Mortgage finance industry continues to favor development of high value properties

This blog previously looked at Census data compiled by the National Association of Home Builders (NAHB), which showed that the average size and sales price of houses has increased rapidly in recent years. The NAHB found that this has been a function of buyer demand for not just more space, but more features.

As a result of this trend, insurers in many areas may find that high value homes comprise a larger share of their policies, increasing the importance of being able to calculate accurate replacement cost values for more expensive properties.

Insurers also need to be able to accurately value insured condos, because developers are responding to demand for more high value condos in major cities, such as Boston, New York and San Francisco. Earlier this year, the Boston Globe reported that a surge in construction of luxury units had driven the average sale price of a condo in the city to nearly $950,000. According to the Globe, even condos at the high end of the price range are "flying off the market," with luxury units selling eight times faster than last year.

Demand for high value houses and condos will likely continue to increase as the economy improves. Higher demand for housing not only drives up sales prices, it can also increase the cost of replacing existing structures, due to the stretching of local construction resources.

The New York Times spoke to one economist who predicts the "move-up buyer" will continue to drive the market in the coming years, because "those who have strong incomes, secure jobs, their stock portfolio is doing well—they are able to buy whatever they want. And what they are buying is larger houses."

Why lenders are increasingly focused on jumbo loans

The trend toward larger homes is supported by the mortgage finance industry. MarketWatch notes that although total mortgage application volumes have faltered recently, demand for jumbo loans—those too large to receive a guarantee backed by the federal government—has been relatively consistent.

Although credit standards have loosened in recent years, lenders remain conservative due to regulatory and market pressures that are forcing them to put a heightened focus on risk management. Financial institutions are reportedly wary of lending to borrowers with low incomes and limited collateral, even if the size of the mortgage being sought is relatively small. MarketWatch suggests that lenders would rather make a larger loan to a wealthier customer.

Outside of risk management, lenders see other advantages to focusing on the high end of the market. Joel Kan, director of economic forecasting at the Mortgage Bankers Association (MBA), told the source that lenders also see jumbo loans as a safe, profitable investment to hold.

Inside Mortgage Finance publisher Guy Cecala writes that it is arguably "one of the best times in history to be shopping for a jumbo mortgage," because compared to the conventional mortgage sector, there is "more competition, more affordable rates and the most flexible underwriting."

Given the trends in the housing market, the financial sector and regulatory requirements, it has become increasingly important for financial institutions to have a solution in place that can provide accurate valuations for any type and size residential property, including high value homes.