TheMReport — News and strategies for the evolving mortgage marketplace.
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24 | M R EP O RT COVER STORY "People will not move unless they have to. Ninety- one percent of homeowners have a long-term, fixed-rate mortgage. They're not going to give that up unless they have to, and that's the lion's share of the existing housing market." —Doug McCoy, Director, Indiana University Center on Real Estate Studies tinue to be a challenging market, and I don't think the market will truly recover until 2024." Other experts MReport interviewed agreed that lower mortgage rates likely won't occur until 2024, though there are some recently published forecasts still calling for slightly lower rates by the end of the year. The Mortgage Rate Gap O ne issue, according to Isaacs, is that the homeowners who in a more normal market would be looking to move up, for the most part, aren't doing so because it would mean exchanging a mort- gage at 3%, or even lower, for one at twice the interest rate. "People will not move unless they have to," agreed Doug McCoy, Director of the Indiana University Center on Real Estate Studies. "Ninety-one percent of homeowners have a long-term, fixed-rate mortgage. They're not going to give that up unless they have to, and that's the lion's share of the existing housing market." With remote work more commonplace than before the COVID-19 pandemic, fewer people need to move due to a job change, McCoy added. "It used to be people moved every seven years, that just doesn't apply anymore," Vaimberg said. Vaimberg added that some people took advantage of the historically low interest rates of the last few years to remodel their homes, removing some of the ur- gency to move up or elsewhere. There will still be some migra- tion to the south for retirees and those who can work remotely who have the financial means, McCoy said. "It all depends on the cost of the housing and if it fits into their budget. They might wait a year or two to see if rates come down." According to McCoy , though borrowers can save 50 to 75 basis points with an adjustable-rate mortgage, most borrowers prefer the certainty of a fixed-rate mort- gage. McCoy also expects more buyers to opt for the lower pay- ments of a 30-year mortgage, even if they could qualify for a 15-year mortgage. "To my mind, no one should commit to more than a 15-year mortgage. The difference in the monthly payment isn't enough to justify it. If they need to, they should get a second job to afford the monthly payment on a 15-year mortgage. It's amazing how little principal people pay down in the first years of a 30-year mortgage, but people still do it because all they can see is the monthly payment." Mortgage rates over 3.5% price out as much as 60% of potential buyers, according to Abhinav Asthana Tavant, Business Head, Fintech Products. "Some statistics say that about 80% of the popula- tion in the homebuying journey is negatively affected by interest rates above 3%." With rates at current levels, the monthly mortgage payment for the average home is about $8,500 per year, or about $700 per month more than it was last year, Asthana said. "This puts the [potential] home buyer under two kinds of pressure—how do you bring in that extra $8,500 in additional income each year and home prices are still high." Some potential homeowners are waiting for rates to drop. Others are being advised by real estate agents to accept the higher payments for now—if they can qualify for it and afford it—then refinance in what is expected to be a lower rate environment in 18 to 24 months." Mortgage lenders need the spread between the existing mortgages and new mortgages to narrow, Isaacs said. For example, his own mortgage is in the 3% range. Going to a move-up home with a rate of about 5.5% would be a much easier decision than moving up to a home with a 6% mortgage. Homeowners that do want to buy the move-up home can be better served by keeping the initial home and renting it out if they have the wherewithal to still come up with the down payment for the second home, Isaacs said. While economists expect inflation to stay high while the job market remains strong, a strong job market helps ensure that homebuyers have the wherewithal to make their monthly payments. If the job market was weaker, risk, and therefore, mortgage rates, would be higher, Asthana said. Lack of Inventory T hough the buyers might be ready to get back in the market, the same won't be true of sellers, so supply will be severely constrained, Fox said. "That will give us some upward pressure on pricing." According to Fox, the hot mar- kets during the pandemic—San Francisco, Austin, Boise, Silicon Valley, and some cities in Utah— will continue to see some price softening, while cities with low cost of living will see higher price appreciation. Beyond higher interest rates and would-be sellers holding onto their homes, another issue putting a damper on the home mortgage is lack of inventory, Isaacs said. "Most inventory in our industry is created by people moving up sell- ing one house buying a new house or by new construction. And we're just not seeing builders build much new product as we would like." Builders are nervous about the market and the general economy, Isaacs said. "Although rising builder senti- ment indicates a turning point for housing later this year, lacklus-