Affordability Issues
For four consecutive quarters, starting in fourth quarter 2006, Utah has had the highest house price appreciation in the country, with increases ranging from 12.9 percent to 17.55 percent, according to numbers from the Office of Federal Housing Enterprise Oversight, the Fannie Mae and Freddie Mac regulator. But these increases have some concerned about affordability in the state.
According to a study by Matthews, housing affordability along the Wasatch Front dropped about 22 percent during the past two years. Matthews says prices were pushed up through a combination of lower-than-expected interest rates, a robust local economy with strong job and population growth, investor activity, and aggressive financing that allowed people to purchase high-priced homes. Together, Matthew says, these factors created a high-appreciation environment where prices increased more than they should have.
Now that investor demand has disappeared and aggressive financing has disappeared and aggressive financing has dissolved, Matthews says people can no longer afford homes at their current prices based on traditional mortgage standards. Nevertheless, some affordability pressures may be easing up as national mortgage problems are resolved and funding returns.
Jumbo loans--mortgages more than $417,000--saw their interest rates spike as global investors panicked in the wake of the credit crunch, causing financing and affordability problems for those purchasing higher-priced homes. Nevertheless Yun says, investors are now realizing that prime loans are not subprime loans and they are returning to invest in mortgages. He says he expects rates on jumbo loans to continue to edge downward.
"Many home buyers in the high-cost regions who have been frozen out of jumbo loans will now be able to return to the market," Yun wrote in a recent article. Concerns about subprime loans should also be easing. A majority of the borrowers who were served by the subprime market should now look to safer FHA loans that have better interest rates and are expected to be reformed in 2008, Yun says. Other good news is that there has not been much change in the lending standards for conventional, FHA and VA loans. In fact, mortgage interest rates are at historic lows, hovering around 6 percent.
"Affordability us always a concern when there's a spike in home prices," Yun said. "One has to remember that a market where people want to move into, that's implying there's a greater demand which means there's a premium attached to home prices."