Homebuyers: Back in the Game?

This piece originally appeared in the March 2023 edition of MReport magazine, online now.

With mortgage rates about double where they were a little over a year ago, the likelihood they will still increase at least slightly, a tight supply of homes for sale, and relatively little new single-family construction, the spring/summer real estate market will be a challenging one.

According to the Federal Reserve Bank of St. Louis, the average 30-year fixed mortgage had a 6.5% interest rate at the end of February, compared to 3.76% at the end of February 2022, and just over 3% at the end of 2021.

The Mortgage Bankers Association’s February 21, 2023, Mortgage Finance Forecast estimated $1.873 trillion in 1-4 family home mortgage originations for 2023, down from $2.245 trillion in 2022. Purchase originations were expected to be 76% of mortgages, up from 70% a year ago.

Rates are still expected to increase another 50 to 75 basis points this year, perhaps more if inflation continues above the Fed’s target rate, but the majority of the rise in rates is likely already in place, economists and mortgage experts agree.

Now that most of the increase in interest rates is through, homebuyers are starting to inch back into the market, but many will stay on the sidelines until the interest rate picture is much more in focus, which could be soon, said Eric Fox, Veros Real Estate Solutions’ Chief Economist. “A lot of those folks on the sidelines are going to be ready to get back in the market during the spring and summer buying season.”

Though rates are double what they had been, the earlier rates were lower than they had been for many years, Fox pointed out. “We’ve had strong markets in the past when interest rates were at 8 and 10%. I think at some point we knew we would get back to higher rates.”

“If the Fed does get interest rates under control, the bond market will rally and mortgage rates will go down because of that,” said Ron Vaimberg, President of Ron Vaimberg International.

“No matter what [mortgage] interest rates do, sooner or later, people adapt to what the new market is,” Vaimberg said. “We saw that when mortgage rates moved to 5%. At first, everything stopped. Then, all of a sudden, it started going again. Then they jumped to 7% and everything stopped again. Then they came down into the 6% range, and in mid-January, people started coming out of the woodwork and were buying homes at a much faster pace than they were during the prior quarter. Sooner or later, people adapt.”

Fox and other market experts expect home prices, which have already fallen some, to drop more before increasing again. Though they don’t expect the sharp appreciation of 2023, there will be bidding wars and all-cash offers, they agreed.

Growth Is Possible
Though rates are up this year, Go Mortgage expects its volume to increase significantly to $1.8 billion this year, company CEO Michael Isaacs said.

“Our strategy for growing volume in 2023 is to add producers, taking market share in areas where we don’t have offices today,” Isaacs explained. “It’s mostly feet on the street, retail officers entrenched in local communities—where most of their business comes from—and their relationships with local Realtors and other referral partners.”

However, most loan officers won’t do more volume than last year, Isaacs added. “If you want to grow, I think you have to add people—mostly good producers with good books of business—and take market share from others. That’s the only way to grow in the current market.”

Earlier in the year, mortgage experts had expected rates to go up a little more early, but level off or even fall by the end of the summer, which could lead to a small refinancing opportunity. However, economic reports that came out in late January and February showed that inflation was still running hot, though not as hot as in the second half of 2022.

“I don’t think that we will see the refinance wave that we were hoping for,” Isaacs said. “It will continue to be a challenging market, and I don’t think the market will truly recover until 2024.”

Other experts MReport interviewed agreed that lower mortgage rates likely won’t occur until 2024, though there are some recently published forecasts still calling for slightly lower rates by the end of the year.

The Mortgage Rate Gap
One issue, according to Isaacs, is that the homeowners who in a more normal market would be looking to move up, for the most part, aren’t doing so because it would mean exchanging a mortgage at 3%, or even lower, for one at twice the interest rate.

“People will not move unless they have to,” agreed Doug McCoy, Director of the Indiana University Center on Real Estate Studies. “Ninety-one percent of homeowners have a long-term, fixed-rate mortgage. They’re not going to give that up unless they have to, and that’s the lion’s share of the existing housing market.”

With remote work more commonplace than before the COVID-19 pandemic, fewer people need to move due to a job change, McCoy added.

“It used to be people moved every seven years, that just doesn’t apply anymore,” Vaimberg said.

Vaimberg added that some people took advantage of the historically low interest rates of the last few years to remodel their homes, removing some of the urgency to move up or elsewhere.

There will still be some migration to the south for retirees and those who can work remotely who have the financial means, McCoy said. “It all depends on the cost of the housing and if it fits into their budget. They might wait a year or two to see if rates come down.”

According to McCoy , though borrowers can save 50 to 75 basis points with an adjustable-rate mortgage, most borrowers prefer the certainty of a fixed-rate mortgage.

McCoy also expects more buyers to opt for the lower payments of a 30-year mortgage, even if they could qualify for a 15-year mortgage. “To my mind, no one should commit to more than a 15-year mortgage. The difference in the monthly payment isn’t enough to justify it. If they need to, they should get a second job to afford the monthly payment on a 15-year mortgage. It’s amazing how little principal people pay down in the first years of a 30-year mortgage, but people still do it because all they can see is the monthly payment.”

Mortgage rates over 3.5% price out as much as 60% of potential buyers, according to Abhinav Asthana, Tavant, Business Head, Fintech Products. “Some statistics say that about 80% of the population in the homebuying journey is negatively affected by interest rates above 3%.”

With rates at current levels, the monthly mortgage payment for the average home is about $8,500 per year, or about $700 per month more than it was last year, Asthana said. “This puts the [potential] home buyer under two kinds of pressure—how do you bring in that extra $8,500 in additional income each year and home prices are still high.”

Some potential homeowners are waiting for rates to drop. Others are being advised by real estate agents to accept the higher payments for now—if they can qualify for it and afford it—then refinance in what is expected to be a lower rate environment in 18 to 24 months.”

Mortgage lenders need the spread between the existing mortgages and new mortgages to narrow, Isaacs said. For example, his own mortgage is in the 3% range. Going to a move-up home with a rate of about 5.5% would be a much easier decision than moving up to a home with a 6% mortgage.

Homeowners that do want to buy the move-up home can be better served by keeping the initial home and renting it out if they have the wherewithal to still come up with the down payment for the second home, Isaacs said.

While economists expect inflation to stay high while the job market remains strong, a strong job market helps ensure that homebuyers have the wherewithal to make their monthly payments.

If the job market was weaker, risk, and therefore, mortgage rates, would be higher, Asthana said.

Lack of Inventory
Though the buyers might be ready to get back in the market, the same won’t be true of sellers, so supply will be severely constrained, Fox said. “That will give us some upward pressure on pricing.”

According to Fox, the hot markets during the pandemic—San Francisco, Austin, Boise, Silicon Valley, and some cities in Utah—will continue to see some price softening, while cities with low cost of living will see higher price appreciation.

Beyond higher interest rates and would-be sellers holding onto their homes, another issue putting a damper on the home mortgage is lack of inventory, Isaacs said. “Most inventory in our industry is created by people moving up selling one house buying a new house or by new construction. And we’re just not seeing builders build much new product as we would like.”

Builders are nervous about the market and the general economy, Isaacs said.

“Although rising builder sentiment indicates a turning point for housing later this year, lackluster single-family production in January is a sign that the housing sector faces further challenges, as elevated mortgage rates and high construction costs continue to put a damper on the market,” the National Association of Home Builders said in February.

Overall, housing starts decreased by 4.5% to a seasonally adjusted annual rate of 1.31 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The January reading of 1.31 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts decreased by 4.3% to an 841,000 seasonally adjusted annual rate.

The multifamily sector, which includes apartment buildings and condos, decreased by 4.9% to an annualized 468,000 pace.

“Housing construction weakened in January as ongoing affordability conditions fueled by high mortgage rates and building material costs challenged the market,” said Alicia Huey, NAHB Chairperson. “While a recent two-month upturn in builder sentiment indicates a turning point for single-family construction could take hold in the months ahead, policymakers need to fix the supply chain for building materials to ensure builders can add the additional inventory the housing market desperately needs.”

Builders were burned by building too many spec homes in the past, so they are only building homes under contract, so little new supply is coming on the market, Isaacs said.

A related issue is that with the cost of labor and building materials up substantially, except for lumber, which has fallen in price in the last year, builders can’t profit from building starter homes, which further constrains the inventory at the bottom of the market, Isaacs said. “In Columbus, Ohio, where I live, you can’t build a new house for under $400,000.”

Student loan debt is also impacting the ability of younger people to buy a house. Though the debt payments on government student loans have been suspended for more than two years, those payments are now set to restart in the summer. Even if some of that outstanding debt is forgiven, which depends on a pending Supreme Court decision, many younger consumers will still have substantial college payments remaining, impacting their ability to save for a down payment and make mortgage payments.

On the positive side, people are earning more today than they did 10 years ago, Isaacs said. Plus, there are down payment assistance programs that can help some potential homebuyers. But there’s still a substantial financial shortfall for many who would typically be looking to purchase their initial homes.

For those who have the financial means, the limited supply means that, like last year, many homes are selling for over list price, a trend that Isaacs expects to grow into the spring and summer.

“The inventory problem won’t be fixing itself any time soon,” Isaacs said.

Keys to Success
To succeed in this challenging market, mortgage lenders need to recruit new loan officers to add to volume while also retaining the loan officers they have, Isaacs said. Lenders that cut support and resources are in danger of losing their best staff.

“Find loan officers in markets where you think you can take market share and increase volume,then give them a compensation structure that makes sense in the current environment and continue to take market share,” Isaacs said.

“To succeed in this environment, we all have to work a lot harder than we’ve worked in the last 10 years,” Isaacs added.

Lenders will have to look harder to find the top-producing real estate agents to partner with—the 80-20 rule has become the 90-10 rule, or even the 95-5 rule, with the top five or 10% of real estate agents doing the lion’s share of business in the local market.

Cost-cutting is important as well, Isaacs said. “Build your model around what you are doing today, not what you think that you will be doing in 90 days. It might not be better 90 days from now. Hope is not a strategy.”

“If you’re a mortgage professional and you want to succeed, you have to keep your head down, stop focusing on market conditions, and focus on what you can control,” Vaimberg said. “As long as you work on your sales skills, work on your marketing, and out-prospect your competitors, you don’t have to worry about anything. But you may have to work three, four, or five times harder for the same amount of business.”

Looking Forward
Asthana expects a good refinance market once rates do drop. “We’ve already seen $1.8 trillion in mortgages originated at rates north of 5.5%. Banks are sitting like hawks, watching this game. That’s where the independents have to get much smarter and leaner because in the next eight to 10 months there will be a [refinancing] opportunity.”