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Boomers Take Over as Top Homebuyer Generation
Millennials made a big push to swipe up available properties during the pandemic. The relocation frenzy caused by the flexibility of work-from-home culture allowed many young renters to make the move to homeownership. Not to mention, interest rates reached historic lows long enough for first-time homebuyers to capitalize. The stars aligned for millennials, which kept inventory low and the market competitive. Unfortunately, many first-time homebuyers have been priced out of the market for several reasons. The door was opened for baby boomers to reclaim the throne as the largest generation of current home buyers.
Market Conditions
Housing inventory has been unusually low for several years. The lower mortgage rates in past years allowed more buyers to qualify for home loans. This combination has driven housing prices to increase at a record pace. To slow down the market, the Federal Reserve made some adjustments that caused mortgage lenders to increase their base interest rates.
As housing prices and interest rates climbed simultaneously, housing affordability suffered. In other words, many home buyers could no longer afford the type of house they wanted. Others couldn't afford to buy a home at all. Since many first time home buyers are millennials, this meant less demand from that generation.
What does this have to do with Baby Boomers?
With less millennials contending for the already low inventory, houses are staying on the market slightly longer than the past few years. However, housing prices aren't falling like many have predicted would happen as a result of the increasing mortgage interest rates. Some buyers in the lower income range have cooled off on the house hunt for now. One major obstacle for first-time homebuyers is the down payment required to obtain a mortgage. The combination of inflation and increasing housing prices could be to blame for the hesitation to buy a home. The question remains: why are housing prices remaining steady with many buyers opting to wait for better options?
Demand from Baby Boomers
A majority of baby boomers already have a home and have likely lived in it for a while. Over time, they can build up equity, or the value of their home increases. Fortunately, they can use this equity toward a down payment. They also aren’t tied down by the financial burdens that many Millennials face. Those baby boomers that are in better financial standing are able to take advantage of a less active market.
The National Observer mentions, “Baby boomers made up 39% of homebuyers in 2022, according to data from the National Association of Realtors. Millennials, who are now 24 to 42 years old, had been the dominant homebuying generation since 2014, but last year made up 28% of homebuyers. That's down from 43% observed in 2021.” Many boomers are approaching retirement age or have been retired for some time. For those with investments or other assets, they can comfortably purchase second properties or trade up for a better home.
Interest Rates are Still Historically Low
In the past, mortgage interest rates have been as high as 18 percent and maintained around 10 percent for a long time. At the height, rates hit the 7 percent mark in October 2022. However, Baby Boomers are well aware that this is still reasonable compared to past experience. While Millennials might have not seen interest rates this high in their house hunting days, Baby Boomers didn't flinch at a slightly raised rate.
On the other hand, Millennials have driven the housing market since 2014. Interest rates haven't risen about 5 percent in that time. In their experience, interest rates are unreasonably high. Perspective plays a big part when making a big decision like buying a home. While Millennials are waiting to see if the market corrects itself, Boomers are snatching up all the real estate they can find.
New Conforming Loan Limits for 2023 [What it Means for Home Buyers]
A conforming loan is a mortgage that meets the guidelines set by the FHFA, in accordance with Fannie Mae and Freddie Mac. Two sectors within the mortgage industry are primary lenders (originators) and the secondary market. The secondary market may purchase your mortgage from the originator and retain the rights to service the loan. This is where the conforming loan limits come into play. In short, the secondary market typically only purchases loans within these guidelines (aka "conform" to the guidelines).
Therefore, originators that plan to sell their loans to the secondary market must make sure they meet the secondary market standards. Conforming loans have less strict standards than other loans, such a jumbo loans, and are beneficial to most home buyers.
Key benefits for consumers:
- Uniform standards for qualification
- Lower down payment requirements
- Lower interest rates
- More favorable loan options
FHFA and the Department of Housing and Urban Development (HUD) announced via press release the new conforming loan limits for 2023. The new conforming loan limit is $726,200, which is a $79,000 increase from last year's limit of $647,200. In addition, the "conforming loan floor and ceiling increased to $472,030 and $1,089,300, respectively, for calendar year 2023." In areas considered low cost, the "floor" figure derives from 65% of the national conforming loan limit. In contrast, the ceiling for high cost areas is 150% of $762,200 conforming loan limit. Detailed information about the new guidelines can be found on the HUD website.
What This Means For Borrowers
In short, more buyers have access to qualify for financing on more houses. “The increase in loan limits, commensurate with the increase in home prices, will allow qualified individuals and families to continue to access FHA-insured mortgages to achieve affordable home financing,” said Principal Deputy Assistant Secretary for Housing and FHA Lopa Kolluri. They still have to meet all of the benchmarks in place to receive the loan. For example, FHA loans require a 3.5% down payment, credit score above 580, and a 43% debt to income ratio (DTI). To put this into context, under the new limit, a home buyer can purchase a property using a conforming loan up to $472,030 in a low cost area. Under the FHA requirements they would need at least a 580 credit score, down payment of at least $16,521.05, and a monthly DTI less than 43%. An individual lender may have additional requirements, but these are the baseline standards for a conforming loan.
The increased limits are more inclusive for borrowers looking for a home on the higher end. The most common alternative for a home valued above the conforming loan limit is a jumbo loan. Some buyers view this as less than ideal because it would typically require a larger down payment. Going back to the previous example, a $472,030 home wouldn't have qualified for a conforming loan last year. The buyer would need a jumbo loan, which may require up to a 20% down payment, or $94,406. That's a substantial leap from the 3.5% down payment of $16,521.05. Buyers on that higher end can get a lot more house for a much more reasonable down payment.
In addition, more buyers can enjoy a lower interest rate by avoiding a jumbo loan. Since jumbo loans are not federally insured, they carry more risk for the lender. As a result, the lender might ask for a higher interest rate to issue a jumbo mortgage. With a higher conforming loan ceiling, more buyers will qualify for a conforming loan and avoid high-risk mortgages.
More Resources for Conforming Loan Limits
Every year, HUD issues a Mortgagee Letter which breaks down Nationwide Forward Mortgage Limit. They also offer resources for home buyers, which lenders can pass along to their customers. It walks you through the home buying process and has information for each stage, from financing to closing.
Is now a good time to buy a home? [Answering common home buyer questions.]
Uncertainty can be a scary feeling, especially when it comes to finances. Homeownership is one of the most rewarding yet challenging endeavors in your life. Considering that purchasing a home may be the largest financial decision you'll make, it's understandable that you might be hesitant during a time when many knowledgeable professionals are giving mixed signals about the housing market.
We'll talk about what experts are saying about the current market, and some important housing topics to consider regardless of the market. If you're on the fence about buying a home, hopefully this offers some encouragement during a time of hesitancy. At the very least, I hope it can help to answer some of the pressing questions surrounding the current real estate market.
Are the big, scary mortgage rates too high?
This is the hottest topic in the industry in the past 6 months. I enjoy listening to podcasts and YouTube videos to stay current on industry trends. You can't listen to a real estate or mortgage podcast for 10 minutes without hearing about how the real estate industry is "red-hot" and listings are selling in extremely quick for over asking price. The combination of low mortgage rates and low inventory has caused the hot market.
You may have heard about how the federal reserve (commonly known as The Fed) is rising interest rates in an attempt to cool down the market. Two things will help calm the market. Increased inventory (supply) of houses or higher prices that buyers are unwilling or unable to pay (demand). The easiest way for The Fed to impact the market is by adjusting the federal funds rate. Bankrate describes this as the, "interest rate at which banks and other depository institutions lend money to each other." For home buyers, this makes it more expensive to borrow money. In theory, less people will be interested in buying as the rate to borrow becomes more expensive.
Consumers are seeing the rising mortgage rates, which begs the question: are mortgage rates too high? The short answer is "it depends." I know what you're thinking. What a diplomatic, cowardly answer! However, perspective is key here. Are you asking if mortgage rates are too high to buy right now, or are they high compared to similar historic periods? You will get a completely different answer depending on the basis for your question.
Dating back to 1970, mortgage lenders were charging as high as 17 percent interest. This consistently declined to 8 percent by 2000, and reached an all-time low in 2021 by averaging below 3 percent according to Freddie Mac. Someone who has been in the industry for a while will suggest that current interest hovering around 5 percent is still extremely low. Of course, 2% over 30 years can amount to a significant chunk of cash. There is no doubt that borrowers from 2 years ago got a fantastic rate.
If 5% is too high for your comfortability level, you might be waiting years before if it comes back down to the historic lows. One way to counter the higher rates is by refinancing. After a few years of paying down the loan, either rates will come down, or at the very least you will have some equity built up. You can renegotiate a lower rate, or get a shorter loan to accumulate less interest.
The bottom line: for those who are considering buying in the near future, it's still a good time to buy. Rates are historically low, and they will likely continue to rise until the market is balanced. Planning to wait it out might cost you valuable years of building equity and living in your own house. Ultimately, everyone's financial situation is different. It's always smart to speak with an expert before making any decisions about applying for a mortgage.
Why is now a good time to buy? [Pros and cons of the current market]
The previous section talked about the slight increase in mortgage rates, while they are still historically low. Some buyers have been priced out of the market, or will need to save up a bit more money to afford the higher rates. In order to make the big decision to buy, the benefits must outweigh the downside of a slightly higher rate.
A fixed-rate mortgage allows you to lock in your rate. Generally, this is common knowledge, but it is even more crucial in an unpredictable market that some would argue is happening today. The Fed has stated that they will continue to gradually increase the federal fund rate until the market is more balanced. Locking in your rate protects you from the volatility that might occur once the market reaches a breaking point. The discouraging outcome that you want to avoid is buying at the peak price for a high interest rate. You could get stuck with an overpriced home, at a high interest rate. Refinancing would be much more difficult, or even impossible, if you made that mistake.
Luckily, the market is still predicted to climb, as demand hasn't slowed much and inventory is low. With the rising interest rates, some buyers have chosen to wait and see if they will go back down. This means less competition for those that choose to stay in the game. As a result, home prices are starting to sell at more reasonable prices. It's too soon to tell if this means the market is slowing. Houses are still selling at record prices and with multiple offers. Simply, it is starting to trend in the right direction for buyers, and sellers are having to negotiate a bit more than the last few years.
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