According to recent reports, the number of Americans who choose to use a home loan to buy a new home instead of using cash is increasing, and has been doing so for the last couple years. The home loan is nothing new; rates have been lower in the past; the country as a whole has a housing shortage. So why is this the case?
Generally, the consensus among industry experts is that a perfect storm of five different things have collided to create the recent boom in mortgage lending.
1. The stock market is unpredictable this year.
A large number of people are predicting a recession in the very near future, which might be scaring away a lot of people who would have bought a home with cash. Since home values and property values might crash this year, people are more aware of the safety and reliability of a home mortgage.
2. High home prices are forcing investors to get mortgages.
In the past, investors would buy with cash because it’s fast and easy. But with the housing shortage, home prices are skyrocketing, putting the average home price beyond what investors are comfortable with spending at one time.
3. Borrowing is cheaper overall
Rates for home loans have fallen a lot in the last year, and they continue to fall. It is quickly turning a mortgage into a source of quick and cheap money for buyers and investors who want to buy a home. Not only does this persuade cash investors to take the cheaper mortgage option, it also encourages those who couldn’t afford a mortgage before to consider one today.
4. The global economy discourages foreign purchases
A large number of homes are bought by overseas interests, but with the slowing of the economy in places like China and Germany, buyers are less willing to purchase away from home and are looking for safer buying options.
5. People just aren’t fighting over houses anymore
Combine the high cost of housing, and the timidity of buyers to overspend on a market that is still recovering from the recession, there are very few areas where there are any more bidding wars that require families and investors to pony up cash for a house they can’t afford. They get a mortgage because there is no pressure to be a cash buyer anymore.
But while journalists, industry veterans and experts have all kinds of reasons and explanations as to why this is happening, it really comes down to two things.
First, the average consumer is smarter with money than ever before.
The generation that is buying homes today saw first-hand the pain and struggle of those who lived through the 2008 financial crisis; it is safe to conclude that they will be doing everything they can to avoid the same fate. They have more resources at their disposal to find the right home, at the right price, with the right agent, at the right time, and discover all the benefits that a home loan can offer them.
This includes living within their means, not buying a home that is bigger than they need, being patient and watching the market before they consider buying a home, or not investing in property at all. When this new type of consumer decides to buy a home, they’re going to be careful about it. That decision usually includes a home loan.
Second, the housing market is a buyer’s market.
Sure, home prices in high-demand cities are skyrocketing, and the housing shortage means that prices overall will continue to increase. But, unfortunately, that also means that less people will be buying homes. Sellers and realty companies are more hungry than ever to find someone to purchase their homes, and not every customer has the cash on hand to buy the home they’re selling. This means they can offer incentives, discounts, and other programs that will help them afford the home through a home loan (essentially paving the way for them to get more money to afford the home they want).
This is all beside the clear fact that supply and demand has put the average home well outside the reach of the average American’s price-range. Not many people of home-buying age are able to fork over the cash to buy a home while still paying off enormous student loans and shouldering increased taxes. The mere fact that prices are so high essentially requires that the majority of home purchases be made with a home loan. While an unfortunate reality, we can be thankful that there is an option for anyone to buy a home they’re happy in.
These two points puts all the purchasing power back in the hands of the consumer. When banks are fighting over you, you’re in a winning situation. This is evidenced by low lending rates and decreasing prices for oversized homes.
It’s not always wise to follow the crowd, and home loans (like everything else) aren’t a one-size-fits-all option. But when the decision involves a home for your family, sometimes it pays to see what everyone else is doing.
