The impact of rising home prices on the misinformed

Home price value impact on homebuyers

Let me start with 2 key assumptions. First, if you're reading this post, I assume you work in the mortgage and real estate industry in some fashion. Second, because you do work in the industry, unless you have been living in cave, I also assume you realize that there has been an inventory shortage for the last couple of years. (In fact, in this market, you could probably sell your cave at 15-20% above asking price with no inspection and no contingencies.)

This supply-and-demand issue has accelerated annual home price appreciation. Pick almost any metric that measures home prices and the story is similar. The Federal Housing Finance Agency’s House Price Index reported home values appreciated 12% nationally from January 2020 to January 2021, followed by an 18.2% increase from January 2021 to January 2022.

The Zillow Home Value Index (pictured below) shows the dramatic upswing in home values, going from $250,459 in February 2020 to $331,533 in February 2022. An astounding $81,074 in 2 short years! (Okay, due to the pandemic we’ll consider them very long years, but still!)

Zillow Home Value IndexZillow Home Value Index (ZHVI) for All Homes Including Single-Family Residences, Condos, and CO-OPs in the United States of America (USAUCSFRCONDOSMSAMID) | FRED | St. Louis Fed (stlouisfed.org)

A lot of focus has been on the impact of rapidly rising home prices on first-time homebuyers, and with good reason. While that issue is indeed a true challenge facing our first-time homebuyers, I’d like to highlight the impact to a subset of that group – the misinformed.

Many stories have been written, including here on MGIC Connects, about all the homebuyers and would-be homebuyers who are working under the false impression that they need to save up 20% for a down payment. That  belief could stem from their own misunderstanding that 20% is a lender requirement, or from misguided advice from other uninformed parties.

Whatever their reason for believing that myth, let’s examine the impact recent home price appreciation has on this group.

Using the Zillow numbers for our example (with some rounding to simplify the math), 2 years ago a 20% down payment on a $250,000 home would have been $50,000. Fast forward to today: Buying a $334,000 home using a 20% down payment will require $66,800 – $16,800 more. That’s a sizeable additional amount to have to come up with.

However, if that same person planned to buy a home taking advantage of private mortgage insurance, the impact would be significantly less dramatic. If they planned on putting 5% down 2 years ago on a $250,000 home, it would have been $12,500. Today, on a $334,000 home, 5% is $16,700... only a $4,200 difference. While still a meaningful amount of money, it’s a much smaller hill to climb.

Or, to reduce the impact further, consider a 3% down payment. On a $334,000 home, that’s  $10,020... requiring only $2,520 more than 3% down on a $250,000 home (and less than the 5% down of $12,500 from 2 years ago)!

Home price down payment impact 

I should point out again that none of this is meant to dismiss the challenge rising home prices will present to first-time homebuyers. Larger loan amounts mean larger monthly mortgage payments, and we haven’t even touched on how rising interest rates also impact the homebuyer’s monthly mortgage payment.

Still, working under a third assumption that homes will continue to increase in value, which is what the Mortgage Bankers Association’s March 2022 forecast is predicting for both 2023 and 2024, the sooner we can safely and prudently help families get into homes they can afford and maintain, the better it will be for them.

To do so, we must find ways to reduce the impact of rising home prices on homebuyers. Private mortgage insurance can be one strategy to use with borrowers facing steeper prices. As important, especially for the misinformed, is education. And as mortgage professionals, we all play a role in addressing misconceptions and helping borrowers understand what it takes to buy a home.

Help borrowers understand the homebuying process at readynest.com

vance edwards

Vance Edwards, CMB, MGIC Marketing Program Director

Vance Edwards joined MGIC in 1999 and currently serves as MGIC's Marketing Program Director. Among Vance’s responsibilities is heading up MGIC’s Marketing Promotions Team which oversees MGIC sales training efforts, marketing of MGIC programs and co-branding efforts with MGIC customers. In addition, Vance leads MGIC initiatives with REALTORS® and consumers, especially first-time homebuyers. He has spoken numerous times to REALTORS® and loan originator audiences on topics including: first-time homebuyers, QM, economic overview, mortgage industry, and sales skills. Vance lives in Menomonee Falls, Wisconsin with his wife Carrie and children Hailey and Trevan. Vance is a certified FICO® professional and earned a Certified Mortgage Banker ("CMB") designation from the MBA.

REALTORS® is a registered trademark of the National Association of REALTORS®FICO® is a registered trademark of Fair Isaac Corporation.

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