NAHB analysis of the most recent Quarterly Sales by Price and Financing published by the U.S. Census Bureau reveals that conventional loans financed the most new home sales in a fourth quarter since 2006 (see red bars in the chart below).
However, the share of sales backed by conventional loans in the fourth quarter was down 2.2 percentage points (quarter-over-quarter) to 68.6%.
FHA-backed sales made up 17.8% of new home sales in the fourth quarter of 2020, a 0.7 percentage point decline, quarter-over-quarter and a full percentage point lower than Q4 2019. The four-quarter moving average (MA) of the share of new home sales financed through FHA has climbed from 12.2% to 18.2% since the third quarter of 2018. The four-quarter MA of sales financed with conventional loans has declined 5.2 percentage points.
In contrast, the share of VA-backed sales and cash purchases rose 1.3 and 1.1 percentage points, respectively.
Although the number (10,000) of cash sales was unchanged, quarter-over-quarter, that is due to a 25% upward revision of Q3 2020 sales (8,000 to 10,000). Cash purchases also increased 2,000 (year-over-year).
Record low interest rates and stock market returns topping 17% since January 2020 have played important roles in the increase in conventional loan and cash purchases. Higher stock returns and the resulting increased wealth aids borrowers in the underwriting process as well as increasing the down payment a household can afford (should they cash out some of their portfolio).
Low mortgage rates improve the odds that a given loan will be approved, all else held equal, as the low rates keep monthly payments lower than they would otherwise be. As the monthly payment for a loan of a certain amount decreases, it becomes less likely that the future payments would increase the borrower’s debt-to-income ratio above a financial institution’s risk threshold.
Although cash sales make up a small portion of new home sales, they constitute a larger share of existing home sales. According to estimates from the National Association of Realtors, 19% of existing home transactions were all-cash sales in December 2020, down from 20% in both November 2020 and December.
Different sources of financing also serve distinct market segments, which is revealed in part by the median new home price associated with each. In the second quarter, the national median sales price of a new home was $346,800. Split by types of financing, the median prices of new homes financed with conventional loans, FHA loans, VA loans, and cash were $388,400, $256,500, $367,200, and $329,800, respectively.