How many more homes will be sold in 2018? The exact number is up for debate, but housing industry and residential real estate experts say that 2018 home sales will be less than the number of homes sold in 2017.
Sales of existing U.S. homes have peaked for the year, according to a team of economists at Bank of America Merrill Lynch. Last November, existing home sales reached an 11-year high of 5.72 million homes. Since then, existing home sales on an annualized basis have failed to meet or exceed that level.
Not only are home sales slowing, but Michelle Meyer, Chief Economist at Bank of America Merrill Lynch, noted that Zillow is seeing the most price reductions since 2013 as homeowners cut prices more aggressively to attract buyers. “The peak in existing home sales can largely be explained by the decline in affordability,” Meyer said.
The Federal Reserve increased the benchmark interest rate for the third time this year to a new range of 2 to 2.25. Mortgage interest rates have had the most sustained increase in the 40 years Freddie Mac has been tracking the data. Mortgage interest rates rose in 15 of the first 21 weeks of 2018, resulting in a rate increase from 4 percent to 4.66 percent.
Mortgage lenders are starting to relax the tighter credit requirements that were imposed after the housing crisis. Why? One reason is that affordability has suffered under the weight of rising home prices and rising mortgage interest rates.
While credit scores overall have been rising, credit scores for new mortgage originations have been dropping, according to a study by the Fair Isaac Corporation (FICO). New mortgage loans with credit scores of less than 700 increased nearly 10 percent over the last decade. The latest Origination Insight Report from Ellie Mae showed the average credit score for a new FHA loan was 672 between January and March of this year, compared to 701 between January and March of 2011. The report also revealed that people are going into further debt to become homeowners. Debt-to-income (DTI) ratios above 50 percent were less than 15 percent of new FHA mortgage loans in 2013, but in the first quarter of 2018, that percentage doubled. Another third had DTI ratios between 43 and 50 percent. Those with high DTI ratios and low credit scores are at greater risk of missing payments and defaulting.
There’s a fine line between restrictive lending practices and enabling those who really can’t afford to buy a home. Now it’s even more important to take time to fully evaluate both the market and your finances before proceeding with buying a home. As the old adage goes: just because you can, doesn’t mean you should.