Real estate wives’ tales? Don’t hang your hat on them

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Published Date 8/9/2024

As inflation begins to ease and the promise of better interest rates loom large for the fall season, many home buyers and sellers may be under the illusion that all sorts of magic can happen. Some of this is a myth — such as thinking sellers will stay in their homes forever to keep their ridiculously low interest rates.

However, no one wants to whitewash the fact that buyers who do find a house face substantial economic challenges as median home prices and mortgage rates remain high. Realtor.com’s Sally Jones reports, “With sellers and buyers at an impasse, misconceptions and outright myths are popping up on both sides about the state of the market on social channels and forums.”

Jones cites the biggest myths about the current housing market and why experts say they’re wrong, the first of which is thinking the housing market is about to crash, just like in 2008. “Today’s buy-sell stalemate has some would-be buyers almost hoping that we are in a bubble—that it will burst and lead to plentiful homes available at fire-sale prices,” says Jones. “No one can blame a buyer dealing with the double whammy of higher home prices and interest rates for hoping for a lucky break. But the reality is that the 2008 housing market collapse tripped a recession that caused record job losses. And job loss doesn’t further anyone’s financial dreams.”

Jones goes on to say that even if we are in a bubble right now—and most experts say it’s hard to call until it’s in the rearview mirror, since conditions are not at all like they were in 2008. Back then there was a glut of new homes being built, sellers were trying to attract buyers, and homebuyers could qualify for a mortgage with little to no money down. Lenders were offering loans to buyers with lower credit scores as well, which partially led to the crash in the first place.

“Subprime borrowers in particular who suffered a job loss had little to no accumulated equity in their homes,” says one lender Jones interviewed. “So when the economic downturn came, they were immediately underwater on their loans and many defaulted.”

None of these conditions is true today, however, when nearly half of all homeowners have more than 50% equity and subsequent laws were passed to strengthen verification of a borrower’s ability to repay a loan. The fact is that the drivers of today’s home prices are entirely different, as all those 2020 to 2022 price increases were driven by an inventory shortage and unusually low interest rates.

Jones admits one of the biggest complaints about today’s housing market is that there just aren’t enough homes for sale. Given the unbeatable interest rates available two years ago, when many bought or refinanced, what would make sellers budge? Remember that mortgage rates were forced lower than they should have been, lower than they likely ever will be again back when home prices were increasing. So practically speaking, it doesn’t make sense to give up a low long-term rate. In reality, however, there are always life events that force homeowners to sell. New jobs in new locales. Growing families that need more room. Retirees who want to downsize, move to a better climate, or move closer to grandchildren.

While many would-be homebuyers hoped higher interest rates would bring down home prices, there is more to it than meets the eye. Jones says the relationship between interest rates and home prices is complex, with rare increases not resulting in price declines in most markets. “In fact, home prices have been all over the place this year and vary from city to city,” says Jones who reminds us that home prices are still being driven by inventory. In the most popular locations, an updated home that’s move-in ready will still get multiple offers.

It’s also a myth that good-credit buyers are subsidizing buyers with bad credit. “This myth blew up over a misunderstanding about government-backed Fannie Mae and Freddie Mac loans and a new fee structure,” says Jones. She explains that Fannie and Freddie are government-sponsored enterprises (GSEs) on a mission to make mortgages more accessible to first-time homebuyers with lower incomes but good credit. “They don’t issue loans directly but work with lenders to lower their risk by guaranteeing certain loans should the borrower default.”

She adds that the organizations also purchase other lenders’ loans on the secondary market and sell them to investors as mortgage-backed securities. This allows lenders to keep lending to new borrowers. While the new fee structure eliminated upfront fees for first-time homebuyers, it increased fees for other loans that are outside the organizations’ stated mission and borrowers who don’t need a leg up: namely, second-home loans, high-balance loans, and cash-out refinances.

Jones admits that it really had nothing to do with a borrower’s credit score. Buyers with poor credit always pay a higher interest rate than buyers with good credit, as the risk for default is always greater for the lender.

Realtor, TBWS

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