Summer is typically the busiest time of year for real estate. The weather is nice for house-hunting, and the kids are out of school, making it a convenient time to move. However, some summers are "hotter" than others. Here's why I think the summer of 2015 could be an especially good one for the U.S. real estate market.
It's getting easier to buy a home
Since last summer, several things have happened that may make it easier to qualify for a mortgage, including cheaper mortgage insurance and lower down payments.
For one thing, Fannie Mae and Freddie Mac both issued more clearly defined guidelines that let lenders know precisely what qualifications borrowers must have to meet their standards. This makes lenders more willing to lend to "borderline" candidates, such as borrowers with lower credit scores. The actual guidelines haven't changed -- a 620 FICO score was the minimum requirement before -- but now lenders are more confident about making these loans.
The agencies both introduced new programs, which allow first-time homebuyers to purchase homes with as little as 3% down (5% for repeat buyers). This is the lowest down payment most borrowers can get, and lets them avoid the higher-cost FHA loans.
Finally, not to be outdone, the FHA lowered its annual mortgage insurance premiums from 1.35% of the loan amount to 0.85%. On a $250,000 mortgage, this effectively lowers the monthly payment by more than $100 per month, making homes more affordable to lower-credit borrowers (FHA loans can be made with 3.5% down to borrowers with 580 FICO scores), and makes the FHA option more competitive with the private mortgage insurance marketplace.
Rate increases are expected
It also seems like people are starting to realize that the current mortgage rates aren't going to last forever. Virtually all analysts agree that the Federal Reserve is likely to raise rates by the end of 2015, meaning that the cost of borrowing money could increase significantly by next summer.
Increasing mortgage rates could significantly affect home affordability, and could make renting a more attractive option than buying for many people. Just as a rough estimate using my local real estate market, a $150,000 home could be expected to rent for about $1,100 per month right now. With the current mortgage rates of 3.8%, a mortgage payment on a home of this price with 20% down would be $559. Adding 1.5% of the home's value annually for taxes and insurance (the estimate many mortgage calculators use) would bring the payment to $747.
Now, if rates were to increase to 5% over the next year, it would increase the payment to roughly $831. All of a sudden, buying the home might not seem to be quite as much of a no-brainer once you factor in maintenance and other costs of ownership. Of course, this is a simplified estimate and the actual difference between the cost of rent and ownership depends on several factors, but you get the idea.
I wouldn't be surprised to see elevated buyer activity this summer, as people try to take advantage of the low rates while they can.
Low supply could mean a seller's market and more new homes
Recent reports indicate that there is a relatively low supply of existing homes on the market. Heading into the busy summer season, we could see supply and demand begin to push prices up further.
The most recent data indicates that there is about 9% fewer homes on the market than there were during the same time last year. And, just as I would expect, Realtor.com found that home prices rose by at least 6% year-over-year in about half of the markets it tracks.
Some of the excess demand can be met by new homes, and this could cause companies like Lennar and D.R. Horton to have a very strong summer, but a low inventory of homes could definitely create a seller's market. Although supply is low now, higher home prices could prompt more sellers to put their homes on the market, which could in turn spark more interest from buyers.
When real estate is strong, everyone wins
This summer could be an interesting time for U.S. real estate, both for buyers and sellers. There are still good deals out there in many markets, as prices still haven't fully recovered from the mortgage crisis, so buyers could take advantage of the low rates and easier mortgages.
However, sellers and homeowners could be the big winners here, especially those who are still underwater on their mortgage. According to recent data, nearly 11% of all homeowners are underwater, meaning they owe more on their mortgage than their home is worth. These are people who may want to sell their homes, but haven't pursued a sale so far because it would cause them to lose money. If the low supply and high demand push prices up, they could finally get some relief.
In sum, the combination of easier lending standards, low mortgage rates, and buyers competing for a relatively small amount of inventory could provide a boost to the housing market as a whole this summer.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.