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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2019

A Dose of Happy News Arrives for the Mortgage Industry

Lower rates and favorable demographics offer unexpected opportunities for originators and investors

r_2019-06_Greenberg_spotThe Federal Reserve’s decision to hold benchmark interest rates steady, and a plunge in mortgage rates this past first quarter, could juice the housing market during this season’s buying and selling season. For real estate investors and mortgage originators alike, the potential for mortgage rates to remain low throughout the remainder of 2019 is welcome news.

As 2018 drew to a close, the housing market was fast becoming unaffordable for first-time homebuyers and showing signs of a slowdown. Lower mortgage rates combined with changing demographics among homebuyers should offer plenty of opportunities for both originators and real estate investors to grow  their book of business this year.

Signs of optimism

New-home sales reached an 11-month high this past February, according to the U.S. Department of Commerce, rising 4.9 percent month over month to a seasonally adjusted annual rate of 667,000 units — the highest level since March 2018. Commerce also revised January 2019 sales to 636,000 units, up from its initial report of 607,000 units.

Existing-home sales also rebounded in February with the largest month-over-month gain since December 2015, according to the National Association of Realtors (NAR). Sales rose 11.8 percent from January to a seasonally adjusted annual rate of 5.51 million in  February, although they were down 1.8 percent from February 2018.

Lower mortgage rates — which declined in late March and early April to about 4 percent for a 30-year fixed-rate loan — should keep demand strong for available housing inventory, which is still constrained in many markets. With affordability a big issue across the country, lower rates could encourage more buyers and sellers to get off the fence. In fact, statistics from the Mortgage Bankers Association (MBA) indicate a rise in mortgage applications took place immediately after rates began to fall in March.

Homebuyers will be able to afford more expensive homes, and sellers who were loath to give up low mortgage rates to enter the move-up market may be more inclined to sell their existing homes, if rates stay in the 4 percent range for a 30-year fixed-rate loan and below 4 percent for a 15-year fixed loan. Getting more move-up buyers to list their homes will help ease inventory constraints.

During the last week of March, MBA noted that the average loan size increased to new highs for both purchase and refinance loans. The average size across all loan types was $346,700, up more than $15,000 from the previous week, and purchase mortgages  averaged $335,900.

Refinances rebound

Lower rates also could boost refinance activity, according to the Black Knight Mortgage Monitor, which said more than 4.9 million homeowners with a mortgage could likely qualify for a refinance and reduce their interest rate by at least 0.75 percent. The size of the potential refinance market increased by nearly 50 percent in a single week in late March, Black Knight noted.

Lower rates could help real estate investors who use financing to purchase properties. These investors have been challenged by the declining inventory of distressed housing, combined with rising prices for non-distressed housing. Of course, it remains to be seen if borrowers will actually take advantage of lower rates  to refinance, but early indications are that they will.

Originators will want to review their marketing strategies to get the word out to borrowers and investors who could benefit from a refinance. They should take a multipronged approach to break through homeowners’ and investors’ inertia. A strong online and social media presence will be important, but direct mail, television advertising, phone calls and other options might also be effective depending on the demographic.

Rising millennials

Even with lower rates, many millennials — some saddled with student loan debt — will need to stretch their budgets to make a downpayment and become a first-time homebuyer, or to move up to a more expensive home.

Millennials made up 37 percent of the homebuying market share last year, the most of all generations, and their share increased from 34 percent in 2017, according to NAR. In its “2019 Home Buyers and Sellers Generational Trend Report,” NAR broke the massive millennial demographic into two groups, older and younger millennials, and noted that their wants and needs may be different.

NAR defines older millennials as those born between 1980 and 1989 (ages 29-38), and younger millennials as those born between 1990 and 1998 (ages  21-28). It puts those born in 1999 or later into Gen Z. Older millennials make up 26 percent of homebuyers and younger millennials make up 11 percent, according to the generational report, which was released this past April.

The report noted that 47 percent of younger millennials with debt reported having student-loan debt with a median balance of $21,000. For older millennials, 42 percent had student-loan debt with a median balance of $30,000. The share of buyers that had student-loan debt declined as their age increased. The younger millennial group also is earning significantly less than the older  group ($71,200 versus $101,200 in median income as of 2017).

Originators, meanwhile, will need to consider what a reasonable debt-to-income ratio is in each lending situation.

Because of these financial challenges, it’s imperative that real estate investors consider exactly which amenities to add to their fix-and-flip investments, as well  as the cost of each amenity, to ensure that the properties remain affordable. Originators, meanwhile, will need to consider what a reasonable debt-to-income ratio is in each lending situation, and will want to examine a variety of loan products and downpayment options to find what makes the most sense for a millennial buyer.

Trends and amenities

Millennials are attracted to open-concept layouts, pet-friendly homes with yards, energy efficiencies and technology such as smart lighting, smart thermostats and remote-access locks. (And speaking of technology, they also prefer an on-line mortgage-application process.)

The National Association of Home Builders (NAHB) did a recent survey to see what homebuyers want in a home. It surveyed nearly 4,000 homebuyers who have recently purchased a home or plan to buy a home within the next three years.

Among the top amenities desired, according to the survey, were walk-in pantries, double kitchen sinks, hardwood flooring and Energy Star-rated windows and appliances. Location remains an important factor, and originators who are lending to fix-and-flip investors will want to know the latest trends in both location and amenities.

Most buyers still prefer the suburbs, according to NAHB, but there are nuances. Although millennials are moving  to the suburbs, they want suburbs with urban-like amenities such as walking access to shopping and entertainment options. Good schools, nearby parks and room for their pets also rank high.

• • •

Although no one has a crystal ball, it’s an exciting time to be in the mortgage-finance business. Both real estate investors and originators have opportunities to seize the day and grow their real estate-investment and loan-origination portfolios. 


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