A few weeks ago, some news about mortgage pricing that was originally announced in January finally got noticed by some in the media who, doing what media often does, framed it in a way that is designed to outrage rather than inform. In this case, the narrative became one of Biden screwing over hard-working Americans in favor of those who have been less “responsible” financially. The reality, as always, needs context.
If you don’t know what the hell I’m talking about and don’t want to click either of the links above, here’s the nutshell. Fannie Mae and Freddie Mac, the entities that purchase mortgages from lenders and resell them on the secondary market (Wall Street), charge fees for the mortgages they purchase so as to insure themselves should these loans go bad. In essence they guarantee the loans, and to pay for this guarantee there’s a charge to the home buyer. The fees are called Loan Level Price Adjustments (LLPA’s) and are expressed as a percentage of your loan amount. They vary based on the risk that each borrower presents, so if you have great credit and a high down payment your fee will be lower than someone with the opposite characteristics. Anyone who pays for auto insurance is familiar with this idea.
LLPA’s were first put into action in 2008, and periodically the FHFA (the agency that controls Fannie and Freddie) will adjust their risk profile. This time around, the fees were generally decreased for those at the lower end of the range (lower credit scores, higher debt-to-income ratios) and increased for some of the middle brackets. The matrix of new LLPA’s is below, which applies to conventional 15-30 year loans for primary residences:
The cells that are shaded green are ones in which the LLPA’s decreased (better for you), and the ones in red are for those that increased (worse for you).
One can look at that matrix and conclude that the middle tier buyers- decent credit, reasonable down payments- are now subsidizing the lower tier. This is simplistic. Note the actual percentages in the cells, and you’ll see that in no case is someone with a lower credit score paying less in fees than someone with a higher score in the same down payment bracket. As has always been the case, those with worse credit pay more for things. That hasn’t changed. They’re just paying less of a premium than they were last year, and they still have to qualify for the loan.
For those who are now paying a higher fee, how does it really impact them? Let’s imagine a buyer with a 740 credit score who is putting 15% down on a $600k house. Their LLPA went from .25% to 1%, which represents the biggest percentage increase among the brackets. This buyer is now paying about $14 per month for this fee (before interest) compared to the $3.50 they were paying.
For the other side, let’s look at a buyer with less than 5% down and a credit score under 640, which is well under the national average. This buyer’s LLPA got cut in half, from 3.5% to 1.75%. The monthly fee went from $48 to $24 on the same loan size as the other buyer.
I’m not going to get too far into the weeds on LLPA adjustments, since there are all kinds of additional fees for different types of purchases. This is complicated enough for a Saturday morning.
Back to the narrative. If you believe one side, what happened here is that Biden hates hard-working Americans, wants Socialism, and this will destroy America. Meanwhile the FHFA has a more benign explanation- their response is that the new matrix aligns to their risk more accurately than the old one, and Congress doesn’t want them to lose money. If you ask me, the answer is somewhere in the middle. Yes, there’s a political reason to increase affordability for home buyers with lower credit scores. Also Fannie and Freddie do need to remain solvent to avoid taxpayer bailouts (remember 2008?), and as any business would they’re going to change their pricing occasionally. In the end, some are paying a little more and some are paying a little less. Also, despite the effective date of May 1 these fees have been priced into loans for several months so if you woke up this morning thinking that these scary LLPA changes you heard about are going to blow up interest rates now that we’re in May, you’re incorrect. Context matters.
Moving on to our little part of the world. The story continues to be one of reduced inventory, as new listings year-to-date are down 28% from last year:
In very broad terms, the pool of home sellers- not including new construction- is made up of these three segments: must-sell (death, divorce, relocation), want-to-sell (got the big raise, having another child, live closer to the new Trader Joe’s, etc), and downsizers. The must-sell market remains fairly constant year-to-year and isn’t particularly impacted by higher interest rates. The want-to-sell segment (often referred to as move-up buyers), is heavily impacted, as they’re the ones staring down a new rate that’s more than double their current one. The downsizers, meanwhile, can split the difference between the two- some will delay the move because of higher rates, some have enough equity in their home that interest rates don’t really matter to them. Throw in some general economic uncertainty (is there a recession coming?) and it’s easy to see why some who would otherwise be sellers are hunkering down and staying put.
The buyer pool isn’t as large as it used to be either, but there are still plenty of them out there. Activity is strong- showing and open house traffic is solid, while good houses are still going quickly and for prices above list.
The median sale price in April came in at $587k, which is 2% higher than March. It’s been climbing steadily since the start of the year- that’s common to see in Spring- but is down 6.8% from last April when things were getting stupid. Glass half-full (for sellers, not buyers): it’s still 10.5% higher than it was two Aprils ago.
A trend that seems to be sticking is the difference between list and sale price, or in other words how much over list the typical house is selling for. It’s been about 1% for both March and April. Relatedly, for the first time since last August we’re seeing the amount of houses that sell for over list be larger than the number that go under.
Lastly, days on market continues to decrease.
Half of April’s sold houses found their buyer in under nine days. That isn’t quite the frenzy that we had when the median number of days was four, but it’s not terribly far off.
We’re getting to be about a year into the big interest rate hikes and from my angle, things are settling into a new normal. There has been no market crash, just correction. The amount of correction depends on what slice of the market you’re watching- good houses in good locations haven’t seen much change. The unanswerable question remains: should inventory increase dramatically will we see prices drop or will more buyers jump back into the pool?
I am a licensed real estate broker in the state of Oregon with ELEETE Real Estate. Data is sourced from RMLS, and all analysis is mine and mine alone. If I can be of assistance in your home search or sale, please contact me at eli.cotham@eleetere.com or via the contact page.
