The mixture of relentlessly increasing home values but still historically low but likely climbing home loan rates has established a bevy of issues for borrowers and potentially their lenders, who still see plenty of business as borrowers' needs shift.
The strongest trend in the current mortgage lending marketplace is ever-increasing home prices, resulting in borrowers facing larger mortgages and deposit, and certain higher property taxes down the road. In the more extreme cases, especially around the coasts, buyers are bidding up already elevated prices by double-digit percentages.
\”Given bidding wars, we're encountering situations where the contract or sales price is much higher than appraisals are arriving for, but buyers are receiving pay those prices given constraints on the market,\” says Sonu Mittal, head of mortgage originations at Providence, Rhode Island-based Citizens.
A number of factors, including still historically low interest, an ongoing shortage of housing, and the pandemic prompting city dwellers to search for more spacious living quarters, indicate rising prices and market frothiness will continue. Such frothiness can lead to unexpected and problematic complications that mortgage brokers can forewarn clients about.
For example, some purchase contracts need a borrower to get the home even if his or her winning bid is well over the appraised value where the bank will base the loan. A lender may base a $160,000 mortgage loan on a home's appraised worth of $200,000. But if the prices are bid as much as $230,000, the loan will stay associated with the appraised value, requiring the buyer to generate one more $30,000.
\”Lenders need to look for those clauses,\” says Dale Baker, president of home lending at KeyBank, that has branches within the Northeast, Midwest and North american. \”In some states they're not unusual, however in others we're seeing more of those clauses designed in and enforced.\”
Loan officers must also be mindful of their clients closing purchases inside the contractually specified time. Since in competitive markets sellers could be less loving toward delays and just end the sale, even keeping what may be a significant earnest-money deposit representing the buyer's good faith to purchase the home.
\”We have seen instances where that is being enforced, because sellers can move right down the line to another buyer,\” Baker said. \”So there's a lot less flexibility with closing dates.\”
Such clauses are typically coming into participate in the best markets, but home values are continuing to rise across the nation considering low rates and a dramatic shortage in housing inventory. The May 2022 Zillow Market Report noted housing inventory going for a positive turn, bumping up 3.9 percent from April, although still down 31.2 percent in one year ago.
The shortage, estimated recently by Freddie Mac to become nearly 4 million homes, rarely is in resolved soon, keeping home values lofty. Matthew Speakman, an economist at Zillow Group, says home values are increasing \”pretty much everywhere\” in the U.S. and especially in big and midsize markets.
\”Our forecasts say prices increases continues to accelerate within the months to come, so lenders could be well informed in their ability to lend knowing the asset will likely appreciate in value in the near term,\” Speakman says.
He notes the broad trend of current homeowners selling their houses to put higher down-payments on larger homes, often in additional affordable zipcodes.
The increase in rates of interest this year, really only a bump up from 2022's record lows, appears to have had little impact on climbing prices so far. In its latest monthly housing report, Realtor.com noted that could represented the 10th consecutive month in which price growth remained in the double digits. The report highlights that the lack of available homes for sale pushed in the U.S. median listing price by 15.2 percent in May compared to a year earlier, as the quantity of properties for sale ended the month 50.9 percent less than last year.
\”Nationally, homes are selling more than a full month faster than this past year and 19 days faster than the typical time available on the market from 2022 to 2022,\” the report points out. And larger metro areas \”offer buyers lower price gains and larger development in newly listed homes.\”
The fast turnover has resulted in significant new-purchase business for lenders.
\”We've seen an almost 30 percent rise in purchase-applications activity annually,\” Mittal says, despite inventory constraints.
Dan Shanahan, director of retail mortgage sales at Columbus, Ohio-based Huntington Bank, states that last year the ratio of refinancings to new purchase loans was 70:30, and today it's closer to 50:50, with new-purchase loans prone to continue increasing.
The demand to refinance mortgages nevertheless remains relatively strong, as homeowners see the equity within their homes increase as consolidating high-interest debt or taking spend to make home improvements at historically reduced rates becomes ever more attractive.
Baker said that the low-hanging fruit when it comes to refinancings continues to be picked and the market is more challenging now, requiring more outreach on the part of mortgage brokers, although there continue to be plenty of clients who could benefit and also have yet to consider their options. He added that another reason for recent refinancings continues to be clients realizing they can move to a 15-year mortgage from a 30-year and keep an identical payment per month. Others are moving to lower-interest, adjustable-rate mortgages.
\”A mortgage that becomes floating-rate after seven or 10 years might be appropriate since the borrower intends to sell the home before this, when they plan to downsize as their kids have graduated and left home,\” Baker says.
In fact, Mittal says, the prospect of increasing mortgage rates-Citizens anticipates rates increasing gradually-could actually accelerate mortgage refinancings for purchasers who're \”in the money and haven't cheated the historically low rates.\”
The anticipated rise in home values may eventually price especially first-time house buyers out of the market, even if low rates persist, since they are typically younger and have less money saved up for down payments and also to cover ongoing monthly mortgage costs. Some borrowers might end up finding themselves overextended. Lenders expressed little worry about a 2007-style housing crisis, however, considering today's significant down payments and ability-to-repay documentation requirements.
Mortgage terms have loosened somewhat since dramatically tightening throughout the pandemic, but, says Speakman: \”What's critical is they're still relatively strict compared to prior to the pandemic.\”
Mittal adds: \”Everybody expects house appreciation to slow down, although not dip like during the  mortgage crisis.\”
John Hintze is a frequent cause of theABA Banking Journal.