Witnessing others amass wealth through real estate motivates people to become homeowners and create wealth for themselves. People who watch their friends’ children playing in a quiet neighborhood with a nice backyard often desire to provide their families with the same sort of environment.

“There’s always the chance that rates drop or normalize to a more natural rate.”

Recent research further validates these beliefs. A Bankrate survey from earlier this year found that 74% of respondents view homeownership as an essential element of the American dream. This holds a greater significance than any other measure of financial stability, including a secure retirement, a thriving career or even a college degree. And a 2019 study published in the International Journal of Consumer Studies indicates that a positive relationship between homeownership and life satisfaction exists, even when respondents were concerned about affording their mortgage.

When coupled with traditional supply- and-demand drivers, psychological and emotional factors enable people to paint a mosaic of potential and probable outcomes in various economic environments. For instance, alongside pent-up demand, the rising interest rate environment has also curtailed supply, resulting in a buildup of deferred sales activity. At some level of reduced interest rates, this has the potential to unleash a torrent of housing supply.

Deferred sales

Using the U.S. Treasury yield curve, one can estimate the “natural interest rate” for the 30-year fixed mortgage. As of Dec. 8, 2023, the natural rate could be estimated to be approximately 69 basis points below the actual Freddie Mac survey rate of 7.03%.

With this information, it’s reasonable to anticipate this variance to normalize over time, with the actual rate approaching the expected natural rate. This normalization could occur through a combination of rising U.S. Treasury yields and/or declining mortgage rates, although it’s impossible to predict the timing and specific factors driving this convergence.

The outlook for mortgage interest rates holds implications for supply, demand, new construction, affordability and home values. While much of this is driven by simple mathematics, psychological and emotional factors inevitably come into play.

From late 2019 to early 2022, there were about $10.5 trillion in new mortgages originated in the U.S., with an average interest rate of about 3.5%. Americans locked in at these rates are not in a hurry to sell their homes and lose their low-rate financing.

It’s a phenomenon called the “lock-in effect,” which greatly affects the balance between the number of homes listed for sale and the number of people who want to buy them. In addition to pent-up demand that occurs when housing affordability declines, the lock-in effect produces a “deferred sales impulse” among those who want to sell but are unable or unwilling to do so in the current interest rate environment.

Case in point: The number of homes available for sale is more than 40% lower than historic averages dating back 25 years, and various indicators like vacancy rates and the time it takes for homes to sell are at or near historic lows. These metrics indicate that there is an overwhelmingly undersupplied housing market relative to today’s demand.

How might this deferred sales impulse change in the coming months? And how can lenders and the originators who work with them possibly benefit from buyers who are emotionally and financially compelled to purchase even in a high interest rate environment? It’s constructive to consider possible scenarios that could take shape in the coming months based on where rates may trend.

Dream scenario

Let’s assume that mortgage financing costs continue heading north — above 8% for the 30-year fixed mortgage. If so, fewer people will be able to afford to buy, resulting in increased rental demand. The number of properties for sale, buyers and total sales will shrink. This would further depress inventory levels and disincentivize prospective sellers. Builders would likely feel less confident too, leading to fewer homes being built.

If mortgage rates remain close to where they are currently — between 7% and 7.5% — more people will still want to purchase homes even though they cost more to finance. As a result, housing inventory will continue to fall short of demand. Builders would be cautious but hopeful. This means that more new residences could be constructed, with home prices leveling out or trending up.

On the other hand, there’s always the chance that rates drop or normalize to a more natural rate (refer back to the estimate that the 30-year fixed mortgage rate should be roughly 69 basis points below the Freddie Mac survey rate of 7.03%). In this case, home prices become more palatable, increasing buyer interest and affordability. Builder confidence would likely increase but, assuming that housing supply remained low, prices would likely rise.

The dream scenario for buyers is when mortgage rates drop below the natural rate and land below 6%. Many on-the-fence sellers would list their homes, buoyed by the prospect of more affordable financing on their next property.

Consequently, inventory levels would rise to meet demand in some markets while outpacing demand in others. Builders would be motivated to increase construction. The effect on home values would vary from market to market. In areas with fewer buyers, home prices might go down due to excess supply, while in other locations, prices might spike due to excess demand.

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While the range of outcomes for mortgage lenders and secondary market investors is wide, today’s probability-weighted outlook is arguably more favorable than what was faced circa 2021 when rates were low, credit spreads were tight and prices were high. As residential housing inventory numbers remain low, offering short-term, high-yield construction loans (with yields exceeding 10%) to builders is one example of an appealing investment opportunity.

Investors should keep their emotions in check when committing to a money-making opportunity. But they also should consider that many potential homebuyers are driven by emotional and psychological factors, even when rates, prices and supply levels are less than desirable. ●

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Despite these challenges, people should keep an optimistic outlook on market trends. Home prices have trended downward but remain stable and there has been some necessary cooling in the markets that overheated in the past few years.  

With pent-up demand and low supply, a homebuying surge could occur once rates return to the 5% range. Now is the time to equip borrowers with negotiating power before competition rises again. To do so, you need to connect with today’s buyer.

Unique opportunity

First-time homebuyers, predominantly tech-native millennials entering their 30s, can access more information than ever. They’re the first generation to have grown up with digital technology that’s revolutionized and streamlined the homebuying process.

Despite this, 92% of millennials report that inflation has held them back from homeownership. The reality is they simply don’t understand the options available to them in the current market. One way to help them get more comfortable is by leveraging the very technology with which they’re familiar.

A study from the National Association of Realtors (NAR) found that 76% of all homebuyers found their home on a mobile device. By harnessing digital tools for everything from mortgage calculators to virtual tours, you can help demystify the process to make potential buyers more comfortable and confident throughout the transaction.

Additionally, financial education is key. Seventy-five percent of adults surveyed by the National Foundation for Credit Counseling said they would benefit from asking an expert some of their financial questions. As a mortgage professional, you can help fill the gap by providing clear, accurate and reliable information on everything from the impact of credit scores on mortgage lending options to how inflation affects home prices.

Here’s the reality — the economic situation has led to a unique opportunity for buyers. As of first-quarter 2023, home prices in 95% of U.S. metro areas had dropped since their spring 2022 peak. This opens up the possibility for negotiation, which would’ve been unthinkable in the seller’s market of the past few years.

This is where seller contributions can make a difference. Mortgage professionals can help buyers understand and negotiate these contributions, including a 2-1 buydown (which has a lower interest rate for the first two years before rising to the full permanent rate in the third year) and concessions like home warranty plans or closing cost assistance. The seller can cover between 3% and 9% of closing costs, depending on the loan type or the size of the downpayment.

Most of all, mortgage originators have to help buyers overcome the fear factor. Many millennials worry about overpaying, but these fears are more of a perception than a reality. Only 36% of homebuyers surveyed by Fannie Mae in Q1 2022 tried to negotiate their mortgage rate. They’ve been gripped by fear and are missing out on opportunities. By sharing facts, offering real solutions and giving clients the confidence to negotiate, originators can ensure they aren’t passive participants while buying a home.

Creative options

Undoubtedly, the ability to offer creative lending options is a critical factor in connecting with today’s homebuyers. NAR reported that first-time buyers made up only 26% of the market in 2022, down 8 percentage points from 2021. As a lending professional, you need to be an expert in your field. This means that catering to the specific needs of this group isn’t only important for good service but also to the survival of your business.

Innovative lending programs, including downpayment assistance programs and loans explicitly designed for self-employed or gig economy workers (like bank-statement loans), can unlock homeownership for people who might otherwise struggle to get a traditional mortgage. Independent contractors make up 15% of all workers, according to a recent paper from the W.E. Upjohn Institute for Employment Research.

Cash programs are especially attractive in a competitive market, given the advantages they offer to both buyers and sellers. All-cash buyers paid up to 11% less for their homes than people who used a mortgage, according to research from the University of California at San Diego. As the study shows, cash buyers can reap substantial savings on their home purchases, but not all buyers are able to make a cash offer. This means you have to provide a broad array of options to make sure you’re meeting the diverse needs of homebuyers.

Investments in technology are also essential for adapting loan offerings to today’s buyers. About 40% of surveyed customers were willing to complete the entire lending process via self-service digital tools, but the highest levels of satisfaction were recorded when digital channels were combined with personal service, according to J.D. Power. This reaffirms that while the industry needs to use digital tools throughout the process, mortgage professionals can’t lose sight of the human touch that clients crave.

Future trends

In a mortgage environment that’s rapidly evolving, keeping up with change means not only understanding what’s happening now but anticipating future trends. While clients are increasingly comfortable with an end-to-end digital mortgage process and enjoy how technology streamlines and simplifies each step, the human touch — your ability to offer personalized guidance and reassurance — makes the difference.

Staying current also means continually expanding your knowledge. Everything from global economic trends to local zoning laws influence the real estate market. Mortgage originators need to be able to provide their clients with a well-rounded view of the market and how these factors could impact homeownership goals.

Adapting to these changes includes keeping an eye on regulatory shifts. For example, the Consumer Financial Protection Bureau has indicated a heightened focus on fair lending practices. Understanding these regulations is vital to providing valuable and compliant advice to clients.

Finally, mortgage originators must remember that today’s homebuyer is more diverse than ever. The Urban Institute forecasts that 70% of new homeowners will be Hispanic by 2040. This diversity requires understanding unique cultural needs and expectations while offering services in ways that respect and meet these needs.

No matter what happens in the coming years, the core of this work remains the same: to guide your clients through one of the most significant decisions of their lives. By embracing change — in technology, consumer attitudes, market dynamics, loan options and more — you’re not just reacting to the new mortgage landscape but helping to shape it. This adaptability and foresight will enable mortgage professionals to turn the challenges of today’s mortgage industry into the successes of tomorrow. ●

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Second-half 2023 MOSS data shows that a comparable share of Top Originators (9% in H2 2023, compared to 7% in H1) believe that their business will worsen in the next six months. But at 45%, the second half’s share of originators who expect their business to perform better is far smaller than it was before the first half of the year (64%).

Meanwhile, the share of originators who believe business will stay the same grew from 29% in the first half of the year to 45% in the second half.

“Top Originators are taking a measured tone in projecting the second half of the year,” said Jeffrey Sabourin, chief product officer for Scotsman Guide. “Negativity remains low, but after a first half of the year that saw elevated interest rates make a huge impact on sales, it seems that many mortgage professionals aren’t putting the cart before the horse when it comes to predicting improvement.”

Uncertainty regarding federal interest rate policy may have played a part in coloring originators’ perceptions. The second-half data was derived from a poll performed from July 1-31, right as the mortgage industry was keenly watching for whether the Federal Reserve would extend June’s pause on rate hikes or resume increasing its benchmark rate. The Fed, of course, ended up enacting a 25-basis-point increase in July.

“Interest rates are so top-of-mind for Top Originators lately, and for good reason,” Sabourin said. “Some of our respondents may have been hedging their bets in case the Fed did raise rates, while optimism among some later poll participants may have been dampened by the reintroduction of rate increases.”

A recent, separate Scotsman Guide poll found that a majority of mortgage originators currently view high interest rates as the chief barrier for sales activity. Fifty-one percent of participants in that poll said that rates are the biggest thing holding back homebuyers, more than twice the second-place answer (lack of supply) and more than all other answers combined.

Interestingly, while brokers have been historically more positive than bankers since the beginning of the MOSS series, that trend was reversed in the most recent MOSS survey. Forty-eight percent of bankers expect business improvement in the next six months, while just 33% of brokers see business picking up. On the flipside, some 17% of brokers think business will get worse, compared to just 8% of mortgage bankers.

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The first-half 2023 iteration of MOSS polled mortgage professionals who qualified for Scotsman Guide’s Top Originators rankings (a comprehensive listing of the nation’s top-producing residential originators) in January. It found that 64% of respondents expect their business to perform better during the next six months compared to the second half of 2022.

That’s a significant turnaround from the survey’s June 2022 findings, which saw only 22% of top-ranking originators expecting business to improve in the six-month period ahead. That survey was performed amid a cyclone of downside risks, including rising interest rates, widespread inflation, low housing supply and political uncertainty in Eastern Europe. These pressures dovetailed to push the already flagging housing market further into a downward spiral during the second half of the year.

But recent developments, such as decreasing mortgage rates and a pullback of the Federal Reserve’s hawkish monetary policy, have mortgage bankers and brokers alike seeing a light at the end of the tunnel.

Only 7% of Top Originators believe their business is going to perform worse in the next six months, down substantially from 37% in the second half of 2022. Twenty-nine percent feel that their business will stay the same, down from 41% in the previous half.

“What a difference six months make,” said Jeffrey Sabourin, chief product officer for Scotsman Guide. “The mortgage industry is certainly not out of the woods yet, but respondents to our survey are responding optimistically to recent market signals.

“Interestingly, Top Originators have so far proved prescient about the direction of the market, so we’re excited to see where their positivity leads.”

Brokers have historically been more upbeat than bankers since the inception of the MOSS. This trend held true in January, with 70.5% of brokers predicting better results in the next six months, compared to 61.1% of bankers. Neither group expects further market declines, with only 5.1% of brokers and 7.9% of bankers projecting that their business will get worse.

On a geographical basis, Top Originators in the South — which has more home sales than any other region — are most upbeat about the next six months, with 68.7% expecting better business than in the prior six-month period. Respondents in all four regions are overwhelmingly positive, with the share of originators expecting business to get better topping 55% in every region.

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