Market opening up for first-time, low-down payment buyers

Despite low inventory levels, homebuyer competition thins on recession fears.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | August 25, 2022

* Article originally posted in Orange County Register on August 04, 2022

First-time homebuyer Diale Ebewele found the perfect Tarzana condo in just six weeks. He locked a 4.99% interest rate putting just 5% down, or $19,750, on a $395,000 sales price. Escrow closes Monday for my client.

“The thing I am excited about is being able to find a place in a very decent, safe area close to my work,” said Ebewele, a health care industry administrator.

Until recently, it’s been very difficult for any low-down payment buyers, first-timers or not, to be able to compete with all-cash offers or big down payment buyers. The last time I remember low-down payment buyers being able to compete was 2018.

Yes, affordability is being offset by the run-up in home prices over the last three years, the rise in the cost of living and this year’s 2 1/2-point jump in mortgage rates. (On Thursday, the 30-year Freddie Mac rate jumped almost one-half point to 5.55%.)

Mortgage purchase applications are down 21% from the same week one year ago, according to the Mortgage Bankers Association.

“Mortgage applications continued to remain at a 22-year low, held down by significantly reduced refinancing demand and weak home purchase activity,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.

Recession fears, collapsing consumer confidence and the prospect of plunging property values are driving many would-be buyers to the sidelines.

This market lull may be a perfect time for motivated first-time homebuyers.

Patrick Veling, CEO and President of Real Data Strategies offers sage advice for homebuyers.

1) It is never a bad time to buy a first property, assuming it meets your lifestyle needs, including size, neighborhood dynamics and location.

2) Buying real estate is always about your personal time horizon. If you plan to hold the property for a short period, this may not be the best time to commit to current property values unless you’re paying an entry-level price.

3) Mortgage rates under 3% were a gift from God, likely never to be repeated in our lifetimes. Today’s rates are inexpensive historically, and inflationary pressures are likely to drive the cost of money even higher in the near future.

California Regional MLS numbers show pending Southern California home sales were down dramatically in July, Veiling said. Compared with a year earlier, escrows had dropped from 32% in Riverside County to 38% in San Bernardino County, 39% in Los Angeles County and 43% in Orange County.

As sales slow, homes sitting on the market are up from 6% in San Bernardino County to 9% in L.A. County, 20% in Orange County and 28% in Riverside County.

That’s good for home shoppers. With more than 31,000 Southern California homes for sale this month, listings are at their highest level in more than two years, according to Steven Thomas, chief economist at Reports on Housing.

On the other hand, that’s still 8% below average for the past 9 ½ years. And its 18% below the average for the three years preceding COVID-19 lockdowns, Thomas’ figures show.

Low inventory levels may be stuck in the mud due to a lack of motivation to sell. Record-low mortgage rates were had by both homebuyers and refinancers around the COVID timeline.  Possibly doubling one’s mortgage interest rate is a non-starter for most.

Potentially higher property taxes would be another tough pill to swallow for homeowners thinking about selling.

“People don’t have to sell, so they are not selling,” said Thomas. “I might not be in love with my home, but I’m in love with my loan.”

Freddie Mac rate news: The 30-year fixed rate averaged 5.55%, 42 basis points higher than last week. The 15-year fixed rate averaged 4.85%, 30 basis points higher than last week.

The Mortgage Bankers Association reported a 1.2% drop from the previous week in mortgage applications, which remain at a 22-year low.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was a whopping $1,012 less than this week’s payment of $3,695.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 5%, a 15-year conventional at 5%, a 30-year conventional at 5.375%, a 15-year conventional high-balance ($647,201 to $970,800) at 5.5%, a 30-year conventional high-balance at 5.875% and a 30-year purchase jumbo (or for more than $970,800) at 5.375%.

Eye catcher loan of the week: A 30-year jumbo locked at 4.5% for the first 10 years with one point cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.