Some odd dynamics are in play within the housing market these days. While real estate has improved from the depths of the Great Recession, much like the economy at large, headwinds in the single-family sector are preventing major breakthroughs.
Much of that can be chalked up to simple supply and demand. Developers, driven by a shortage of available lots as well as a lack of funds, are focused on building for wealthy consumers and apartment management companies in order to maximize their return on investment.
As a result, Andy Carswell, associate professor of Housing and Consumer Economics at the University of Georgia, said, “High LTV buyers are not winning out on their offers if the home is median priced or higher.”
Further exacerbating the trend of middle-class consumers being priced out of homeownership, FHA loans—the primary financing option for low-down-payment buyers during the downturn—have nearly doubled in cost since 2008. You can now expect to pay $17,398 in FHA mortgage insurance premiums in the first five years following the purchase of a median-priced home, compared to $9,210 just six years ago, according to a WalletHub study.
The question you therefore have to ask yourself is: Can borrowers save once again with private mortgage insurance?
Yes, buyers with less than 20 percent to put down can save $3,479–$12,943 over five years if they opt for the combination of a standard loan and private mortgage insurance rather than an FHA-guaranteed loan. As you would expect, the savings increase as the borrower’s credit improves.
10% Downpayment, Five-Year MI Costs
The savings only become more significant past year five. The study found that the average buyer would save $12,639 (56 percent) by year seven and $20,715 (68 percent) by year 10. There is also very little price disparity between PMI companies, which means the majority of PMI borrowers will be able to save roughly the same amount.
Private mortgage insurance is not a panacea for consumers with low credit scores and little saved up, however. Only 16 percent of banks offered conventional loans with a downpayment of less than five percent at the time the aforementioned study was released, and only a single lender offered a three percent down mortgage to borrowers with a credit score below 660. PMI will nevertheless play a bigger and bigger role relative to FHA insurance as the economy improves.
There are, ultimately, a few reasons for optimism when it comes to the affordability of real estate for middle-class consumers and therefore the housing market’s overall trajectory.
Not only will continued economic improvement leave consumers in a better position to meet the credit and down payment requirements of the new, more cautious post-recession environment, but building should also pick up as banks begin to trust in the recovery and relax their underwriting standards for developers.
“Weak economic growth is not the norm. High levels of unemployment aren't the norm,” said Elliott Eisenberg, former senior economist with the National Association of Home Builders (NAHB). “The economy is trying to rectify this. People are trying to fix their situation.”
Odysseas Papadimitriou is CEO of the personal finance Web sites WalletHub & CardHub. He previously worked as a senior director at Capital One.