Eye On Housing
NAHB analysis of the most recent Census estimates concerning sources of financing for new home sales reveals an ongoing long-run trend toward conventional mortgages.
According to data from the Census Bureau’s Quarterly Sales by Price and Financing and NAHB calculations, new home sales due to FHA-backed loans decreased to a quarterly count of 19,000 and a market share of 16% for the third quarter. This is, however, higher than the approximate share of 12% from a year prior.
The FHA share bumped up at the start of 2015 due to a reduction in FHA mortgage insurance premiums, reducing annual mortgage insurance premiums by 0.5 percentage points from 1.35 percent to 0.85 percent. Prior to this announcement and since 2010, the annual MIP on a typical FHA loan nearly tripled and the upfront MIP increased 75 basis points. Further, FHA had terminated the policy that allowed borrowers to stop paying mortgage insurance premiums after their loan reaches 78 percent of its original value.
It is worth adopting some caution associated with the Census market share estimates. In particular, the statistical error associated with the FHA, cash, and VA sales estimates from this data set are relatively high. This reduces the reliability of measures of short-term market changes.
Mindful of this limitation, the current FHA-share estimate is lower than the 28% share determined for the first quarter of 2010 but is higher than the 10% 2002-2003 average. The FHA share has fallen as the conventional financing share recovered.
Cash-based transactions for the third quarter made up just under 5% of sales for a total of 6,000 homes. During the 2002-2003 period, cash sales made up only 4% of purchases. However, in contrast to new home sales, cash purchases constitute a considerably larger share of the existing home market – 24% in September according to estimates from the National Association of Realtors.
It is also worth noting that a slightly different measure from CoreLogic shows a higher market share for cash sales for new construction: 15.6% in July.
VA-backed loans were responsible for about 8% of new home sales during the third quarter of 2015.
Conventional financing has expanded as the housing recovery has grown. The market share of new home sales with conventional financing was 62% in 2011 and came in at approximately 71% for the third quarter of 2015.
These sources of financing serve distinct market segments, which is revealed in part by the median new home price associated with each. For the second quarter, the median new home price due to FHA financing was $217,500. The median price for VA-backed loans was $242,200.
Conventional mortgage financing had a median price of $315,500.
Finally, the median price for cash purchases for the first quarter was $330,300.
The reason sales are not where they should be in light of prevailing interest rates and pricing is the disappearance of approximately 25% of the first-time buyers who would be participating in a “normal” market. With FHA having priced itself out of the market, there is little alternative but to seek conventional financing.