Prices and interest rates squeeze home buyers

In Arkansas and across the United States, the housing market is reaching an affordability crisis that is crowding out many buyers as home prices continue to soar and mortgage rate increases sap family budgets.

Home prices in Arkansas have jumped an average of at least 15% year over year – and realtors and industry watchers note that prices have probably not peaked – while that 30-year mortgages are at their highest level in more than a decade, with forecasts calling for more interest rate hikes through 2023.

Mortgage rates were around 3% at the start of the year and are now well above 5%.

These factors, combined with falling housing inventories and investors flooding the market with cash offers, are creating dangerous conditions for many individual buyers.

Indeed, the American dream of home ownership now seems to be becoming a pipe dream for many buyers. “It’s a market like we’ve never seen before,” says Carolyn Cobb, who has 20 years of industry experience and works in the central Arkansas market for Coldwell Banker RPM.

“The dream of owning your own home and creating wealth for your family is getting harder and harder to achieve,” she added.

The percentage of average salary required to buy a home is at the highest level in nearly 15 years, according to Attom Data Solutions, a real estate data company that tracks national housing and foreclosure data.

Attom found that “median-priced single-family homes are less affordable in 79% of counties nationwide” that were surveyed in the company’s first-quarter price analysis. This compares to 38% in the first quarter of last year.

Many buyers feel the pinch.

“It’s certainly no surprise that affordability is harder for potential buyers today than it was a year ago,” said Rick Sharga, executive vice president of market intelligence at Attom. “Historically low mortgage rates and higher wages have helped offset rising house prices over the past few years, but as house prices continue to soar and interest rates approach 5% on a 30-year fixed rate loan, more and more consumers will struggle to find a property they can comfortably afford.”

Atom’s Affordability Index is calculated by the amount of income needed to meet the monthly expenses of home ownership of a single-family home at the median price. It also assumes a 20% down payment. The index then compares the required income to annualized average weekly wage data from the US Bureau of Labor Statistics.

Prices and interest rates continue to rise. Attom reports that prices soared more than 20% in Benton and Washington counties in the first quarter of this year, while prices jumped 23.2% in Saline County, home to cities with high growth of Benton and Bryant.

Nevertheless, sales are exploding. Benton and Washington counties saw record numbers of homes sold in the last half of 2021, although listings were at the highest average prices on record, according to Arvest Bank’s Skyline report, released in March. .

“People are really desperate to get into a house,” said Maria Lau, senior vice president of Arvest who has worked in the residential real estate industry for more than 25 years. “I’ve never seen anything so crazy as right now.”

The report notes that the average price of a home sold in Benton County has increased nearly 56% and has increased 54% in Washington County over the past five years. For the second half of 2021, the average selling price of a home in Benton County was $345,517 while the average selling price of a home in Washington County was $311,517.

Arkansas, however, is in “slightly better shape” than the nation as a whole, Sharga said.

Overall, homeownership costs are lower in Arkansas, with the most expensive region — Washington County — requiring 26.6% of the average wage to buy a home, according to the Attom report. This is on par with the national average of 26.6%. About 25% of wages went toward housing costs—including mortgage, property taxes, and insurance—in Saline County.

Between 25% and 30% of gross income is the rule of thumb that most lenders recommend homebuyers spend on a mortgage, although some are willing to extend that to 40%, Sharga said.

Falling inventory of available homes is exacerbating the price crisis and creating a market where demand exceeds supply for homes, pushing many buyers out of the market or putting more pressure on their family budgets.

“For a number of years when we faced historically low mortgage rates, they offset rapidly rising house prices,” Sharga said. “There is definitely an imbalance between supply and demand. And the other issue is that there are few products available at the entry level.”

At Arvest Bank, Lau says the situation is the most difficult she has seen. “Scarcity of inventory is a huge problem and rising interest rates are a problem,” she said.

Either problem in itself would be a challenge that could be overcome. Together they create affordability issues for many buyers. “It’s kind of a double whammy,” Lau added.

Central Arkansas faces the same issues, real estate agents say.

Coldwell Banker’s Cobb says housing stock is down and there are fewer choices for buyers. “We just need an inventory,” she said. “We’ve never seen it like this.”

Market data compiled by the Little Rock Realtors Association shows residential listings have declined each month since April 2021 compared to the same month a year earlier. For example, registrations last month were down 20% from last year.

Another affordability-destroying ingredient includes cash offers that flood the market, most often from out-of-state investors willing to pay above the listing price and without any contingencies such as appraisals. . “It’s an interesting concept that we’ve never had to deal with before,” Cobb said.

Cash bids drive up prices and keep local buyers out of the bidding process. “It’s a market where people are willing to pay 10, 20, or 30,000 (dollars) above the listing price,” Cobb added. “It’s new for all of us.”

The upside-down market is reversing the traditional nature of real estate transactions, according to Angie Johnson, Crye-Leike’s chief broker in Benton.

Traditionally, a seller would step in and pay for certain costs that a buyer would pay, such as closing costs. Now, sellers dominate and ask buyers to bear many transaction costs. “It really was a turnaround from what we used to see,” Johnson said.

First-time buyers, who typically come in at the lower end of the market, “are really the hardest hit” by current conditions, Johnson added, noting that these families are struggling to find an affordable home.

Starting Monday, a new real estate company is entering the Little Rock market in hopes of relieving the average buyer by allowing them to make cash offers. The company says its offering will help put individual buyers on a level playing field with investors able to pour money into door-to-door sellers.

Ribbon gives homebuyers the freedom to forego the contingencies associated with the mortgage, appraisal and sale of the home. Little Rock joins other metro areas where the company operates: North Carolina, South Carolina, Texas, Tennessee, Georgia, Florida, Alabama, Missouri, Oklahoma, Virginia and Indiana, with plans to expand to half the states States by the end of 2022.

Ribbon says this will allow any buyer to qualify to make a cash offer with no contingencies. “It puts the everyday family at the top of the pile and gives them the opportunity to win,” said Shaival Shah, CEO and co-founder of Ribbon.

The company enters the central Arkansas market through a partnership with Crye-Leike.

“It’s really going to be a game-changer for us,” Johnson said of Crye-Leike. “This program really takes the contingencies out of an offer.”

The initiative, she said, could also increase housing inventory by motivating more potential sellers who are sitting on the sidelines to enter the market with a listing. Many have waited because they have to sell their home before buying a new one, and in today’s market, few sellers accept such an emergency offer.

“These people will be able to put their homes on the market and buy another one with a cash offer and no contingencies,” Johnson said. “It also allows them to compete with other cash offers.”

As buyers navigate the messy market, industry officials warn against doing nothing and waiting for conditions to improve. Instead, this strategy will likely cost more in the long run, according to Attom’s Sharga. For example, the average home purchased today costs up to 30% more than a year ago.

“It’s important that people try not to time the market,” he said. “If they are financially ready to take on the responsibility of home ownership, waiting is unlikely to get them a better deal. We are unlikely to see house prices drop dramatically and it is unlikely that we are going to see interest rates reverse anytime soon.”

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