The chart below depicts the percentage of new home sales that are priced below $200,000 (blue bar) and priced between $200,000 and $400,000 (orange bar). Those priced above $400,000 would be the remainder of the market, and this remainder has been where the action has been over the past few years. Since 2010 the market share of new homes priced above $400,000 has gone from 13 percent of the market to more than 29 percent.
The issue here is not that inexpensive homes new homes are being built and sitting unsold. There are simply fewer of them being built at all. One reason for is that more expensive homes are generally more profitable per unit for a builder because the cost to build an expensive home is only marginally more than building an inexpensive home.
When builders do build less expensive homes, they would build relatively more of them and would take a commensurately greater risk that the homes would not sell. In the current market, that is a significant risk to take because most buyers buy homes with a mortgage loan and mortgage loans are more difficult to get than they used to be, for several reasons.
The biggest reason is that the largest banks in the country have significantly curtailed their mortgage lending outside of the ultra-prime jumbo mortgage space. In 2011, 50 percent of all new mortgage money was loaned by the three biggest banks in the United States: JPMorgan Chase, Bank of America and Wells Fargo. But by September 2016, the share of loans by these three big banks dropped to 21 percent. The home lending business is less profitable for these banks due to increased regulation, aggressive enforcement, increased liability and significant headline risk.
Smaller lenders, like Quicken Loans and LoanDepot have entered the void left by the giant money center banks, but they have nowhere near the balance sheet, origination capacity and marketing power of the household name banks with a brick and mortar presence in almost every sizeable town in the country.
In addition, for most borrowers, even at the boutique lenders,
• Lending standards are tighter than they have been historically.
– Interest only mortgages are generally unavailable.
– Self-employed borrowers are required to prove their earnings over two years pursuant to strict criteria.
• The Fed’s recent increases in the federal funds rate triggered a dramatic spike in mortgage rates. Rates have since drifted down but are still about 50 basis points higher than before the increase. As the chart above shows, in an already tight market with affordability a huge issue, this was a knockout punch for this year’s spring and summer home sales season.