With the mortgage rate at 21-year highs and the number of homes sold each month hovering around their lowest in more than 10 years, mortgage brokers will go to extraordinary measures to convince buyers to join the market for housing.
One of the most eye-catching ideas comes from Zillow, the internet-based real estate portal that offers new home buyers hundreds of dollars to assist in their down payment. The program the company is testing in Arizona provides cash for homebuyers who meet the criteria with a value of 2% of their purchase price and reduce the down payment by just one percent.
For a home referred to as a starter in Arizona, which costs $275,000, Zillow offers the example in their press release to announce the program– that is, you would receive a grant of $5,500.
According to Zillow Economics, Orphe Divounguy explains that the company offers the same kind of assistance that potential buyers of homes typically get through their parents.
“In the current economic climate, that is a bit tight on lending, and renters are paying the same amount if not more in rent than they are paying to buy a house,” Divounguy says. “This is the perfect time to intervene to help those who are disadvantaged because they do not have access to the equity in their parents’ homes.”
Zillow spokespersons would not reveal the amount it plans to give out as down payment aid, nor what they expect to be the amount of the typical individual grant; however, the company hopes to roll out the program nationwide. Since the program is only available to first-time buyers with an income less than the median in the region, the funds will probably not be larger than $10,000.
High-Interest Rates, Low Inventory
According to the National Association of Realtors, the number of homes sold (4.04 million homes purchased in August across the U.S.) was the worst figure for August since 2010. As per real estate brokers and housing market analysts, the slow market is caused by rising interest rates and a lack of houses available. The problem is the result of a slowdown caused by a pandemic in construction, as well as the inability of homeowners who are already in the market to surrender the low mortgage rates they secured in the past.
“It’s an unusual, odd marketplace,” claims Butch Leiber, an agent in real estate and president of the Phoenix Realtors board of directors. “We have an extremely low inventory. When interest rates increased, we noticed that buyer activity decreased. However, so did the activity of the sellers. If they’re a homeowner that has a 3 percent, 4 percent, or five percent mortgage, they do not want to relocate.” A typical fixed rate for 30 years is 8.07 percent as of October. 16 According to Investopedia.
To attract buyers to buy homes, builders are also attempting to reduce the cost of borrowing. Zillow offers assistance with down payments, and builders are cutting the interest rates of buyers through “buying lower” interest rates on mortgages. Simply put, they pay the mortgage originator or a bank a one-time cost in exchange for lower interest rates. The top home builders, such as Lennar and Pulte, are also mortgage origination companies, meaning they have less financial risk.
Although Zillow isn’t a home construction company, it seeks to be a part of the real estate market as much as possible. The company was established in 2004 and is based out of Seattle. Zillow was initially an online real-time data listing service. It has since grown to manage rental apartments, brokering rentals, and connecting sellers and buyers with agents. 2018, the company acquired Mortgage Lenders of America to start a home loan business. Based on Zillow co-founder and CEO Rich Barton, the company plans to increase its share of U.S. real estate transactions from 3 to 6 percent in 2025.
The Journey To “The “Zillow Ecosphere”
Through helping prospective buyers obtain loans, Zillow locks them into its real estate-related products and services, Leiber says. “If they can get their feet into the Zillow ecosystem, they’ll be connected in Zillow for a considerable period of time,” he says.
Offering incentives to those with lower incomes to make loans could bring back memories of subprime mortgage problems that led to the financial crisis that hit the world in 2008. But, Zillow executives say the program differs from the high-risk loans provided to non-qualified buyers two decades back.
“This isn’t 2006, 2007, or 2008,” Divounguy says. “This is a traditional 30-year fixed loan, and prospective buyers must be able to meet the normal requirements and prerequisites.”
Furthermore, Divounguy says that because there are so many qualified home buyers, Zillow can provide loans to rightfully qualified people. “Mortgage delinquency rates are much lower in the present than before the pandemic, or never before in recorded time,” Divounguy says. “Credit scores of new homebuyers are at or near their highest levels since we’ve been keeping track of them.”
Although the program of Zillow is unique in that the down-payment assistance comes from a lender, numerous programs are run by governments and non-profit organizations to assist new home buyers, especially those who are military personnel or people from economically disadvantaged groups.
Before you sign up for any program, it’s a good idea to speak with a home-buying consultant, suggests Jackie Boies, a housing expert at Money Management International. This non-profit provides guidance for several Financial education courses. Although there’s nothing concerning about the down payment assistance program, “buyers need to do some research,” she says. “If it appears too appealing and believable, it is.”
