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Buyers Dread Mortgage Market Related Obstacles to Homeownership

A seemingly optimistic survey showing 68% of all respondents, or seven out of 10 homeowners and six out of 10 renters, agree it is a good or very good time to buy a house does not mean much for the housing market recovery—at least for the present.

Stringent mortgage qualifying criteria and downpayment affordability are on the way as much as job security and employment opportunities.

“Homeownership is not dead,” nor going to be largely replaced by renting as claimed by some, said Kent Colton, senior fellow at the Joint Center for Housing Studies at Harvard University, during a webcast about the most recent findings from the Hanley Wood “Housing 360” survey.

The survey found 89% of owners (of which 62% were first-time homeowners) and 59% of renters consider homeownership important to the American family. Also, 87% of owners and 73% of renters see homeownership as important to the economy overall.

Despite the current market conditions one in five homeowners and one in three renters say they want to buy a home over the next two years, so there is a gap between the present and that future. The housing market is still uncertain, he said. There is “no sense of urgency” to change current housing arrangements among the 3,005 homeowners and renters surveyed. “It will be a slow recovery.”
It is not yet clear what will be the trigger to new demand and exactly when, he argued.

The most optimistic conclusion—if findings are analyzed within the wider housing market context—is an expectation to see current downward pressure factors such as double-up housing and higher renting demand eventually open the way for new, reasonably affordable housing demand in the longer term.
Between 2007 and 2011, up to 7.5 million households have doubled up. It means nearly 30% of all households had to give up independent living arrangements, which represents withheld demand from about 2.8 million households.

Rent increases across the country will continue until they reach a point where “people will realize” they can afford a mortgage for the same price they pay for rent, Colton said. Supply versus demand driven market adjustments may turn into “a very important” housing market recovery factor creating new demand as early as 2012 and during 2013.

Findings show there is no substantial difference in the way of thinking between homeowners and renters. Even though 40% of owners and 45% of renters say they have no urgency to buy now, homeownership is important to 89% of owners and 59% of renters surveyed. Sixty-six percent of all respondents “would rather build equity than pay rent,” a sentiment shared by all age groups reaching to 70% among those 45 years or older.

At present, up to 80% of households earning $75,000 or more consider it either a good time or a very good time to buy, and for several very well-known reasons. Low interest rates were cited as the primary reason by 80% of the households in this group, followed by attractive prices for 78% and abundance of choices for 63% of them. The first-time buyer market also is important since about 29% of renters are considering homeownership in the near to distant future depending on affordability.

What needs to change in order to get them back to the market? Besides employment the main obstacles why buyers are sitting on the sidelines are mortgage market related.

Downpayment is one of the key reasons that deters demand or at best directs it towards the GSEs and FHA loans that currently have the lowest threshold, at 5% and 3% down.

Up to 55% of the renters surveyed cannot afford a downpayment with 51% saying they need a better-paying job.  Ironically, the top two reasons for buying for 77% of all respondents are attractive home prices and low interest rates, along with “lots of homes for sale to choose from” for 62% of respondents.

Once again these findings suggest that mortgage underwriting guidelines and qualifying standards need to be more realistic. In Colton’s view “the market has overreacted” creating new problems. For example, while a growing group of people is self-employed and trying to start their own business because of the financial crisis, it is tough to almost impossible for them to qualify for a mortgage.

“The mortgage market is broken” and may benefit from regulation, Colton said. It may also benefit from new, reliable mortgage loans that can help invigorate the housing market, he added, granted the high-risk products offered in 2005 and 2006 that contributed to its collapse will never be reintroduced.

Positive long-term expectations for a more sustainable housing market are primarily based on the fact that major price corrections during this crisis, various price indexes, will help keep prices not only more affordable but also closer to real property value.

Investor acquisitions of REO properties in the hardest-hit areas that experienced more drastic bubble bursts like Nevada and efforts to turn them into rental housing or rent-to-purchase units also represent an important market adjustment phenomena. Plus, survey findings show homeowners and renters are weary about their financial future but “more upbeat” about their long-term housing options and homeownership, Colton said.

Judging from statistical evidence from the 1960s until the present, the nation’s homeownership rate is also adjusting to where it should be,” he said, about 64%-65%, instead of the 2007 aberration at 69%.