Homebuyers find alternatives to high-interest mortgages

The frenzy may be gone from the real estate market, thanks to mortgage interest rates that have more than doubled in the last two years, but experts say Southern Nevada is still a seller’s market. 

Homeowners, some with mortgage rates as low as 3%, have been in a self-imposed lockdown of late, soured by the prospect of down-sizing, upgrading, or making even a lateral move with 30-year fixed mortgage rates at more than 7.5%. 

But sellers, buyers, lenders, and even builders are engaging in creative ways to keep deals closing in Southern Nevada, albeit at a slower pace than in recent years. 

Las Vegas Realtors report 2,374 existing single-family homes sold in September, down 10% from the previous year. With 4,300 homes on the market, Southern Nevada has a little more than a two-month supply of inventory, according to LVR, half the supply of last year.  

Prices are holding steady, with existing homes selling at a median price of $450,000 for much of the year. That may be about to change. 

“Homes are selling on average in 32 days,” says Realtor Diane Varney. “But I’ve seen 100 homes a week coming on the market recently. If that trend continues, it will soften prices. The fourth quarter and first quarter are historically lower months for sales.”

Varney says despite challenges, sellers still have the upper hand. “We’ve handled an inventory of 8,000 homes. If we get to 10,000, it will be a buyers’ market.”  

“Even at current rates and with our very tight housing supply, owning a home here in Southern Nevada is a better deal than renting for most people, especially when you consider that homeownership is still one of the best ways to build wealth and financial stability over time,” says Lee Barrett, president of Las Vegas Realtors. 

Closing the deal may be a challenge, experts say, but options exist – from plunking down cash to the return of assumable mortgages.  

Cash is king

The best option for avoiding high interest rates is paying cash, a strategy once employed primarily by equity-rich Californians. But Nevadans are getting in on the action. 

“People who wouldn’t normally be considered a cash buyer have amassed decades of equity in their homes,” says Varney, adding she’s closed cash transactions in less than a week. 

LVR reports just under 28% of transactions in September were cash sales, up about two percentage points from last year. Cash buying peaked in May 2013, at 59.5% of all transactions. 

But cash offers, which are almost always preferred by sellers, are typically not an option for first-time buyers and others who require financing. 

Discounted rates 

Homeowners who are eager to sell are buying down interest rates to make the deal more palatable for buyers. It’s a costly practice that can make a small dent in mortgage payments. 

Buying down a mortgage rate by one point (1% of the total loan amount) can lower the interest rate between one-eighth and one-quarter of a percent, says Varney. At that rate, it would cost a seller $15,000 to buy down the interest rate on a $500,000 loan from 7.25% to 7%.  

Lenders usually limit buy-downs to a maximum of three-quarters of a percent, an amount determined by the type of loan, the buyer’s credit and the size of the down payment. 

Buy new 

Home builders, who don’t have the luxury of remaining on sidelines waiting for interest rates to come down, are circumventing the challenge of high mortgage rates by offering incentives and interest rates in the 5-6% range, usually on limited properties. 

“Builders have purchased a product that allows them to offer low rates on some of their homes, like outstanding inventory,” says Varney. “But it’s a limited amount of funding available for a limited time.”  

Some big builders, such as D.R. Horton, have lending subsidiaries that originate mortgages for new home buyers.  

Builder-provided rate buydowns can be permanent or temporary, the latter resulting in a teaser rate that could increase and result in increased payments.   

Assumable mortgage rules 

Some lenders are resurrecting assumable mortgages, a popular feature during the 1980s, but rarely used in recent years as interest rates have fallen.

Assumable loans allow qualified buyers to take responsibility for the seller’s mortgage, often at a lower cost than originating a new mortgage.

Assumable mortgages are insured by the Federal Housing Authority (FHA), the Veterans Administration (VA), or the Rural Housing Service (RHS). Buyers who assume a mortgage will likely have to make up the remainder of the sales price with cash and/or a second mortgage. 

“By supporting this financing option, the FHA, the VA, and the RHS are creating an opportunity for buyers with low and moderate incomes to compete with cash buyers,” Ted Tozar, former head of Ginnie Mae, wrote last year.

But not all mortgages are assumable. Fannie Mae and Freddie Mac loans, which make up 70% of mortgages, cannot be assumed.