Smaller Down Payments/Easier Loan Qualifications Change Mortgage Market

Housing prices have soared dramatically in recent years, in virtually all markets around the U.S. and in major markets around the world. Shortages of inventory and low mortgage interest rates combined with the fact that investors purchased large numbers of homes to place on the rental market have driven housing prices higher and higher. At the same time, new household formation surged, as many young people moved out of their parents’ homes and purchased or rented houses. The home sales and mortgage origination sectors fell apart in 2022 when interest rates soared due to government efforts to tame very high inflation. Higher mortgage rates make it more difficult for buyers to afford to purchase a home due to higher monthly payments. This recent rise in mortgage interest rates led to a drop in home sales. It also means slightly lower home prices in some previously booming markets.

According to the National Association of Realtors (NAR), sales of existing (not new) homes in America were 7.08 million units in 2005 at the peak of the last boom. For 2023, 4.2 million units were sold. In 2023, the median price of a newly built home had soared to $428,600, up from $336,900 three years earlier. This means that affordability has become a very significant issue, as higher prices mean both larger down payments and higher monthly mortgage payments. 2022-2024 increases in mortgage interest rates compounded this problem.

The U.S. Census reported homeownership rates (that is, the percentage of households living in homes that they own) in 2023 at 65.9% (compared to 65.5% in 2021). 2006 saw homeownership at its highest point in history, at 68.9%.

According to the National Association of Home Builders, the average new home size was about 2,600 square feet in 2018. The average fell to about 2,479 square feet in the first quarter of 2024. High construction prices are likely to restrain average home size over the mid-term. New home sizes may increase in the aftermath of the Coronavirus pandemic, with more people electing to work from home permanently, and needing dedicated space for that purpose.

Major investment companies have purchased tens of thousands of homes across America. These companies then rent out the houses. They have computer programs that help them know exactly what to pay, what improvements to make, and what rents to ask. This business practice makes it even harder for families to find their own homes to buy. A new, related trend is for thousands of new homes to be built yearly, not for sale to families, but specifically for the rental/investment market.

Investors generally offer cash (non-mortgage) deals and quick closings. In fact, in the most popular housing markets, facing shortages of homes for sale, sellers often hold out for cash deals, above their asking prices, with no appraisals or property condition inspections involved. Bidding wars often ensue for homes in popular neighborhoods, and buyers must be in a position to react quickly to sellers’ demands.

Overall, the work-from-home (WFH) trend’s impact on commercial real estate has been very significant. Employers find themselves needing much smaller office spaces. When their current leases expire, they move, or negotiate down-sized space. City center office towers are now much less popular, with some companies shifting their office spaces to smaller, more accessible buildings that are closer to employees’ homes—often in the suburbs. This also means less foot traffic for restaurants, parking lots and other businesses located near office towers, as well as lower sales tax revenues for city governments.

As of mid-2024, some major office towers were being foreclosed upon by lenders, with Los Angeles, San Francisco and New York City particularly hard-hit. Roughly only 50% of office workers in the U.S. were back to full-time in-office schedules, with many others on at-home or hybrid schedules. In general, commercial rent prices are now lower than before the Coronavirus. However, San Francisco’s status as a premier location for technology related business is helping this city attract startups and expansions related to the booming artificial intelligence sector.

There will be opportunities for the conversion of commercial office buildings into residential apartment units. There is already some evidence of this being put into practice. Commercial leases are evolving, with growing numbers of firms negotiating with landlords to switch from fixed monthly rent payments to revenue sharing models based on a percentage of sales.

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