Cash reigns as king in resales of homes. More than a quarter (27%) of existing home sales are all-cash, a reflection of two housing economic phenomena. One, deeper-pocketed discretionary buyers get first dibs on ever-more scarce choice existing home inventory. And two, there’s still an active institutional market for single-family homes being added to a growing single-family for-rent portfolio, one of housing in America’s post-recession going concerns.
But among new home sales, cash is taking an ever lower share of the total annual sales tally. This is a sign of housing’s continued healing, and that builders are increasingly effective in helping get their buyers into mortgages to help them finance their homes.
National Association of Home Builders economist David Logan takes a look here at Census data for Quarterly Sales by Price and Financing, noting that in the first quarter 2017, all-cash purchases represented less than 5% of the 150,000 new homes sold during the period.
FHA and VA loans helped finance upwards of 23% of that 150,000 total, the FHA share of which trended upward from 14.4% of the market in 2014 toward 15% in Q1 2017. What’s noteworthy in looking at the Census data is that, while median new-home prices during the Q1 2017 topped off at $306,000 nationally, the median price of an FHA-backed new home was $212,200, which is what many builders look at as the threshold they need to hit if they expect their offerings to be attainable among first-time, entry-level buyers.
Cash buyers represented one of every 10 new-home buyers in the fourth quarter of 2014, and symbolized how selective housing’s recovery was during its early phases, when the “credit box” was tiny and when discretionary buyers were the first movers from the state of pent-up demand.
The fact that conventional loans accounted for 108,000 of the 150,000 total new-home sales transactions in Q1 2017, or very nearly three out of four new home sales, indicates that conforming mortgages increasingly are meeting a need in the market among move-up and second-time move-up buyers.
The red flag here, of course, is home prices and interest rates.
The median sales price for a home bought with conventional mortgage financing in Q1 2017 was $335,100. Now, that’s down from where it was, at $355,200 in Q2 2016, but it’s still beyond attainability for most of the first-time buyer market.
In 2017, while price premiums for lot costs are already factored in, two moving-target input expense areas are at risk: labor, and now, materials.
With those two risk areas potentially muting the stream of new for-sale supply, there’ll be pressure to raise prices to their maximum tolerance points. Throw on a few hundred basis points on interest rates, and you could see the beginning of the end of the surge in demand that’s been such a welcome foundation to planning over the past couple of years.
An important contributor to demand fundamentals for 24 months or more now has been rising household income levels that have come with increased headcount employment and strengthening wage power. CoreLogic economist Shu Chen looks carefully at this trend, noting that while household incomes are rising, home prices are outpacing the earnings trajectory, which means that, eventually, even better wages can’t keep up with the costs of bringing new homes to the market profitably.
Something’s gotta give, but what? And when?
