Madolyn Greve, Broker Associate, Callaway Henderson Real Estate

Housing affordability has declined dramatically in 2022 due to continued rising home prices and a three-percentage point jump in mortgage rates. Based on the popularity of Google searches for "housing bust" or "housing bubble", it could be surmised that buyers are anticipating relief, but they are probably not going to see it anytime soon.

Home price appreciation is moderating and is down from the 20% level experienced in 2021. Some of the major industry prognosticators are estimating anywhere from 9% to 14% for 2022. Interest rates are expected to continue to rise through the end of 2022 and could be at 7%. Freddie Mac 30-year fixed-rate mortgage was 6.66% on October 6, 2022.

Even though homes currently for sale increased to 3.2 months in August 2022, it isn’t that much more than it was for the same month in 2021 when it was at 2.6 months. Most markets are still entrenched in favor of sellers because a balanced market between buyer’s and seller’s is at six month’s supply.

While buyers may be feeling that a new home is no longer affordable, there are several affordability indexes that provide a baseline for objective measurement. The National Association of REALTORS� produces a monthly index. Affordability is determined by indicating a median income person/family can afford to purchase a median priced home with a 20% down payment based on a 25% qualifying ratio for monthly housing expense to gross monthly income.

The index is structured so that a value of 100 indicates that a family with the median income has exactly enough income to qualify for a mortgage on a median priced home. When the index is above 100, the family has more than enough to qualify.

The NAR Housing Affordability Index for 2019, 2020, and 2021 was 159.7, 169.9 and 152 respectively. It was 143.1 in January and by April had decreased to 108.1 and the preliminary number for June is 98.5. The decrease in the index is directly affected by rising interest rates and home prices outpacing family income.

Home sales were seasonally adjusted in August to be 4.8 million which is down .4% from the previous month and down 19.9% from August 2021. Lower sales are partly a function of a smaller pool of eligible buyers and concerns about a variety of economic conditions.

This may not sound like good news for buyers whether they are labeled first-time or move-up, but it is an objective view of the market. It has become more expensive to buy a home now and will continue to increase in the future.

Getting into a house using whatever devices are necessary can at least put the momentum on your side. Homes are appreciating faster than inflation and the fact that leverage improves the growth rate due to using borrowed funds to buy the home is also to the buyer’s advantage.

So, getting back to the original question "when will the market turn to make homes more affordable?" It may not be a dramatic change but more likely, a subtle one. Prices will moderate by still appreciating but not as much as in 2021. Inventories will increase slightly but won’t affect price because the low supply has been almost a decade in the making and it will take time to reach balance in the market.

Mortgage rates are not as low as they were, but they never were before in the history of the U.S. Millions of people had mortgages in the 1980’s that were as high as 18.5%. Buyers financed the homes at the going market rate, sometimes with creative financing, and refinanced the properties later when the rates came down and the values had gone up.

Real estate is still a great hedge against inflation, and many times, the largest and best investment individuals have. The Federal Reserve Survey of Consumer Finances found that homeowner’s net worth is 41 times greater than renters.

The rapid rise in mortgage rates during 2022 coupled with continued appreciation of home prices have limited the number of buyers in the market which is reflected by the lower number of home sales currently. "It’s a fact that many households are impacted by higher mortgage rates as they no longer earn the qualifying income for the median-priced home." Nadia Evangelou, NAR Economist

One of the things that agents are doing to help buyers lower their house payments is to suggest an adjustable-rate mortgage. The rates on these types of loans are tied to indexes that reflect the current market rates and produce less risk for the lender. The payments adjust on the anniversary date based on the index plus margin named in the note.

While many people think that they only adjust upward, they also adjust downward when the index indicates it. For the week of September 29, 2022, the Freddie Mac 5/1 ARM was 5.03% compared to the 30-year fixed-rate of 6.70%.

Another tool that experienced agents are using to address affordability issues are interest rate buydowns. In recent years, there have not been many buydowns used because interest rates were already very low, but now, more people are considering them again.

A buydown is prepaying the interest on a mortgage at the time of closing to lower the payment for a specific period or for the term of the mortgage. Obviously, it would be more expensive to buydown the rate for the whole term of the mortgage.

Either the seller or the buyer can buydown the rate and it would be specified in the sales contract. From a practical perspective, sellers in the recent past haven’t had to consider this option because of the high demand and multiple offers that were commonplace. Now that sales have slowed, and both inventory and market time is increasing, some sellers want to make their homes more marketable and are seeking a competitive advantage.

A common temporary buydown is called a 2/1 which reduces the payment in the first two years of the loan by calculating the borrower’s payment at 2% less than the note rate for the first year and 1% less than the note rate for the second year. Years three through thirty, the payment would be the normal payment at the note rate.

A buydown is a fixed rate, conforming mortgage that the borrower must qualify at the note rate to indicate that borrowers will be able to afford the mortgage after the first two years of lower payments.

As an example, on a $400,000 sales price with a 90% mortgage at 5.54% interest for 30-years, the normal principal and interest payment would be $2,053.08. By using a 2/1 buydown, the payment for the first year would be at 3.54% interest, 2% lower than the note rate, making the payment $1,624.61. The second year, it would be at 4.54% interest, 1% lower than the note rate, making the payment $1,823.63.

The buyers’ payment would be $428.47 lower each month for the first year and $220.45 a month lower for the second year. The total savings would be $7,787.04 which becomes the cost of the 2/1 buydown. This amount must be paid at the time of closing by either the seller or the buyer.

2/1 Buydown Example	1st Year	2nd Year	3rd … 30th Years
Interest Rate	4.7%	5.7%	6.7%
Principal & Interest Payment	$1,867.10	$2,089.44	$2,323.00
Monthly Savings	$455.90	$233.56
Annual Savings/Total Savings	$5,470.80	$2,802.72	$,8,273.52

The most prevalent providers of buydowns in the past have been builders. It is a concession like paying closing costs or upgrades for the buyer. As sales have started to slow, some builders in particular price ranges and areas are currently considering this benefit to close more sales.

To summarize: a buydown is a fixed-rate mortgage where the interest is pre-paid for a period to help the borrower with lower payments for a time. A 2/1 buydown allows the buyer to have significantly lower payments in the first two years which will give them time to settle into the house while they can be confident of what the payment will be in years three through thirty.

The pre-paid interest is deductible for the buyer, even if the seller pays for it. This is something that the buyer will want to talk about with their tax advisor when they are doing their income tax for that year.

If you are selling a home, talk to your listing agent about this option to increase marketability. If you are a buyer, discuss this as an affordability option. If your agent isn’t familiar with buydowns, ask them to research it with a trusted mortgage officer. Buydowns are legal and have been available for decades. The determining factor may be whether the market has softened enough that sellers are willing to consider them.

Rising mortgage rates are causing some would-be buyers to pause their decisions until they determine whether rates are going to come back down. While it may be possible, the probability is that prices are going to continue to increase.

On December 23, 2021, the 30-year fixed-rate, according to Freddie Mac, was 3.05% and is at 6.29% as of September 22, 2022, a 3.24% increase. On a $360,000 mortgage, the principal and interest payment went from $1,528 to $2,226. The $698 difference represents a 46% increase in the payment.

It seems understandable to pause and see if rates will come down again, especially since they went up so fast, but it probably isn’t going to happen anytime soon based on the Fed’s position on controlling inflation.

The fact that inventories are growing slightly, and market times are increasing doesn’t negate that supply cannot keep up with demand and homes are continuing to appreciate, albeit, not as much as they did in 2021.

If a person waited a year to see if the rates come down but, in the meantime, the prices increased 10% and the rates stayed the same, the home in the example above, would have a $226 larger P&I payment.

As an alternative strategy, the buyer could purchase the home on a 5/1 adjustable-rate mortgage with a 4.64% rate for five-years. Instead of $2,226 for the P&I payment for the fixed rate at 6.29%, the payment on the ARM would be $1,926, a $300 savings.

They would have purchased the home at today’s prices, avoiding appreciated prices and would have five years to refinance at a lower fixed rate should they come down. Assuming the rate adjusted upward the maximum amount at each period, it would take over seven years to exhaust the savings on the lower payments for the first five years.

It is unfortunate that some buyers missed a window of opportunity to purchase last fall when mortgage rates were near an all-time low. That window has closed, and it may not open again. People who can still afford to buy, even though rates are significantly higher, are taking a risk waiting for rates to come down. Even if they are correct, the prices will be higher, offsetting any possible savings.

If they are wrong, both prices and rates will be higher, and they may be priced out of the market.

In the 1980s, when mortgage rates topped 18%, the best real estate agents in the country presented alternative financing choices to buyers. If your agent hasn’t had conversations with you about alternatives to fixed rate financing, there could be options available that you need to consider.

Depending on your price range and individual situation, investigate local and state financial assistance programs, ARM Comparison, 2/1 Buydown, and Cost of Waiting to Buy and download our Buyers Guide.

Owners directly control four of the five factors that affect the sale of any home: price, location, condition, terms, and the agent you select. The one thing you can’t control is the location of the home, but you can adjust the other factors to compensate for failings.

The seller controls the price of the home which determines its positioning in the marketplace. If is priced too high, it will take longer to sell and, in some cases, for less than what it should have sold for because when it doesn’t sell immediately, it is assumed that there must be an issue with it. If it is priced too low, the owner will not realize as much of their equity as they should.

Not pricing the home in the proper search brackets could keep the property from being exposed to potential and likely, buyers. For example, if a home is priced at $399,000 to follow an age-old retail marketing principle, many of the most likely buyers will never know about it because they are searching for properties in the $400,000 to $450,000 range.

The seller also controls the condition of a property which affects not only the marketability of a home but indirectly, the price. Homes in the best condition appeal to more buyers because for the most part, they are using their available cash for the down payment and closing costs and may not be able to afford to make cosmetic or more expensive improvements to the property.

Clutter can keep buyers from seeing your home, and more importantly, it will keep them from seeing themselves in your home. There are three basic causes of clutter: there is too much stuff in the home; there is not enough space in the home; and there is no organization.

Selling a home is about positioning it to sell which sometimes means temporarily or permanently getting rid of things that make the home look small or distracts the buyers from seeing its potential for them.

Terms are the financial preferences established by the seller. In a competitive market with multiple bids, a seller may not have to offer any terms such as a financing, appraisal, or inspection contingencies. This will restrict the number of buyers who are financially able to pay cash and are willing to do so.

In lower price range homes, there could be a wealth of qualified buyers that need to use low down payment options, closing cost assistance from the seller, or other things. When the seller consents to offer a variety of terms, the market of potential buyers increases. The seller can still select the most qualified if they are not limiting protected classes.

The fourth marketing factor that the seller controls is the agent they select to represent them in the sale of the home. Selecting the "right" person to market your home is very important and worth careful consideration.

Your agent will be the manager of the entire marketing process. They’ll position your home to be competitive with the other homes in your price range and area while attracting the broadest range of buyers possible. Your agent will offer advice on what needs to be done before the property is offered for sale. Your agent can also offer recommendations for a variety of service providers if work needs to be done.

There are a lot of professionals involved in the sale of a home like lenders, title officers, appraisers, inspectors, insurance agents, surveyors, and the buyer’s agent, just to name a few. Your listing agent will coordinate the communications between the other professionals and negotiate directly with them. Your agent’s role as third party negotiator is critical and you need to feel confident in their ability to serve your best interests.

1. Price
   • Too high; not realistic
   • Doesn’t acknowledge Internet search range
2. Location
   • A poor location can negatively affect price
   • Since location cannot change, must adjust price for a poor location
   • Condition
   • Clutter
   • Drive-up appeal
   • Deferred maintenance
   • Odors
   • Carpets
   • Lack of updates
3. Terms (applicable to certain price ranges)
   • Buyer concessions like closing costs
   • Incentives like home warranty, appliances, floor covering, etc.
   • Buy-down interest rates
4. The Agent you select
   • Experience
   • Knowledge of neighborhood
   • Promotional expertise

For more information, download our Sellers Guide.

The limit for tax free gifts for 2022 is $16,000 and no tax is due to the donor or the donee. There are provisions that would allow gifts higher than this amount providing the total lifetime gifts above the annual exclusion of $12.06 million for 2022 has not been met.

The donor and donee can be separate persons so that the aggregate tax-free gift for one-year amounts to more money. For instance, a father and mother can gift $16,000 each to their married son in 2022 and an additional $16,000 each to the daughter-in-law for a total $64,000.

If the son and daughter-in-law used the money as a down payment to purchase a home, depending on how recent the gift occurred, the mortgage company might require a gift letter from the parents stating the amount was a gift and is not expected to be repaid. Lenders may ask the exact amount of the gift, where it came from and the relationship involved.

Family members and friends with financial resources can become the catalyst that allows buyers with good credit and income but without a down payment to purchase a home. Sometimes, the gift is looked at as an early inheritance that allows the recipient to show their gratitude and the donor to see the enjoyment and benefit of the gift.

In some situations, the buyers have saved enough money for a minimal down payment, but the gift allows them to put more money down that may help them get a lower interest rate or eliminate the need for private mortgage insurance.

The important thing involving gift funds is to have complete disclosure with the lender. It is best discussed during the pre-approval process. Your real estate professional should also know about it so they can guide you through the process.