Risk Potential

When evaluating housing market strength, affordability concerns currently pose a higher risk than those of supply and demand. Affordability is defined by how accessible for-sale homes are relative to the population of a given metro area, says Kate Seabaugh, manager of research at John Burns Real Estate Consulting. Mortgage rates and price appreciation also figure in when examining affordability.

As high demand spurs home price growth and fierce competition, constraining a supply of affordable homes, experts are watching for potential ramifications, including other, riskier behaviors.

Rising interest rates are expected to encourage more buyers, especially first-timers, into the market to lock in the lowest possible rate. The rate increases may also motivate lending institutions, including banks and non-banks, such as Quicken Loans, to loosen lending requirements as refinance volume dwindles. Indeed, the share of non-banks originating Federal Housing Administration mortgage loans, popular among first-time homebuyers, has soared over the past five years. The potential risk, Seabaugh points out, is less regulation—and risk not kept on the books.

Additionally, low down-payment programs are becoming more popular. Lenders are requiring 3 percent down, Seabaugh explains, adding, “We’re starting to see the credit box opening.” Individuals with less-than-stellar credit may now be more easily welcomed into the market, further encouraging more risk on buying and lending sides.