Each month when it releases Existing Home Sales for the prior month, the National Association of Realtors (NAR) seems baffled by the conundrum posed by its own numbers: How can home sales rise when the deck is seemingly stacked against buyers, and in particular first-time buyers? Month after month when confronted with the numbers, the NAR reverts back to stating that “tight credit” should be keeping sales from rising. But it keeps on missing the crucial link.
This month was no different. The NAR reported May Existing Home Sales were up 4.5 percent over the prior year following the familiar trend seen over the last couple months. But rather than explain why sales have risen strongly and consistently, the NAR focused on why they should never have gone up in the first place.
And so, Lawrence Yun, the NAR’s chief economist, rattled off his usual litany of reasons: tight inventory, rising house prices, and stagnating wages. While he did mention falling mortgage rates, which are close to their all-time lows, as a boon to consumers, these alone can hardly account for the strong sales numbers months in and months out. Only by connecting the dots can this trend be explained.
As the National Mortgage Risk Index (NMRI) has been consistently showing, first-time buyers have been flocking into the market spurred by increasing leverage. Some may doubt this, in fact they argue that first-time buyers still need 20 percent for a down payment. As home prices have been rising faster than incomes have been growing for a few years now, this should be putting homeownership even farther out of reach, especially for first-time buyers.
But this misses the mark. Rather than 20 percent, the reality is that over 70 percent of first-time buyers are putting down 5 percent or less for their new homes. But there is more. Due to their exemption from the Qualified Mortgage rule, which limits total debt-to-income ratios to 43 percent, the five government mortgage agencies (Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs, and Rural Housing Service) have been all too willing to support the purchase of more expensive homes.
Given all this, rising home sales and house prices should not surprise anyone –after all we are now entering the 45th month of a sellers’ market. Expanding debt leverage is a conscious policy choice that is drawing new borrowers into the market by allowing them to take on more debt – and unfortunately greater risk – to “afford” home ownership. Connecting the dots would help the NAR solve its conundrum.