Conventional Loan Share of New Home Sales Reaches 13-Year High


NAHB analysis of the most recent Quarterly Sales by Price and Financing published by the U.S. Census Bureau reveals that conventional loans financed 75.7% of new home sales in the third quarter of 2021—the largest share since the beginning of the Great Recession in 2008. The share increased 1.7 percentage points over Q2 2021 (revised) and has risen each of the last three quarters, up 6.9 percentage points since Q4 2021.

The share of sales backed by conventional loans in Q3 2021 increased 1.7 percentage points (quarter-over-quarter) from 74.0% and is 4.9 percentage points greater than it was in Q3 2021.

Conversely, FHA-backed sales made up 11.9% of new home sales in the third quarter, a 1.1 percentage point decline over Q2 2021 and 6.6 percentage points lower than the Q3 2020 share.

The four-quarter moving average (MA) of the share of new home sales financed through FHA was 15.5%–the lowest it has been since Q1 2019. The MA share has decreased 3.5 ppts over the past two quarters.

The share of VA-backed sales declined to 4.9% in the third quarter and is down 1.7 ppts, year-over-year. In contrast, cash purchases made up an increasing share of sales as they accounted for 7.6% of the total. The share of cash purchases has climbed each of the past two quarters since reaching its most recent trough of 4.4% and is the largest share since Q4 2014. The reported number of cash sales climbed 1,000, or 7.7%, in the third quarter. Cash purchases increased 4,000 on a year-over-year basis.

The average effective interest rate of a 30-year fixed rate conventional and government-backed mortgages both declined quarter-over-quarter and were 93 and 72 basis points lower, respectively, than they were in Q4 2019. Government-backed loans were slightly cheaper than conventional (as measured by the effective interest rate) in Q2 2021 while the reverse was true in the third quarter.

Stock market returns (proxied by the S&P 500®) in the third quarter were 5.7%, quarter-over-quarter, and 33.2% year-over-year. Tailwinds from fiscal stimulus payments have mostly dissipated and most of the economic buoy from expanded unemployment insurance benefits had been lost by the end of the quarter.

Each of factors has played an important role 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 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 September 2021, up from 22.0% in August 2021 and 18.0% in September 2020.

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 third quarter, the national median sales price of a new home was $404,700. Split by types of financing, the median prices of new homes financed with conventional loans, FHA loans, VA loans, and cash were $423,900, $277,100, $478,500, and $393,100, respectively.

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