First-Time Buyers Face Rosier Prospects in 2015

It’s official: 2014 was the best year for total job growth since 2000. The housing market now has a confluence of several important demand-boosting factors that should make 2015 a big year for growth in home sales.

First, mortgage rates remain—at least for the time being—at near historic lows. The latest reprieve from higher rates is thanks to the bond market’s reaction to global economic concerns. Yet, as the jobs data indicate, the U.S. economy is on much better footing than the rest of the world.

Key factors for first-time buyers

But the key issue for first-time buyers has not been rates, which have been historically low for several years. Their employment situation, overall level of confidence, ability to qualify for credit and ability to afford the down payment have been the larger issues.

December data show that employment for younger households, in particular, has improved dramatically in the past year. For example, more civilian jobs for 25- to 34-year-olds were created in 2014 than in any other year since 1987.

Mortgage backers Fannie Mae and Freddie Mac clarified their credit qualification standards in the fall, which had been murky since 2009 legislation enacted in reaction to the housing bust. This should make it easier for many would-be home buyers to get a loan with slightly lower FICO scores and slightly higher loan-to-income and debt-to-income ratios.

The new low-down-payment programs announced in December from Fannie Mae and Freddie Mac will make conventional mortgages more accessible to first-time buyers.

FHA change could save borrowers almost $1K a year

The latest important factor was announced this week: The Federal Housing Administration intends to lower the annual mortgage insurance premium rate that applies to FHA-insured loans from 1.35% to 0.85%.

That may not seem like a lot, but it can make a tremendous difference to the very people that FHA mortgages are intended to help.

For example, the median price on an existing home sold in November was $205,300, according to the National Association of Realtors. Assuming a 3.5% down payment, the higher fee amounted to $222.88 a month on top of the mortgage payment. The new monthly fee would be $82.55 lower, or just shy of $1,000 a year. For a median household in the U.S., that difference is almost 2% of its annual income.

That 2% could make a critical difference to falling within the income qualification ratios required for a loan.

Counties where households could save 6% of income

We analyzed the local median incomes, median home prices, and applicable mortgage, insurance and property tax rates for each county in the U.S. We found that in some counties, the change in the FHA fee could be as high as 6% of annual income.

The county with the highest impact from the fee change is Greene County, GA, where a median-income household would save 6% of its income. The most affected counties can be found in states such as Hawaii, Idaho, California, Colorado, Washington, and New York. In these areas, housing tends to be less affordable. That’s why the FHA fee has such an impact.

Consumers should work with knowledgable local REALTORS®, lenders or mortgage brokers to review the pricing and qualification details to decide if the FHA loans are appropriate for them. With the proposed fee change, the pricing of the FHA mortgages should be more attractive to more consumers at various credit score and down payment levels. However, there are still some aspects of the FHA-insured mortgages that could make the conventional mortgages more attractive.

It is a clear positive for the residential real estate market that all of these demand-increasing factors are coming together just as the employment picture is much better. First-timer buyers now have a much better chance of qualifying and buying, and would-be sellers should be encouraged to think about this being the year to list.

Jonathan Smoke is chief economist at realtor.com®.