Conventional Loans: Greatest Share of New Sales Since 2008


NAHB analysis of the most recent Quarterly Sales by Price and Financing published by the U.S. Census Bureau reveals that conventional loans financed 76.3% of new home sales in the second quarter of 2021—the largest share since the beginning of the Great Recession in 2008.

The share of sales backed by conventional loans in Q2 2021 increased 5.1 percentage points (quarter-over-quarter) from 71.2% and is 9.5 percentage points greater than it was in Q2 2020.

Conversely, FHA-backed sales made up 12.1% of new home sales in the second quarter of 2021, a 6.7 percentage point decline over the prior quarter and 8.3 percentage points lower than the Q2 2020 share.

The four-quarter moving average (MA) of the share of new home sales financed through FHA had been on an upward trend since the third quarter of 2018.  The latest reading, however, was enough to depress the MA by 1.1 percentage points.

The share of VA-backed sales declined for the second consecutive quarter—from 6.1% to 5.1%.  In contrast, cash purchases made up 7.1% of sales. Although this is the highest share since Q3 2019, it is roughly in line with the post-Great Recession average (6.0%) and is the most volatile data series in the set.  The reported number of cash sales climbed 4,000, or 40.0%, in the second quarter.  Cash purchases increased 6,000 on a year-over-year basis.

Interest rates remain historically low even after a recent uptick, stock market returns nearly hit 40% from Q2 2020 to Q2 2021, and tailwinds from fiscal stimulus to middle-income individuals have dissipated. 

All of these factors have played important roles in the large increase in the share of 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 downpayment 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 July 2021, up from 16.0% in July 2020 partly driven by continued 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 $374,900. Split by types of financing, the median prices of new homes financed with conventional loans, FHA loans, VA loans, and cash were $396,200, $286,000, $406,400, and $382,800, respectively.

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