NAHB analysis of the 2016 Census Bureau Survey of Construction (SOC) data shows that reliance on non-conventional forms of financing varied across the United States, with its share exceeding 37% in the South Atlantic division but accounting for less than 20% of new single-family home starts in the East South Central and East North Central divisions. Nationwide, the share of non-conventional financing declined in 2016 and, for the first time since 2008, it accounted for less than a third of the market, 31.5%.
Non-conventional forms of financing, as opposed to conventional mortgage loans, include loans insured by the Federal Housing Administration (FHA), VA-backed loans, cash purchases and other types of financing such as the Rural Housing Service, Habitat for Humanity, loans from individuals, state or local government mortgage-backed bonds. Looking at new single-family homes started in 2016, the South Atlantic division was most dependent on non-conventional financing, with its share exceeding 37% of the market. FHA-backed loans accounted for more than half of all non-conventional financing in the division, 19% of the market – the highest FHA-loans share in the country.
The West South Central (35%), Mountain (33%) and Pacific (33%) divisions also registered elevated shares of non-conventional forms of financing, exceeding the national average. While homebuyers in the South Atlantic and West South Central division relied more heavily on FHA-insured loans, VA-backed loans dominated non-conventional financing in the Mountain division. Here, the share of VA-backed loans was close to 14%, twice as high as the national average, making the Mountain division the only region in the nation where the share of VA-backed loans exceeded that of cash purchases and other types of financing combined.
Next on the list are the New England and Middle Atlantic divisions where 30% and 26% of new home buyers, respectively, did not make use of conventional loans. FHA and VA-backed loans played a minimal role in these markets, with their shares varying from under 1% to 2%. Both divisions, however, stand out for registering the two highest shares of cash purchases in the nation. In New England, more than a quarter of all homes started in 2016 were purchased with cash. The Middle Atlantic registered the second highest share – 21%. In comparison, the US share of cash purchases was 9%.
At the opposite end of the spectrum is the East South Central division where only 16% of new single-family homes were financed using non-conventional methods. This share is roughly half of the US average, making it the lowest share of non-conventional financing in the nation. In the East North Central division, one out of five new single-family homes was purchased without conventional loans.
Nationwide, FHA-backed loans remained the most prevalent form of non-conventional financing of new home purchases – the status they temporarily lost to cash purchases in 2014 following the implemented decline in the 2014 FHA loan limits. For homes started in 2016, the national share of mortgages insured by the FHA was 13%. The share of VA-backed loans remained relatively stable in 2016, accounting for close to 7% of the market.
The share of cash purchases, the second most prevalent form of non-conventional financing, declined slightly from 10% to 9% in 2016. The market share loss was more pronounced in New England, where cash purchases lost 8% of the market and conventional loans picked up the slack with their share expanding by 10%. Nevertheless, as discussed above, New England continues to register the nation’s highest share, with one in three new homes started in 2016 purchased with cash. At the other end of the spectrum is the East South Central division where less than 5% of single-family starts were financed with cash.
The high prevalence of cash financing in the New England, East North Central and Middle Atlantic divisions can be partially explained by the popularity of custom homebuilding in these divisions, with all three claiming the top three custom home market shares in 2016. Custom homes are more likely to be financed with cash, especially if built by the owner acting as the general contractor. In 2016, a third of custom homes built by the owner were financed with cash, while only 5 percent of spec homes were purchased with cash.
Other types of non-conventional financing methods – such as the Rural Housing Service, Habitat for Humanity, loans from individuals, state or local government mortgage-backed bonds and other – are more common in the West South Central division (6%), exceeding the national average of 3%.