Wells Fargo

American’s are taking out gratuitous mortgages

May 10, 2017 (STLRealEstate.News) For the past few years, the real estate market has been heading towards a one-sided equation with the amount of supply falling deeply short of the mounting demand.  The market is unbalanced as ever today, and strong demand continues to push prices higher and higher on the lean supply.  This past Wednesday, more evidence was released to confirm these equation suspicions.  The Mortgage Bankers Association’s weekly purchase loan data showed that the average size of a home loan was the largest in the history of its survey.  The survey’s life extends back to 1990.

The higher prices are having multiple effects on the market at this time.  For starters, buyers have to take out heftier loans to compensate for the unaffordable rates that sellers are getting away with.  Additionally, buyers have to make trade-offs on the kinds of homes they can afford, or consider shutting out home-ownership altogether.  To stay competitive, they have to adjust their borrowing.  This results in larger mortgage sizes, reflecting not just more expensive properties, but also more leveraged ones.

Back when the MBA started this survey, the median mortgage size was only about 3.3 times the median annual income.  It’s now over five times as big.  However, it is worth noting that buyers get bigger homes and lower interest rates with the purchases today.  Regardless, first-time home-buyers and other members of the millennial generation are being hit with unaffordable home prices that are sending them scurrying in every other direction.

Forcing Americans to take out these gratuitous mortgages in order to stay competitive in the market isn’t helping the health of the industry.  Construction industry participants are feverishly snatching up building permits to try and offset the unbalanced equation.  Today, the median down payment on a home is 10% of a couple’s income.  That’s a tough payment to swallow.

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