The great home-buyers’ market of 1998 could get another shot in the arm.
With mortgage rates nearing their lowest levels of the decade and home prices still at moderate levels, houses are more affordable today than they have been at any time since the mid-1970s.
If rates fall further, as expected, an even greater number of Americans would find home ownership within their reach–and keep sales hopping.
Here’s why: The median home price in April, according to the National Association of Realtors, was $128,200. When mortgage rates were at 8 percent, a family with little debt and with income of about $37,700 could qualify for a $120,000 loan, assuming they could come up with the down payment. But at today’s average mortgage rate of 7 percent or lower, the family would have to earn only about $34,200 to qualify for the same home.
As a result, the bite that home payments take from the family budget has been falling this decade, with the after-tax cost of a mortgage taking about 22 percent of income last year, down from a peak of 34 percent in the early 1980s, according to the Harvard University Joint Center for Housing Studies.
At the same time, government housing programs and competition within the mortgage-lending industry have made home buying even easier, especially for first-time and lower-income buyers.
“We really used all those things to our advantage,” said Tammy Valle, a bank employee in Citrus Heights, Calif., who bought her first home several weeks ago.
In purchasing a three-bedroom home for $130,000, she got a 7.75 percent mortgage and had to make only a $2,500 down payment under a special Federal Housing Authority program.
“It was a great deal,” she said.
Higher-income buyers are finding their dollars stretch further, too. A family looking to trade up to a bigger house today would pay less for a $220,000 mortgage at 7 percent–about $1,468 a month–than it would have paid for a $200,000 mortgage at 8 percent a couple of years ago.
This week’s drop in U.S. Treasury yields could mean even lower rates, as mortgage rates tend to track yields on Treasury bonds. Last week, the yield on the 30-year bond plunged to a record low of 5.579 percent before rising slightly. And mortgage rates slipped a bit, falling to 7.04 percent for the average 30-year fixed-rate loan, from 7.11 percent a week earlier, according to HSH Associates, a Butler, N.J., research firm.
Taking out the rate of high-cost jumbo, or large mortgages, the average rate was 6.9 percent, HSH said.
Of course, rates could rebound on a word from Federal Reserve Chairman Alan Greenspan or a sign of recovery in Asia. But analysts predict that the rate drop could continue, bringing mortgage rates to or below the low of 6.8 percent last seen in 1993, when a wave of purchases and refinancings inundated the mortgage market.
“As long as Treasurys (bond rates) stay down, and as long as the world is worrying about the Asian recession, the Fed will sit on its hands,” says David Lereah, chief economist for the Mortgage Bankers Association of America, a trade group.
A combination of low mortgage rates and moderately increasing home prices has already led to record level of home ownership–65.9 percent of American households, according to first quarter data from the U.S. Census Bureau.
An increase in that rate can have a significant social impact. One study last year found that children from home-owning households were more likely to stay out of trouble and graduate from high school than those from homes that parents rented.
“When people buy housing, it tends to change their behavior. It’s a strong incentive to take responsibility for, at least, their homes,” said Michelle J. White, economics professor at the University of Michigan and co-author of the study.
Home ownership also generally means an increased level of household savings in the form of equity, says Edwin Mills, emeritus professor of real estate at the Kellogg School of Management at Northwestern University.
“It’s a major form of savings for people, and everybody thinks we don’t save enough,” he says.
Low- and lower-middle income households are making up a significant portion of the home sales, observers say. First-time buyers accounted for about 35 percent of all home buyers in major metropolitan areas in 1997, compared with about 30 percent in 1996. Also, an increasing number of loans have high loan-to-value ratios, indicating increased popularity of low-down payment programs, which are targeted toward less-than-affluent home buyers.
Slow but steady home-price growth has kept most houses in reach of a buyer. According to mortgage buyer Freddie Mac, home prices grew about 5 percent in the first quarter of 1998 from the year-earlier period. That is a bigger jump than the 2 percent to 3 percent growth the nation saw earlier in the decade, but well below the double-digit excesses of the 1970s and 1980s.
Meanwhile, mortgage rates have been attractively low. The rate of the common 30-year fixed-rate mortgage has remained below 8 percent since early last year, and for most of this year has drifted from 7.1 percent to 7.3 percent, according to HSH Associates.
It’s a far cry from the 1960s, when home buyers bemoaned mortgage rates moving above 7 percent for the first time, but it has helped to keep monthly mortgage payments manageable for most Americans.
All this has led to record home sales. Although analysts expected this year’s sales of existing homes to fall below last year’s total of 4.2 million, sales have exceeded that rate in the four months reported so far this year, according to the National Association of Realtors, which compiles the numbers. That indicates 1998 home sales could surpass last year’s. Meanwhile, sales of new homes in April soared 16.5 percent from April 1997, according to the Commerce Department.
