Affordability isn't all about home prices and rates
Housing affordability is a topic that isn’t going away in the mortgage industry anytime soon. As the spring buying season approaches, expect to hear more about efforts to improve affordability, especially for first-time buyers.
When most people think of affordability, they typically think of home prices and mortgage rates as two of the largest factors. However, a mortgage payment isn’t just made up of principal and interest payments, and that’s where even current homeowners are feeling the squeeze.
One mortgage executive continues to work with customers to try to address affordability issues. And one of the first places it starts is with rising insurance costs.
Hector Amendola (pictured top), president of Panorama Mortgage Group, said it’s the escrow portion of a mortgage payment that is becoming a detriment to affordable housing.
“You know how expensive the homeowners' insurance is getting now,” Amendola told Mortgage Professional America. “I think I saw a number recently where in a lot of markets, up to 40% of your payment now is the insurance and tax escrow. That's insane. If my principal and interest, as an example, could be $1,200, and $800 for escrow, I'm paying $2,000.
"And only $200 to $300 is going toward principal, and everything else is going to kind of pay the piper for the right to be a homeowner. That’s a tough one.”
Ongoing insurance issues
Amendola said it’s not just a matter of insurance costs being so high and impacting affordability. In some areas, it’s hard to get insurance at all. He said he saw the direct impact of this himself recently.
“I told a story recently on a podcast about how I wasn't able to get insurance on my house,” Amendola said. “I called an insurance carrier and said, ‘I want a bundle.’ They said, ‘Great, no problem.’ I pay for my auto insurance, and then I go, ‘Okay, what about my house now?’ And they go, ‘Yeah, let me look it up. No, we don't insure there. Thanks for calling.’ And I'm like, ‘Where's my bundle?’
“It was just eye-opening because I did a little research, and that insurance company has two providers for fire here, and neither one of them wants to do this area, even though Las Vegas doesn't really have fires. We're up near a mountain, and so maybe that's why, I'm not sure.”
Because carriers are pulling out of certain areas due to previous natural disasters, it allows the remaining carriers to raise prices, making the affordability challenges even worse.
In addition to the surging insurance costs, many of these areas are also in communities governed by homeowners’ associations (HOAs), adding to the fees.
“If there's less carriers, and there's less competition, that's going to make prices go up,” he said. “And so you have that, and you're hard-pressed to find a house without an HOA nowadays. So you have the homeowners' association you have to pay. There are just so many factors that I think are affecting affordability.”
How rates impact affordability
In the end, affordability challenges will circle back around to mortgage rates and home prices. Amendola notes that even though rates have come down, the low-rate environment around the beginning of the decade still has an impact on the market.
“The one that everybody talks about and points out initially is always going to be interest rates,” he said. “Even though they're not necessarily historically high, they're considered that, especially given the fact that they came off such extreme lows. What low rates do is they create inventory problems, which then create a supply and demand problem.
“There's not enough supply for the demand, and when there's not enough supply for the demand, prices go up, and then when the rates go up behind it, now you have a lack of affordability.”
While many people are rooting for a plunge in mortgage rates, Amendola doesn’t want to see that happen right away. It’s not that he doesn’t want people to get lower rates, but he believes that inventory needs to increase first, or home prices could soar with a rate plunge.
“I have the unpopular opinion amongst my peers in the industry of not thinking that rates have to come down so fast,” he said. “I think that we still need some time for the prices to settle and for wages to catch up a little bit before they come down. Because when they come down, what's going to happen next is prices are going to go up because demand is going to go up. Supply is going to have a hard time keeping up again because we're still at low levels for inventory as a whole.”
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