Michael Rappaport of Homespire Mortgage: Prevailing Winds–3 Predictions for the Year Ahead

Michael Rappaport is President of Homespire Mortgage, an award-winning national residential mortgage lender. Homespire has been included in Inc. 5000’s List of America’s Fastest-Growing Private Companies and recognized as one of the “Best Mortgage Companies to Work for” by National Mortgage News for four consecutive years. For more information, visit www.homespiremortgage.com.

What is causing the unexpected shifts in the mortgage industry seen throughout the first quarter of 2022? As we feel the impacts of events occurring both globally and at home, predictions of what to expect continue to build within the industry. What are the key factors affecting and driving the winds of change now, and will they continue to do so in the months to come?

Based on current data and trends, here are three predictions for the industry’s landscape as we move further into 2022.

Rates will rise again

Last year the industry saw exceptionally low rates. While rates remain low historically speaking, they are now hovering in the low to mid 4 percent range, up an average of 150 BPS. Rising rates lower the home-buying budget for borrowers. Consider a rate rise of 4.25 percent on a $320,000 loan. The monthly payment goes up by roughly $250, and many potential homebuyers can no longer afford a mortgage that was feasible only six months ago. That $250 suddenly takes a segment of the population out of their previous affordability range, and now, they must shop for a smaller mortgage. This prevailing wind, one that can dramatically shift and quickly remove borrowers from the home-buying process, will continue impacting the market for the remainder of 2022.

Borrowers may see even steeper shifts in rates as we enter Q2— something many experts predicted would not happen until later in the year. With the world intently focused on tensions between Russia and Ukraine and the impact on global markets, rates will likely climb higher than originally predicted.

The good news is that the Fed wants to keep rates low to help boost the economy and to stave off a recession like we experienced in 2008. Short-term interest rates have risen to help curb inflation and will continue to climb throughout the year, but this causes only a slight impact to long-term rates. While rates in the mid 4 percent range hold strong as the new norm, the perceptions of 2021’s ultra-low rates will cause a period of adjustment for many borrowers. Whichever way it blows, it is important to keep in mind that, historically, rates continue to remain low compared to the industry averages of the last 10 – 20 years.

The seller’s market will remain strong

We can expect fierce competition to continue among homebuyers and prices to be driven up with multiple offers and bidding wars often exceeding the listing price in many transactions.

In markets where people are willing to pay well above the appraised value, these prices become the new comparable range, pushing other sellers to follow suit. This cycle creates a question of sustainability. Will these levels stabilize or continue rising? While it’s uncertain if the markets will see an eventual correction over the next year, it is highly unlikely to be something as drastic as what we saw in 2008.

If the seller’s market holds as predicted, then our current conditions will prove to be rather sustainable, or value increases will begin returning to more reasonable levels of 3-5 percent. This is what we expect under normal economic times, and it is something we are already seeing in specific markets today.

Rising prices will steer some borrowers towards options like renovation loans, especially for those seeking more space or a fresher look. Rather than risk overpaying in high-priced markets, renovation loans provide a better option to upgrade an existing property. Not only can this help mitigate a sustainability issue, but it can save borrowers money.

Inventory will remain low

Home appreciation grew at an astronomical rate in 2021 — far exceeding the levels of the past decade — but we are not in a housing bubble. The driving factor in today’s market is one of low inventory.

In a normal market, there’s typically a six-month supply of homes available at any given time. Projected conditions equate to a less-than-two-month supply in the current market (based on the all-time low of existing homes for sale in December 2021, per data from the National Association of REALTORS®).

There are several reasons for the low inventory that we are currently seeing. One is that there are not as many homebuilders in business today, so fewer new homes are being built. Part of this is because building costs have risen steadily, both for labor and supplies.

Another factor is the scarcity of land in many major markets. National builders purchased and held land in the 80s and 90s for new communities to keep pace with growth. With these communities now built, and shrinking tracts of land for new developments, builders are pushing farther out in some metropolitan areas. However, therein lies an opportunity to help offset the inventory gap. The shift to remote work environments has many homebuyers looking toward outlying areas for more affordable housing, rather than dealing with soaring costs in major cities. Builders are beginning to recognize this opportunity and refocus on building more affordable homes in these areas to meet this growing demand.

The basic economics of supply and demand will ultimately depend on the level of available inventory. Currently, there is not enough supply to meet the unbelievable demand in many markets, which in turn has driven up prices.

Though refinancing will slow down with rates remaining higher in 2022, purchase activity shows every sign of remaining strong, keeping mortgage companies and the housing market robust. With these signs, it is hopeful that the prevailing winds of the industry continue to thrive for the remainder of this year and into the next.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)