Scotsman Guide > Residential > October 2013 > Department

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Residential Department: BackSpace: October 2013

 

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Borrowers are a moving target in a higher-rate market

Despite all the struggles in the mortgage market since the recession, mortgage brokers and originators have enjoyed one thing:record-low rates. With that advantage, the refinance business boomed and filled the void created by the shortage of purchase homebuyers who were hit by job losses and tightened lending criteria.

As expected by many savvy brokers and originators, an increase in mortgage rates was inevitable. This past June, mortgage rates shot up almost immediately after remarks from Ben Bernanke, chairman of the U.S. Federal Reserve System, regarding a possible end of its quantitative-easing policy later this year.

Mortgage rates averaged 4.37 percent this past July, compared to 3.54 percent this past May. This past November and December, the average mortgage rate was as low as 3.35 percent, according to data from Freddie Mac.

Although rates are still well below their levels before the housing crash, the rate increase, coupled with appreciating home prices, is expected to change the makeup of potential borrowers in the market — particularly in terms of refinance clients, first-time homebuyers and investors. With that in mind, mortgage brokers and originators should keep an eye on how their pool of clients may be shifting.

Ebbing refinances

The increase in rates marks the end of the refinance boom that provided mortgage originators with a steady flow of relatively easy business. This end should not come as a surprise, however. In addition to the fact that it was widely predicted, interest in refinances has been tapering.backspace_10-13

“The refinance market certainly will drop off significantly because interest rates have been low for such a long period,” says Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors (NAR). “Any rational person would have already locked in those rates.”

There still will be cases when people may be looking to refinance their homes, however. “The only reason for refinance at a higher rate is somehow the price increases have been so large that people may try to do a cash-out refinance to help relieve college tuition or unexpected health-care costs,” Yun says.

Donald Frommeyer, president of NAMB — The Association of Mortgage Professionals, agrees that, although there will be people interested in refinances for reasons like seeking a shorter term or because of a divorce or a death in the family, originators won’t have the huge volume of deals they had in the past.

“You’re just not going to have the people knocking down your door in order to refinance at 3 percent,” Frommeyer says.

His advice to mortgage brokers and originators is to continue to focus on the purchase market — as many have been in the past year. “Always look  under rocks to find what you can as far as business,” he says.

With most of this potential business expected to be in the purchase market, it is important to take a closer look at the status of homebuyers who now are facing appreciating home values and higher rates.

First-time homebuyers

Higher rates coupled with appreciating home values certainly affect the affordability of home purchases for everyone. Jed Kolko, Trulia’s chief economist and vice president of analytics, estimates that these two factors have made buying a home roughly 20 percent more expensive now than it was just a year ago. First-time homebuyers are likely to be the most affected by this increase.

“First-time homebuyers don’t have equity built up in an existing home and often are more dependent on a mortgage than repeat homebuyers are,” Kolko says.

Kolko points out that affordability has been an ongoing problem for young adults, however, regardless of the recent increases in rates and home values. “They had a more difficult recession than older adults did. Their unemployment rate went higher than for older adults and many of them are still living in their parents’ homes — neither buying nor renting,” he says.

According to Kolko, only 512,000 new households were created between first-quarter 2012 and this past first quarter, well below the pre-recession rate of 1.1 million new households per year. This slowdown is driven by the struggles of young adults, and it represents a significant pent-up demand for housing that a real recovery should unleash.

Frommeyer, however, believes that increasing rates are eliminating certain categories of people who are limited by their income and no longer can afford to purchase the house they want.

“The rate increase may be going to eliminate 8 percent to 10 percent of the people who wanted to [buy a house],” Frommeyer says. “Many people are just adapting to the higher interest and the loan amounts they have to go to,” he adds.

Upgrade clients

Mortgage brokers and originators should be prepared for the return of another segment of homebuyers: those who are selling their houses to move up to bigger or better houses. This sector was hard hit in the downturn because home values plunged and many homeowners ended up underwater.

“Because prices have risen so much in the past year, many people who are now back above water — and [even] many people who were not underwater — now begin to feel that their home values have appreciated enough to make it worthwhile to sell,” says Kolko.

Having these houses coming to the market creates opportunities for mortgage originators who can help clients finance their new homes. This also will continue to increase the overall inventory in the market, slightly curbing the future pace of increases in home prices. “So far, prices have risen as fast as, or faster than, anyone expected, but we now are starting to see prices slow down because of rising rates, expanded inventory and declining investor interest,” Kolko says.

At the end of this past July, total housing inventory increased 5.6 percent to 2.28 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace, according to NAR.

Investors

With home prices continuing on their upward trend, real estate investors’ days of bargain hunting seem to be coming to an end. Yun thinks investors will take a slow step backward because prices have increased much faster than rents, and the yield return has become less attractive. Still, he points out that mortgage originators should keep a close watch on investors to see if they move from using all cash to seeking investment loans.

“There can be some business opportunities for small mom-and-pop investors who have been pushed out by institutional investors, if mortgages on second-home purchases become more readily available,” Yun says.

Frommeyer, however, sees investors’ activity continuing unabated, especially in the Midwest.  People still are looking at real estate investment as a quick way to make money, he says. “People are buying investment properties again — going in, putting in a little bit of money and trying to sell them.”

“There is a shadow inventory out there, and those are some of the houses that eventually will be taken up with people who want to buy houses and potentially some investors,” Frommeyer adds.

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Mortgage brokers and originators must be aware of how the changes that are taking place in today’s housing market are impacting their pool of clients. By understanding which segments may emerge as potential customers, brokers and originators can tailor their networking and marketing efforts to target these groups, and stay ahead of the curve.


 

Rania Efthemes is director of content strategy at Scotsman Guide Media. Reach her at (800) 297-6061 or raniae@scotsmanguide.com.

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