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 largest share of new home sales since 2018.
The share of sales backed by conventional loans in the Q1 2021 increased 2.8 percentage points (quarter-over-quarter) to 71.6% and 2.1 percentage points since Q1 2020.
FHA-backed sales made up 19.3% of new home sales in the first quarter of 2021, a 1.0 percentage point increase, quarter-over-quarter and 1.6 percentage points higher than Q1 2020. The four-quarter moving average (MA) of the share of new home sales financed through FHA has climbed every quarter over the past two and a half years, from 12.2% to 18.9%. The four-quarter MA of sales financed with conventional loans has declined 4.4 percentage points over the same period.
In contrast, the share of VA-backed sales and cash purchases fell 2.1 and 0.9 percentage points, respectively, in Q1 2021.
The reported number of cash sales has held steady over the past three quarters while losing share due to the increase in total new home sales. Cash purchases increased 2,000 on a year-over-year basis.
Interest rates remain historically low even after an uptick in March and stock market returns topping 20% from Q1 2020 to Q1 2021 have played important roles in the large increase in the number conventional loan and cash purchases relative to sales financed through the FHA and VA. 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 they 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, 23% of existing home transactions were all-cash sales in March 2021, a four percentage point increase over the year partly driven by extremely tight inventory and resulting multiple-bidder sales.
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 $347,500. Split by types of financing, the median prices of new homes financed with conventional loans, FHA loans, VA loans, and cash were $386,600, $255,400, $324,300, and $369,600, respectively.
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