Residential Magazine

A Buyer’s Market Can Be a Bear for Originators

There are no crystal balls, but trends can be seen that are challenging for the industry

By Andy McDonough

It seems that no matter the year or state of the housing market, potential homebuyers always ask mortgage originators the same burning question: “Is now the best time to buy a home, or should I try to time the market bottom and wait for prices to drop?”

It’s a great question, and it’s absolutely something they should be asking. After all, buying a home is one of the most significant investments and achievements of a lifetime.

Unfortunately, though, there is no crystal ball for the housing market. Timing the market is a difficult, if not impossible, feat. The fact is, there are too many forces at play. As 2019 arrives, that’s no different. But trends can be spotted, and those can be used in an attempt to gauge where the market is headed.

In 2018, after years of surging home prices, dwindling inventory and historically low interest rates, the market took a turn midyear. Suddenly, in booming markets such as Seattle — where homes would sell in a matter of hours or trigger exhausting bidding wars — there has been a distinct shift. Homes are sitting on the market longer — the result of higher inventory, rising interest rates and buyer fatigue.

While Seattle isn’t a carbon copy of the nation’s housing market, it is a microcosm of what is happening in similar large metro markets across the country. The slowdown is real, and it’s already having a profound effect on the market.

These trends will likely continue into 2019 and originators should be aware of them for themselves and their clients. While certain metrics may improve for buyers all across the country, affordability will be a key hurdle, and the industry will need to adapt quickly as a result.

Buyers, sellers, mortgage originators, Realtors, builders and lenders should all be prepared to reset their expectations.

Upper hand for buyers

In recent years, there has been a countrywide mass migration into cities. Fourteen percent of Americans will move at least once each year — with educated millennials migrating in droves to the largest metro areas, according to a report in USA Today.

While there are many reasons people move to cities — including amenities like better public transit — there’s one overwhelming motive that tops them all: jobs. It’s as a simple as that. People will relocate to where there is good-paying work. And because there are more opportunities in larger metro areas, the housing market will continue to improve in the nation’s biggest cities.

Seattle, for example, has experienced explosive job growth thanks to a burgeoning tech scene and massive companies like Amazon that continue to flourish and spark further migration. At one point in 2017, 1,000 people were moving to the Emerald City every week.

Likewise, regions and metro areas already experiencing steady growth continue to attract new residents who are looking for places to live. If the economy continues to add jobs, expect to see improvement in large metro areas due to normalized inventory, days on the market and appreciation in 2019.

While those conditions will improve, rising interest rates and affordability barriers will throw everyone a curveball in 2019. Since the beginning of 2018 alone, interest rates went up by at least 0.75 percentage points. For homebuyers, this means affordability will continue to become a greater issue, even as inventory increases across the markets.

As a general rule, a 1 percentage point increase in interest takes away approximately 10 percent of a homebuyer’s buying power. With less buying power, the pool of potential affordable homes narrows significantly. This can cause one of two things: Potential homebuyers will stay in their current homes and choose to remodel, or they will move further outside the metro area to buy a new homes in more affordable locations.

This, in turn, will continue to fuel a slowdown in the market. To combat this, builders and sellers in 2019 will need to employ creative strategies to make homes more affordable and help seal the deal. More sellers will likely consider offering attractive incentives to get buyers to consider a home that they wouldn’t otherwise be able to afford, for example.

That’s a strategy many builders are already employing in the Seattle area. Instead of slashing prices for buyers, they’re providing larger concessions. Instead of reducing the home price by 10 percent, the builder-as-seller will contribute 3 percent of the sales price to the buyer so they can use that money toward closing costs and to permanently buy their rate down. As a result, the interest rate is lower, the monthly principal/interest payment is less and the home becomes more affordable.

Because of these conditions, it is anticipated that buyers will gain the upper hand in 2019. In fact, if the country continues to experience job growth and ex-

hibit other signs of a strong national economy, with inflation in check and no major geo-political events, next year will likely transition into a buyer’s market. That means more homes remaining on the market longer, stagnant price growth and more options for buyers.

While affordability will remain a concern, buyers will likely hold the cards in 2019. They will have more options, added flexibility and better leverage during negotiations.

Mortgage industry impact

With so many shifting forces at play, what does all of this mean for the mortgage industry? While the housing market continues to improve for buyers nationally, it will get increasingly more difficult for originators and lenders. Gone are the days of homes flying off the market in 24 hours. Instead, homes will stay on the market longer and purchase business will slow down.

That’s not to say the market is going to bottom out. On the contrary, it’s simply beginning to normalize. With that, the industry will need to realign expectations to manage the shifting landscape.

The mortgage industry is currently over capacity. Because there will be fewer transactions in 2019, there will be less work for originators and lenders. This creates a supply and demand issue.

Simply put, there are too many originators and not enough business to go around. In 2019, there likely will be a major consolidation — with underperformers leaving the industry and smaller companies getting acquired by larger lenders.

With the purchase market normalizing, the mortgage industry also can expect refinancing to come to a near standstill in 2019. With interest rates expected to rise nationally, refinancing will drop sharply. Unless there is a major life event, it won’t make sense for most homeowners to give up their historically low fixed rate and refinance their home.

For that reason, expect home equity lines of credit (HELOCs) to continue to rise in popularity in 2019, as an alternative to both refinancing and purchasing. Some current homeowners will simply choose to remodel their current home, keep their historically low fixed rate on their first mortgage and stay put.

All in all, 2019 will be a year of realigning expectations — for buyers, sellers, originators, Realtors and lenders. Affordability will remain a key challenge as interest rates continue to rise. More houses will sit on the market for longer periods of time. Creative financing strategies will become more prevalent. And, ultimately, buyers will have more options and leverage as the market normalizes.

Again, there’s no crystal ball that will paint a perfectly clear picture of next year’s market. There will always be a risk for the buyer who tries to time the market correctly. That’s why now, more than ever, is the time for buyers and sellers to take advantage of their originators’ and Realtors’ expertise.

The bottom line is this: Most buyers are in a much better position today than they were even a few months ago. Expect that trend to continue into 2019.


  • Andy McDonough

    Andy McDonough has more than 20 years of experience in the mortgage industry and is currently a senior vice president at HomeStreet Bank, which is headquartered in Seattle and is one of the top companies in purchase-loan market share in the Pacific Northwest. HomeStreet offers consumer, commercial and private banking services, investment and insurance products, and originates residential and commercial mortgages and construction loans for borrowers located in the Western United States and Hawaii.

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