With Existing Homes Scarce, Buyers Are Building

As house hunters continue to have trouble finding existing homes, more are constructing them.

For some, it’s the first home purchase of their lives. For many more, it’s their first time buying a newly built home — a process that has its own quirks and can intimidate prospective buyers.

Westerra Credit Union of Denver ($2.2 billion, 116,635 members) recognized the need, and developed a new product that it calls a “One-Time Close Construction-to-Permanent Loan.”

Jeff White, Westerra’s director of mortgage development, said the loan is designed to help homeowners overcome the traditional challenges of securing financing for new home construction or major renovation projects.

Westerra’s new loan offers a secured permanent loan rate during the construction period, protecting borrowers from potential interest rate increases and allowing them to benefit from lower rates if they improve during the construction phase. The loan also offers interest-only payments during the construction phase to reduce financial strain for borrowers making payments on their existing home as their new one is built.

Westerra’s loan combines construction and permanent financing into one loan.

“In the past, homeowners had to go through the daunting process of obtaining separate loans for construction and permanent financing. This often led to increased complexity, more paperwork and potentially higher costs for borrowers,” White said.

Like the rest of the country, White said many Colorado homeowners locked in long-term interest rates of 3% to 5% on their current homes a few years ago. Now with rates hovering near 7%, it “dramatically reduces the likelihood that they will be selling,” further decreasing the supply of existing homes for sale on the market.

The 11-county Denver metro market currently has a 1.6-month supply of homes for sale on the market, compared with four to six months when the volume of buyers and sellers is balanced.

“With fewer existing homes coming on the market, more and more buyers are going to have to turn to a newly constructed home,” he said.

The Mortgage Bankers Association has been tracking the rise of households buying new homes as the sale of existing homes remains constrained.

In June mortgage, applications for new homes was 26% higher than a year earlier, but down 5% from May. The MBA’s survey does not adjust for seasonal variations.

Joel Kan, the MBA’s deputy chief economist, said new homes continue to be a bright spot for mortgages as applications have risen for five months in a row.

“With existing inventory still held back by homeowners, prospective buyers have turned to newly built homes instead,” Kan said. “Rising mortgage rates in June likely caused some pullback in purchases over the month, as the 30-year fixed rate averaged close to 6.8%.”

Like many credit unions, Westerra has had plummeting first mortgage originations partially offset by higher volumes for home equity lines of credit and other second liens.

Westerra originated $43.2 million in first mortgages in the six months ending June 30, down 54% from a year earlier. The result was similar among the nation’s 10 largest credit unions for first-mortgage originations, which fell 59% in the first half.

Conditions aren’t improving.

The MBA reported Wednesday that its applications index for purchase mortgages in the week ending Aug. 4 were 3% lower than a week earlier after seasonal adjustments – the index’s fourth consecutive week of declines as homebuyers continue to struggle with low for-sale inventory and elevated mortgage rates. The unadjusted index was 27% lower than a year earlier.

The rate for 30-year fixed mortgages rose to 7.09%, the highest level since November 2022. The rate on FHA mortgages rose to 7.02%, the highest rate since 2002.