated, the demand to move to Utah is being driven by a highly educated, younger, and more racially diverse populace. Furthermore, the US Census Bureau estimates that Utah’s population increased at a rate of 17.6% between 2010 and 2020 – the highest rate of any state in the nation. There are several factors that have fueled the demand of this migration of people to Utah:
Outdoor activities and open spaces to explore and live in with proximity to 5 national parks and 4 seasons of recreation.
Lower cost of living compared to large metropolitan areas.
Top Ranking Economy in the United States according to US News.
Emerging technology along the Silicon Slopes with companies such as Amazon, Adobe, Podium, Micron, Microsoft, Domo, Qualtrics, and others building headquarters in Utah.
Highly rated colleges and universities. In fact, Forbes named Salt Lake City as the Number 1 American city that is "Poised to Become Tomorrow's Tech Mecca".
Individuals and Corporations in Utah pay a flat tax rate of 4.95% and an average property tax rate of 0.62%.
Conservative policies regarding size and power of government.
The emergence of the more acceptable means by which employers are allowing employees to work remotely from home.
The US Housing Market, Fannie Mae, Freddie Mac and the “Why”
Armed with the information above, it is no surprise that the Utah housing market is one of the most desirable locations in the nation, however, the housing demand is not just localized to Utah. Nationally, housing prices are increasing and affordability is at its lowest level ever…
Housing prices are rising faster than wages…
78% of the market saw double-digit home price increases throughout the last year…
If you thought the market could not continue to increase, well, buckle your seat belt because the path is going to continue to be crazy. On December 1st, Fannie Mae, Freddie Mac, and the FHA announced that they will all be raising the maximum conforming loan limit by 18.05%, or to just under $1 million in high-cost markets like Heber City and Park City, in a way to reflect the current pricing landscape of real estate.
Fannie Mae and Freddie Mac Conforming Loan Limits
FHA Loan Limits
The Wall Street Journal reports, “The increase may make it easier and cheaper for some borrowers to buy a home, particularly in more expensive areas of the country, but the higher limits are also likely to elevate debate about how big of a mortgage is too big to be backed by the government.”
You may be asking, “How do Freddie Mac and Fannie Mae impact the market and what does this really mean?”
When someone wants a mortgage to purchase a home, they go through a bank or lender to qualify for a loan which allows them to borrow most of the money they need to purchase the property. The bank or lender does not hold onto this loan for 30 years while you make your monthly payments. Rather, they package bundles of similar loans together and sell these loans to investors who want to purchase Mortgage-Backed Securities with a relatively risk-free return. The purchase of these bundles of loans frees up capital for the banks/lenders to be able to lend to more anxious homeowners. Because the investors who purchase these bundled mortgages are not always in the market to buy, in 1938, Congress created two Federally insured companies called Freddie Mac and Fannie Mae. The sole purpose of these two companies is to purchase loans from the banks that meet their criteria – making this a very “safe” investment. In return, the banks are able to free up money to lend again which provides market stability because lenders know there will always be a purchaser for their mortgages. Since these loans are backed by the government, there is a limit to how much money you can borrow. These are the limits I mentioned above that have been dramatically increased.
One benefit to the increase of the loan limit is it provides buyers the availability to purchase a home that they would previously not be able to qualify for due to prices increasing at an almost exponential level. Essentially, the new loan limits were simply “bumped up” to match where the market is selling. Not to mention, these higher limits would no longer punish buyers who happen to live in a market where “starter homes” fetch $1 million dollars …so, in a way - it could be fairly justified.
The drawback to this must also be considered as the Wall Street Journal states, “some housing experts say the expected jump in loan limits raises questions about the appropriate role of the government in housing and whether taxpayers should effectively backstop sky-high housing prices, when Fannie and Freddie’s market share is already rising.”
The argument is that by raising the loan limits to almost $1 million dollars, Freddie and Fannie are inadvertently causing more housing demand by giving easier to access loans and thus making housing prices rise even more. Now, you may ask, “Is this history repeating itself from the mortgage crisis in 2008?” My answer to this is, “No”. At the time the housing market crashed, the lending guidelines were almost non-existent, thus allowing borrowers to have easy access to money with little income verification, no money down, adjustable rates that could even allow borrowers to make minimum payments without even fulfilling the interest portion of the payment. The borrower really had no way of paying the mortgage back. This was all fueled by speculation that as long as the housing prices continued to increase, then they could always sell their home and make a profit after paying back the mortgage. Many of these mortgages had a short adjustment period that caused their payments to dramatically increase, and they could not make their payments, causing a flood of defaults. This was a disaster, and everyone began to sell at the same time. This eventually fell back onto the banks who could not pay back the investors who purchased the loans and the Mortgage-Backed Securities which many investment firms such as the now defunct Bear Sterns and Lehman Brothers had purchased and repackaged into other investments. This nearly caused the financial collapse of the United States and other countries who invest in the United States capital markets to hedge their own country’s investments. The US Government stepped in to bail out the banks to preserve the integrity of the US as well as many of the global markets around the world.
Although there are similarities today, in terms of rising prices, lower rates, and larger loan limits, the loan qualifications today are much more stringent. Buyers must prove a consistent income, a good credit score, sufficient savings and a substantial down payment of up to 20% in order to purchase the property, otherwise they are turned down. This is a stark contrast to the no money down and introductory rate financing of the early 2000’s. The reality is, there are not enough homes being built to keep up with the demand. This has only been exacerbated by supply chain issues causing increased prices for raw materials, the labor shortage equating to higher costs and more money to build – especially for qualified laborers, and a rising stock market which has allowed many to cash out and place their money into real estate. All of this is the perfect storm which leads to the housing market continuing to rise in price.
With the dramatic increases in home prices, will there be anything else done to help those who want to purchase for the first time or even those who have fists full of equity to be able to purchase a home at an affordable monthly payment? There are discussions about reintroducing the 40-year mortgage back as a lending option. This would give borrowers an 18% lower payment on a monthly basis as compared to a 30-year mortgage. Although this has not been adopted as the norm, it could be an option to keep buyers in the market even when mortgage interest rates do begin to climb again.
What Will Cause Home Prices to Fall?
The driving factor that will create a slowing of the housing market will be increased interest rates. The NAR expects interest rates to climb to 3.50% by the middle of 2022. When this occurs, along with when the labor and supply chain shortages begin to stabilize, we will begin seeing more homes for sale and prices will begin to cool down. As far as when that is going to happen, the Federal Reserve thinks about 18-24 months, but it’s anyone’s guess.
Should You Wait to Purchase?
The best course of action is to be very prepared by going through the effort to get preapproved with a lender, know what you can afford – not just what you qualify for, create a plan of action with your Realtor, and plan to purchase with the intention of holding for at least 7-10 years, with a fixed rate 30-year mortgage. As I stated in my article titled, "Are Buyers Suffering from Housing FOMO", over the past eighty years, the average price of homes sold in the United States has risen 5.1% annually and has risen in 73 of those 80 years. In fact, 5 of the 7 years where home prices declined were during the Great Recession from 2007 through 2011.
Being a prognosticator is never easy, but I can say that there will be a correction, however it will not be a repeat of the housing crisis – most likely it will be a correction of 5-10% and a calming stabilization of prices. The best advice I can give is to act now - there are still fantastic opportunities available, and I can certainly help you to find them.
I would love to speak to you about anything real estate, please contact me at 801-885-2558 or email me at brandonrwood19@gmail.com.