Demand for Homes Strong Even With Rising Mortgage Rates

June 27, 2018 — 12:33 PM EDT

Mortgage rates and property values are rising, but that isn't denting the real estate market as some had feared, at least according to homebuilder Lennar Corporation (LEN). In reporting second quarter earnings earlier this week, Lennar executive chairman Stuart Miller said that low unemployment and increasing wages had helped to offset concerns about rising interest rates.

"Demand remained strong as we continued to see pricing power support margins while affordability remained consistent," said the executive in prepared remarks. He noted that short supply based on years of underproduction of new homes is continuing. His comments as well as the Federal government's announcement this week that new-home sales in May came in better than expected, with the south seeing a lot of strength, should give the real estate market a little relief.

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Rising mortgage rates and increasing home properties have spurred fears about a lackluster spring selling season this year. While mortgage rates have been staying flat in recent days, they have climbed during the year, shutting a lot of first-time buyers out of the market. Add rising property values and price wars into the mix, and there were real concerns about how sales would fare.

Despite these potential headwinds, the easing of standards by mortgage lenders could be helping the real estate market. According to a new analysis by market research firm CoreLogic, which looked at conventional conforming loans, or the ones that can be purchased by Fannie Mae and Freddie Mac, looser underwriting standards have made it easier to get a mortgage, with borrowers who are deemed slightly more risky getting approved.

The data also showed that, in 2017, Fannie Mae increased the maximum debt-to-income ratio with which a borrower could qualify for a loan. While most lenders stick to a 43% debt-to-income ratio as the maximum, Fannie Mae raised that to 50% from 45% last year. CoreLogic found that mortgages that had debt-to-income ratios of more than 45% increased to 20% of all conventional conforming mortgages in July 2017 from between 5% and 7% in the early days of 2012. From the first quarter of last year to the first quarter of this year, mortgages with debt-to-income ratios of more than 45% accounted for nearly 37% of all the conventional conforming loans.