New York-based digital lender Better.com has shifted its strategy ahead of its initial public offering (IPO).
Following a merger with special purpose acquisition company (SPAC) Aurora Acquisition Corp, Better Home & Financing Co. is expected to begin trading on the Nasdaq Stock Exchange on Thursday under the ticker symbol “BETR.”
Better is partnering with other businesses to offer services such as homeowner’s insurance and to provide access to a network of real estate agents, rather than offering these products and services directly to borrowers. The change resulted in Better’s exit from its real estate business.
“Our overall model has changed from being a one-stop-shop, where we do everything in-house, to being a one-stop-shop where we do the things in-house that we’re the best at,” Vishal Garg, Better’s CEO, said in an interview. “For things like homeowner’s insurance, title insurance, and realtors, we’ve now just become a marketplace. We match the consumer to the product with a partner capable of delivering the best product to them.”
And what is Better.com best at?
According to Garg, the company has developed a one-day mortgage product that provides a commitment letter within 24 hours. It is possible, said Garg, because of Tinman, a platform that interacts directly with the customer — meanwhile, in other platforms in the market, a human extracts information from borrowers, he said.
Better wants to sell this platform to other companies, becoming a “mortgage-as-a-service” company or a white-label provider of mortgage tech, Garg said. When asked how relevant this business will be, Garg refers to Amazon, a company that drives two-thirds of its sales from third-party sellers. “We aim for a similar mix.”
It took Better two years to go public. The transaction will result in an infusion of up to $750 million from sponsors Novator Capital and SoftBank. The business combination closing, announced Wednesday, unlocks approximately $565 million of fresh capital, including a $528 million convertible note previously committed from affiliates of SoftBank and additional common equity from funds affiliated with NaMa Capital (formerly Novator Capital).
The company went from a $500 million profit and 11,000 employees in 2020 to only 950 employees by June 2023. It incurred an $89.9 million loss in the first quarter of 2023. During this period, Better faced the deterioration of the mortgage market due to surging rates, along with the fallout from bad press after Garg laid off employees via Zoom in December 2020.
Garg said the company has come a long way from that episode. “I’ve gone through extensive coaching and professional development,” he said. “Better is a much more mature company, and I’m a much more mature and empathetic leader than I was.”
Garg offered his views on the company’s IPO strategy in an interview with HousingWire at Better’s New York office.
This interview has been condensed and edited for clarity.
Flávia Nunes: Better took nearly two years to go public, with Aurora’s shareholders’ merger approval extended three times. What happened, from your standpoint?
Vishal Garg: I can’t comment on the process at the SEC. But all I can say is that it was worth it. In that time, the market, the industry and the consumer changed dramatically. We went from the lowest interest rates on record to the highest interest rates on record in the past 20 years, from great housing supply to the most constrained housing supply in many years. We’ve just worked hard to address all of these challenges head-on.
Nunes: The transaction will infuse the combined entity with $750 million in new capital. How will Better use these resources? And what role will SoftBank play?
Garg: The first thing is: we’re going to be very prudent because we’re still in a very bad macroeconomic climate for mortgages and housing in general. Secondly, we are going to continue to invest in our technology and drive products, like One Day Mortgage, that are innovative and groundbreaking and drive the adoption of those products across the industry.
[SoftBank] will be a significant shareholder—no seats on the board. Being public means I have to answer to a whole new set of shareholders, which we’re happy to welcome, and other than that, we will drive innovation and growth.
Nunes: How is Better prepared for the scrutiny of being a public company?
Garg: We’ve had a lot of scrutiny from external sources. We passed our first CFPB exam with really great results. We have been subject to multiple Fannie Mae audits, all with great results. We generally have viewed our ability to have a technology platform where the technology makes the decisions rather than people making the decisions, and technology creates tasks for the consumer rather than people creating paths for the consumer. That technology platform has helped us maintain best-in-class compliance and regulatory audits. We’ve made a substantial investment in those systems, and we continue to believe they’re going to help yield great results as we’re a public company.
Nunes: Better was a very efficient refi shop during the Covid years when rates were historically low. How can Better succeed in a purchase market?
Garg: It took us six years to do $100 billion of refinances and to build an industry leader in refinances. Over the past two years, we’ve had to pivot very hard so that 90% of our business is purchase mortgages. To do purchase mortgages, we knew it was not enough to just be cheaper, because Better could save consumers money on their mortgage versus the MBA [Mortgage Bankers Association] average, but we had to be faster and easier to use.
We’ve done that through products like One Day Mortgage, which are helpful to a consumer if they’re buying or shopping for a home because literally the same day that they enter into a purchase contract, they can get a commitment letter on their mortgage. We believe that the innovation, which we launched earlier this year, has yet to really play itself out in the mortgage industry. As we get widespread adoption of One Day Mortgage, we will be able to grow our purchase volumes dramatically, [much] in the same way that we did our refinance volumes.
Nunes: But how is Better building relationships with real estate agents, financial planners, and other professionals, who can help you get more customers and win in the purchase market?
Garg: The bulk of leads are actually generated from the internet. We’ve been able to consistently get that cost of acquisition down, such that the internet is now a viable source of customer acquisition for us. We’ve always been very good at direct customer acquisition and reaching consumers directly. We’ve always had the ability to get consumers from direct advertising.
But more recently, we have partnered with Realtors. As you know, we took our in-house BRE [Better Real Estate LLC.] operation, deprecated it, and launched a partnership operation with Realtors. We’re partnering with Realtors, we’re helping Realtors win new business and get new business by referring Better’s customers who don’t have a Realtor to those realtors, and then also helping realtors understand the power of One Day Mortgage and how it can speed up the mortgage process.
Nunes: What is the rationale behind the change at Better Real Estate, pivoting from in-house licensed professionals to a partner agent model?
Garg: We had to shut down our in-house division, and with that came the associated layoffs. When we had agents, we were not large enough to provide the consumer full coverage [geographically]. Honestly, our in-house platform was not nearly as efficient as some of the best agents in the country.
Our overall model has changed from being a one-stop-shop, where we do everything in-house, to being a one-stop-shop where we do the things in-house that we’re the best at. With One Day Mortgage, we are the best at delivering a fast response to a consumer along with an industry-leading price.
For things like homeowner’s insurance, title insurance, and realtors, we’ve now just become a marketplace. We match the consumer with a partner capable of delivering the best product to them. So, we ended [Better Real Estate] for the sake of efficiency and savings for the consumer. We partner with best-in-class agents, insurance companies and title companies.
Publicly, we’ve gone from over 11,000 people to about 1,000 people. Along that journey, we have become much more efficient.
Nunes: Better rolled out the “One Day Mortgage” in January. What is the share of clients getting a mortgage commitment letter within 24 hours? What are the challenges for the product?
Garg: I’ll be able to tell you that soon. All I can tell you is One Day Mortgage has been an amazing lever for our customers, and customer adoption has been off the charts.
The biggest challenge initially was reengineering the entire process of tasking out to the consumer, getting their income, getting their assets, and figuring out which of their debts they might be paying off. All of those things are processes built to begin in the old mortgage process to be weeks long because of the overall process of 60 days that it took to close a mortgage.
Now, if you say to a consumer, ‘I’m going to give you a commitment letter in one day,’ all of those sequential processes have to be parallel processes. [So this] can’t be done by humans. The machine has to do all of them.
The other thing we have to do is use technology to predict which customers can qualify for One Day Mortgage based on just the data that’s in their pre-approval. The first job is predicting which customers might be able to be qualified for this pathway, and the second step is then delivering the product within 24 hours.
Nunes: How has the company changed internally to offer One Day Mortgage?
Garg: We had to build an underwriting and processing operation that was 24/7, which is unheard of in the mortgage industry. We had to have the machine provide a lot of the steps —more of the steps than are traditionally done. Most mortgage companies use technology to collect data. We’re using technology to decide the data itself [that should be fed into it]. Our rules engine Tinman can]do all of that work of getting to a commitment letter and reduce the number of human touches involved. We have offices in New York, Charlotte, Irvine, and India.
Nunes: Last August, Better partnered with Palantir to create the proprietary loan platform you mentioned, Tinman Marketplace. What makes this technology competitive?
Garg: The Tinman platform fundamentally differs from the traditional mortgage industry platform. The traditional mortgage industry platforms —like Encompass or Empower Pro — are more built around capturing data and storing data that humans extract. So, a human underwriter might extract from looking at someone’s paystub, what their income is, and then type that into Empower Pro or Encompass, and then use that along with other things to calculate the consumer debt-to-income ratio or other things.
Tinman interacts directly with the consumer; captures the data directly from the consumer; puts it into the calculation engine; figures out what their debt-to-income ratio is going to be; figures out which investors that the debt-to-income ratio is compatible with; routes it into those investor engines; and gets the appropriate pricing. If there’s anything that needs to change, it then automatically displays that to the consumer. So, it’s a very different process than a human entering and taking out data and then coming back to the consumer.
Nunes: How do you review the data customers are providing for accuracy?
Garg: We’ve built one of the largest training data sets in the industry. Anytime we have a rule change that we put into the system, we run it against all the loans that we’ve done previously to see if that rule was applied today, whether it would be consistent or not. This gives us a lot of comfort versus actual human underwriters. Our error rates are substantially lower than that of the rest of the industry as a result. I can’t disclose the error rates.
Nunes: Does Better.com want to be more like an originator or a “white-label” platform, just like Blend?
Garg: Before the pandemic struck, we were on our way to doing that [white-label platform]. We had Ally Bank and American Express. With the pandemic, a lot of those efforts took a backseat. Now, you will see us leverage Tinman to be the mortgage platform of choice all the way to closing for a variety of banks. Now you hear a lot of the banks are getting out of the mortgage industry because it costs them too much to originate. We plan to offer the platform to many other financial institutions, mortgage lenders, and Realtors to use for mortgages as a service.
Nunes: How relevant will the white-label platform be compared to Better’s origination business?
Garg: If you think about a concept like Amazon, Amazon drives two-thirds of its sales from people who are leveraging the Amazon platform, third-party sellers, rather than running it through their own distribution warehouse. So, we aim for a similar mix.
Nunes: What is your strategy with origination channels?
Garg: Right now, we have direct and partnerships, like Ally and Amex, large-scale private white-label partners. We have not done correspondent or TPO [third-party mortgage origination] yet. We are considering it. We have had conversations [with brokers], but I can’t give more details. If the consumer desires a local expert and wants to be handheld every step of the way locally, then a broker might make a better option than what we traditionally deliver today. So we’re thinking about that.
Nunes: What does the path to profitability look like?
Garg: First, we are in the worst mortgage market ever, in a very bad housing market, with a low housing supply. A lot of the issues that we are having today are a result of the macroeconomic environment. That being said, we have to continue improving our conversion rate, which will lower our customer acquisition cost and improve our efficiency,resulting in lower processing costs.
Today, we are about 45 basis points cheaper than the industry average as of Q1. On a $400,000 mortgage, we’re about $1,800 a year cheaper. [We plan] to maintain price competitiveness. That means that we have less money to pay for all the things, and that requires us to be even more efficient in customer acquisition and the processes.
We always guaranteed to the consumer that we would either beat their rate or give them money. We’ve been involved in the price war. As many of the big players in the industry take a step back, that will improve profitability for everyone.
But I can’t say [when Better will be profitable].
Nunes: Would you consider M&A?
Garg: To date, we’ve done three acquisitions, primarily in the U.K. We would be interested in acquisitions here in the U.S. that help us expand our footprint or the range of products that we offer to customers.
Nunes: When the layoff through Zoom happened in December 2020, the board ordered you to take a month-long break from your role, and you went through a mentoring process. Where are you and Better in the journey to recover from that episode?
Garg: Better is a much more mature company, and I’m a much more mature and empathetic leader than I was. I’ve gone through extensive coaching and professional development. With respect to where Better is, the consumers love Better, and we continue to have amazing customer experience scores, and customers come to our doors every day. While there was no other way that we could have done what we did with respect to the layoffs over Zoom, we believe that we’ve learned a lot from it.
Nunes: Where is the mortgage market in the current cycle? Are we close to a market turn?
Garg: I don’t know when the next refi boom will happen. There was a story in Bloomberg about the economist of Goldman Sachs thinking that the first-rate cut is coming in June of 2024. But it’s completely unpredictable. We’ve never had an inflationary environment like what we’ve just had and coming out of it.
Now that inflation is going down, we’ll see what happens — whether we have a hard or soft landing. What is going to be exciting for Better is that One Day Mortgage works well for purchase. One Day Mortgage works extraordinarily well for refinance.
Nunes: What have you learned from the last refi boom?
Garg: We grew our headcount way too quickly. We underestimated how high the rate increases were going to be. This time, we’re going to do a much better job.
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Home sales will be weak in 2024 regardless of “soft landing”: Fannie Mae
Strong consumption data combined with slowing inflation points to a “soft landing” for the economy, Fannie Mae‘s Economic and Strategic Research (ESR) Group said Thursday. But the government sponsored enterprise still expects a recession next year.
“In order to achieve a soft landing, economic growth will have to slow to a rate that is below trend for some time in order for the unemployment rate to rise sufficiently to cause wage growth to slow consistent with a 2% inflation target over the long term, but not so slow that the economy falls into a contraction,” the ESR group said.
Retail sales rose 0.7% in July from the prior month, a faster pace than the previous month’s upwardly revised 0.3% gain. CPI rose 0.2% both in July and June from the previous month and 3.2% and 3% respectively from a year ago.
Wage growth also likely remains too high to be consistent with 2% inflation over the long run, which the ESR Group believes will keep monetary policy tight.
Fannie Mae maintains its baseline call for a recession to occur – forecasting it to begin in the first half of 2024. In its July ESR note, Fannie Mae projected a modest recession beginning in Q4 2023 or Q1 2024.
The group upgraded its 2023 real GDP growth outlook to 1.9% from 1.1% on a Q4/Q4 basis and revised its 2024 GDP growth prediction to a 0.2% decline from 0.1% previously, reflecting a recession hitting later than was initially anticipated.
Subdued home sales
Regardless of whether a soft landing is achieved over the coming year, Fannie Mae expects existing home sales to stay subdued and within a tight range.
“With an ongoing tight supply of existing homes for sale and the recent rise in the 30-year fixed-rate mortgage rate to around 7%, we expect home sales in 2023 to remain near the lowest annual level since 2009,” the group said.
Total existing home sales fell 2.2% in July from June to a seasonally adjusted annual rate of 4.07 million. Year-over-year, sales slumped 16.6% down from 4.88 million in July 2022, according to the National Association of Realtors.
“If a recession is avoided, then ongoing limited supply of homes for sale on the market combined with continued affordability constraints and the ongoing ‘lock-in’ effect, whereby existing owners do not want to give up their current low mortgage rates, is expected to lead to a low pace of sales,” according to the ESR group.
Rising mortgage rates will also exert more downward pressure on sales. However, given the already very low pace of sales, the majority of highly interest-rate-sensitive borrowers are already on the sidelines and current sales activity is being supported by less rate-sensitive buyers, Fannie Mae said.
In the case of a recession scenario, interest rates would likely pull back somewhat, lessening the lock-in effect thereby potentially boosting the number of homes available for sale.
However, in a recession, a weaker labor market, tighter credit, and lower consumer confidence would act as downward pressure on housing, Fannie Mae noted.
In contrast, new home sales and construction, while choppy in recent months, have generally been on an upswing.
Single-family housing starts jumped in July by 6.7% to a pace of 983,000 annualized units. This was 9.5% higher than a year prior, the first annual increase since April 2022.
However, based on permits being substantially lower at 930,000, Fannie Mae expects some pull-back in the near term, especially given the recent rise in mortgage rates.
Fanie Mae expects a modest pullback in construction due to a slowing economy, though a similar outcome may occur if instead a soft landing is accompanied by higher for longer mortgage rates leading to slower housing construction and sales.
“In fact, somewhat softer housing construction and sales may be needed to make a soft landing possible,” according to the ESR group.
Mortgage originations forecast little changed
The forecast for purchase origination volume in 2023 is largely unchanged at $1.3 trillion.
For 2024, the ESR group revised upward its forecast of purchase mortgage originations volumes by $25 billion to $1.5 trillion, consistent with upward revisions to the home sales forecast.
Refinance volumes are expected to be $261 billion in 2023 and $456 billion in 2024, representing downgrades of $4 billion and $9 billion, respectively, from the July projections.
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Mortgage rates continue to climb beyond 7%
Mortgage rate shot up again last week as the bond market continues to grapple with a growing economy in the run up to the next Federal Open Market Committee meeting.
Investors are concerned that the central bank will continue raising the funds rate, pushing borrowing costs even higher. For many, there is worry that the Fed may overtighten on the monetary front and lead to economic damage,” said George Ratiu, chief economist at Keeping Current Matters.
Freddie Mac‘s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 7.23% as of August 24, up from last week’s 7.09%. By contrast, the 30-year fixed-rate mortgage was at 5.55% a year ago at this time.
“This week, the 30-year fixed-rate mortgage reached its highest level since 2001 and indications of ongoing economic strength will likely continue to keep upward pressure on rates in the short-term,” said Sam Khater, Freddie Mac’s chief economist.
Other indices showed even higher mortgage rates.
HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 7.22% on Wednesday, compared to 7.18% the previous week. At Mortgage News Daily on Wednesday, the 30-year fixed rate for conventional loans was 7.36%, up 2 basis points from the previous week.
What does it mean for the housing market ?
Higher borrowing costs are part of today’s overall consumer experience: interest rates on credit cards, auto and personal loans, as well as mortgages, are higher. A strong economy still supports rising wages, allowing many households to mitigate the financial pressures.
However, persistently high mortgage rates pose a significant affordability challenge to buyers and sellers (not to mention the workers of a trillion dollar-plus industry). People adapt to the higher costs using different strategies, observed Ratiu. Some are leveraging high home equity levels, others downsize their budgets or ask their family for cash assistance. In July, 26% of existing homes sold to cash buyers while 7% of new homes sold to cash buyers.
For a majority of people, buying a home still means borrowing money. At today’s rate, the monthly cost to purchase a home totals about $2,400, not including property taxes and insurance, a 17% increase from a year ago.
Home sales have been tracking below last year’s levels and are also more than 20% below 2019 totals, noted Bright MLS Chief Economist Lisa Sturtevant. Higher mortgage rates probably signal “a further contraction in home sales activity,” she added.
“We could see monthly sales fall to 2010 or 2011 levels when the market was recovering from the free fall after the housing bubble.”
However, the big difference between the financial crisis of 2008 is that the current higher-rate environment is not sending home prices down, and other factors have kept inventory close to historic lows. Therefore, sales activity will probably continue to slow in the fall but home prices should decrease only modestly and not homogeneously across all markets.
The combination of high prices and high rates makes single family residential an unattractive investment option currently, said Charles Clinton, CEO at commercial real etate investment platform EquityMultiple.
“This is exacerbated for investors pursuing short term rental strategies, where Airbnb hosts have seen a drop in average revenue,” he added.
What to expect with the Fed ?
When the Fed halted its rate hikes last June, many investors were hopeful that the Central Bank was close to declaring victory. Forecasts were for mortgage rates to begin to decline, perhaps falling to 6% by the end of the year. Now, however, as inflation ticked up, the labor market is still strong and bond yields are rising amidst economic uncertainty, optimism starts to wane.
“Instead of talking about rates falling to 6% this year, the question is how much above 7% are we going to go?” said Sturtevant.
However, the MBA still expects mortgage rates to fall off recent highs later this year. If that were true, it could bring some buyers back into the market, MBA President and CEO Bob Broeksmit said in a statement.
Next week’s reading of the Personal Consumptions Expenditures Price Index will be another strong influence on the Fed’s decision in September.
Additionally, former Federal Reserve Bank of St. Louis President James Bullard told Bloomberg Television that a pickup in economic activity this summer could delay plans for the Fed to wrap up interest-rate increases.
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New home sales picked up significantly in July. Can it last?
After a slump in June, the sales pace of new homes picked up month over month in July, according to data published on Wednesday by the U.S. Census Bureau and the Department of Housing and Urban Development (HUD).
In July, the sales pace of new homes climbed 4.4% compared to June, reaching a seasonally adjusted annual rate of 714,000. On a year-over-year basis, new home sales were up 31.5%.
This aligns with mortgage application data for new builds, which showed demand up 35.5% year-over-year in July and up 0.2% from June.
Building activity continues to be buoyed by a strong and steady demand, but there could be a shift underway in the housing market, warns Bright MLS Chief Economist Lisa Sturtevant.
Two factors are at play here: high mortgage rates, which, currently around 7.5% are likely to price out many prospective homebuyers this fall, and inventory, which is beginning to tick up in many markets.
However, the rate of supply for new homes still surpasses that of existing homes.
“Although there is just 3.3 months of supply of existing homes, that level has been increasing for the past few months. For new homes, there is 7.3 months of supply,” detailed Sturtevant.
The seasonally‐adjusted estimate of new houses for sale at the end of July was 437,000. At the current sales pace this inventory represents 7.3 months of supply, which is a decline from the 7.4 months of supply recorded in June and 2.8 months below July 2022.
Regional breakdown
In the Midwest and West regions, transactions saw double-digit monthly gains. The pace of sales jumped 31.5% above the same month in 2022. In fact, all regions of the country posted double-digit improvements from a year ago. Southern metros saw a majority of newly built homes this year, as many people migrated towards the region, noted George Ratiu, chief economist at Keeping Current Matters. At the same time, the Northeast region also experienced a noticeable pickup in activity. Mid-sized markets that offer proximity to major employment centers and relative affordability saw strong demand.
Homebuilders are making new homes more affordable
As the sales pace picked up month over month, the median sales price of new homes also ticked up in July, climbing $21,300 to $436,700. It was up 4.8% from June, but down 8.7% from last July. Still, it was the largest monthly increase since September 2022. The average sales price was $513,000.
New home prices have been declining year-over-year for the past four months, smoothing the affordability crisis, noted Sturtevant.
In fact, in July 2023, 40% of new houses were sold for less than $400,000. A year earlier, 33% cost less than $400,000, remarked Holden Lewis, home expert at NerdWallet.
“Some home builders have edged prices down slightly, but builders also are increasingly offering concessions, builder financing, or upgrades to help entice buyers,” Sturtevant added.
While prices are marginally declining, economists also noticed that smaller homes were coming to market this year in response to shrinking affordability. According to Ratiu, that trend should continue for the balance of the year.
Can this strong builders’ activity last ?
In August, the homebuilder confidence index declined for the first time in 2023, signaling headwinds looming in the sector.
“In the near term, a lull in demand brought on by 7% mortgage rates could mean that builders will see less traffic and more empty model homes in the latter half of 2023,” said Sturtevant.
Doug Duncan, chief economist at Fannie Mae, said the new home sales report was in line with expectations. But mortgage rates are the X factor.
“Given that mortgage rates have again risen above 7 percent, we believe the risk to new home sales is to the downside. Of course, this may be partially offset as a rise in completed inventories may lead builders to offer more generous concessions to bolster demand.”
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Vishal Garg unveils Better’s new strategy as a publicly traded company
New York-based digital lender Better.com has shifted its strategy ahead of its initial public offering (IPO).
Following a merger with special purpose acquisition company (SPAC) Aurora Acquisition Corp, Better Home & Financing Co. is expected to begin trading on the Nasdaq Stock Exchange on Thursday under the ticker symbol “BETR.”
Better is partnering with other businesses to offer services such as homeowner’s insurance and to provide access to a network of real estate agents, rather than offering these products and services directly to borrowers. The change resulted in Better’s exit from its real estate business.
“Our overall model has changed from being a one-stop-shop, where we do everything in-house, to being a one-stop-shop where we do the things in-house that we’re the best at,” Vishal Garg, Better’s CEO, said in an interview. “For things like homeowner’s insurance, title insurance, and realtors, we’ve now just become a marketplace. We match the consumer to the product with a partner capable of delivering the best product to them.”
And what is Better.com best at?
According to Garg, the company has developed a one-day mortgage product that provides a commitment letter within 24 hours. It is possible, said Garg, because of Tinman, a platform that interacts directly with the customer — meanwhile, in other platforms in the market, a human extracts information from borrowers, he said.
Better wants to sell this platform to other companies, becoming a “mortgage-as-a-service” company or a white-label provider of mortgage tech, Garg said. When asked how relevant this business will be, Garg refers to Amazon, a company that drives two-thirds of its sales from third-party sellers. “We aim for a similar mix.”
It took Better two years to go public. The transaction will result in an infusion of up to $750 million from sponsors Novator Capital and SoftBank. The business combination closing, announced Wednesday, unlocks approximately $565 million of fresh capital, including a $528 million convertible note previously committed from affiliates of SoftBank and additional common equity from funds affiliated with NaMa Capital (formerly Novator Capital).
The company went from a $500 million profit and 11,000 employees in 2020 to only 950 employees by June 2023. It incurred an $89.9 million loss in the first quarter of 2023. During this period, Better faced the deterioration of the mortgage market due to surging rates, along with the fallout from bad press after Garg laid off employees via Zoom in December 2020.
Garg said the company has come a long way from that episode. “I’ve gone through extensive coaching and professional development,” he said. “Better is a much more mature company, and I’m a much more mature and empathetic leader than I was.”
Garg offered his views on the company’s IPO strategy in an interview with HousingWire at Better’s New York office.
This interview has been condensed and edited for clarity.
Flávia Nunes: Better took nearly two years to go public, with Aurora’s shareholders’ merger approval extended three times. What happened, from your standpoint?
Vishal Garg: I can’t comment on the process at the SEC. But all I can say is that it was worth it. In that time, the market, the industry and the consumer changed dramatically. We went from the lowest interest rates on record to the highest interest rates on record in the past 20 years, from great housing supply to the most constrained housing supply in many years. We’ve just worked hard to address all of these challenges head-on.
Nunes: The transaction will infuse the combined entity with $750 million in new capital. How will Better use these resources? And what role will SoftBank play?
Garg: The first thing is: we’re going to be very prudent because we’re still in a very bad macroeconomic climate for mortgages and housing in general. Secondly, we are going to continue to invest in our technology and drive products, like One Day Mortgage, that are innovative and groundbreaking and drive the adoption of those products across the industry.
[SoftBank] will be a significant shareholder—no seats on the board. Being public means I have to answer to a whole new set of shareholders, which we’re happy to welcome, and other than that, we will drive innovation and growth.
Nunes: How is Better prepared for the scrutiny of being a public company?
Garg: We’ve had a lot of scrutiny from external sources. We passed our first CFPB exam with really great results. We have been subject to multiple Fannie Mae audits, all with great results. We generally have viewed our ability to have a technology platform where the technology makes the decisions rather than people making the decisions, and technology creates tasks for the consumer rather than people creating paths for the consumer. That technology platform has helped us maintain best-in-class compliance and regulatory audits. We’ve made a substantial investment in those systems, and we continue to believe they’re going to help yield great results as we’re a public company.
Nunes: Better was a very efficient refi shop during the Covid years when rates were historically low. How can Better succeed in a purchase market?
Garg: It took us six years to do $100 billion of refinances and to build an industry leader in refinances. Over the past two years, we’ve had to pivot very hard so that 90% of our business is purchase mortgages. To do purchase mortgages, we knew it was not enough to just be cheaper, because Better could save consumers money on their mortgage versus the MBA [Mortgage Bankers Association] average, but we had to be faster and easier to use.
We’ve done that through products like One Day Mortgage, which are helpful to a consumer if they’re buying or shopping for a home because literally the same day that they enter into a purchase contract, they can get a commitment letter on their mortgage. We believe that the innovation, which we launched earlier this year, has yet to really play itself out in the mortgage industry. As we get widespread adoption of One Day Mortgage, we will be able to grow our purchase volumes dramatically, [much] in the same way that we did our refinance volumes.
Nunes: But how is Better building relationships with real estate agents, financial planners, and other professionals, who can help you get more customers and win in the purchase market?
Garg: The bulk of leads are actually generated from the internet. We’ve been able to consistently get that cost of acquisition down, such that the internet is now a viable source of customer acquisition for us. We’ve always been very good at direct customer acquisition and reaching consumers directly. We’ve always had the ability to get consumers from direct advertising.
But more recently, we have partnered with Realtors. As you know, we took our in-house BRE [Better Real Estate LLC.] operation, deprecated it, and launched a partnership operation with Realtors. We’re partnering with Realtors, we’re helping Realtors win new business and get new business by referring Better’s customers who don’t have a Realtor to those realtors, and then also helping realtors understand the power of One Day Mortgage and how it can speed up the mortgage process.
Nunes: What is the rationale behind the change at Better Real Estate, pivoting from in-house licensed professionals to a partner agent model?
Garg: We had to shut down our in-house division, and with that came the associated layoffs. When we had agents, we were not large enough to provide the consumer full coverage [geographically]. Honestly, our in-house platform was not nearly as efficient as some of the best agents in the country.
Our overall model has changed from being a one-stop-shop, where we do everything in-house, to being a one-stop-shop where we do the things in-house that we’re the best at. With One Day Mortgage, we are the best at delivering a fast response to a consumer along with an industry-leading price.
For things like homeowner’s insurance, title insurance, and realtors, we’ve now just become a marketplace. We match the consumer with a partner capable of delivering the best product to them. So, we ended [Better Real Estate] for the sake of efficiency and savings for the consumer. We partner with best-in-class agents, insurance companies and title companies.
Publicly, we’ve gone from over 11,000 people to about 1,000 people. Along that journey, we have become much more efficient.
Nunes: Better rolled out the “One Day Mortgage” in January. What is the share of clients getting a mortgage commitment letter within 24 hours? What are the challenges for the product?
Garg: I’ll be able to tell you that soon. All I can tell you is One Day Mortgage has been an amazing lever for our customers, and customer adoption has been off the charts.
The biggest challenge initially was reengineering the entire process of tasking out to the consumer, getting their income, getting their assets, and figuring out which of their debts they might be paying off. All of those things are processes built to begin in the old mortgage process to be weeks long because of the overall process of 60 days that it took to close a mortgage.
Now, if you say to a consumer, ‘I’m going to give you a commitment letter in one day,’ all of those sequential processes have to be parallel processes. [So this] can’t be done by humans. The machine has to do all of them.
The other thing we have to do is use technology to predict which customers can qualify for One Day Mortgage based on just the data that’s in their pre-approval. The first job is predicting which customers might be able to be qualified for this pathway, and the second step is then delivering the product within 24 hours.
Nunes: How has the company changed internally to offer One Day Mortgage?
Garg: We had to build an underwriting and processing operation that was 24/7, which is unheard of in the mortgage industry. We had to have the machine provide a lot of the steps —more of the steps than are traditionally done. Most mortgage companies use technology to collect data. We’re using technology to decide the data itself [that should be fed into it]. Our rules engine Tinman can]do all of that work of getting to a commitment letter and reduce the number of human touches involved. We have offices in New York, Charlotte, Irvine, and India.
Nunes: Last August, Better partnered with Palantir to create the proprietary loan platform you mentioned, Tinman Marketplace. What makes this technology competitive?
Garg: The Tinman platform fundamentally differs from the traditional mortgage industry platform. The traditional mortgage industry platforms —like Encompass or Empower Pro — are more built around capturing data and storing data that humans extract. So, a human underwriter might extract from looking at someone’s paystub, what their income is, and then type that into Empower Pro or Encompass, and then use that along with other things to calculate the consumer debt-to-income ratio or other things.
Tinman interacts directly with the consumer; captures the data directly from the consumer; puts it into the calculation engine; figures out what their debt-to-income ratio is going to be; figures out which investors that the debt-to-income ratio is compatible with; routes it into those investor engines; and gets the appropriate pricing. If there’s anything that needs to change, it then automatically displays that to the consumer. So, it’s a very different process than a human entering and taking out data and then coming back to the consumer.
Nunes: How do you review the data customers are providing for accuracy?
Garg: We’ve built one of the largest training data sets in the industry. Anytime we have a rule change that we put into the system, we run it against all the loans that we’ve done previously to see if that rule was applied today, whether it would be consistent or not. This gives us a lot of comfort versus actual human underwriters. Our error rates are substantially lower than that of the rest of the industry as a result. I can’t disclose the error rates.
Nunes: Does Better.com want to be more like an originator or a “white-label” platform, just like Blend?
Garg: Before the pandemic struck, we were on our way to doing that [white-label platform]. We had Ally Bank and American Express. With the pandemic, a lot of those efforts took a backseat. Now, you will see us leverage Tinman to be the mortgage platform of choice all the way to closing for a variety of banks. Now you hear a lot of the banks are getting out of the mortgage industry because it costs them too much to originate. We plan to offer the platform to many other financial institutions, mortgage lenders, and Realtors to use for mortgages as a service.
Nunes: How relevant will the white-label platform be compared to Better’s origination business?
Garg: If you think about a concept like Amazon, Amazon drives two-thirds of its sales from people who are leveraging the Amazon platform, third-party sellers, rather than running it through their own distribution warehouse. So, we aim for a similar mix.
Nunes: What is your strategy with origination channels?
Garg: Right now, we have direct and partnerships, like Ally and Amex, large-scale private white-label partners. We have not done correspondent or TPO [third-party mortgage origination] yet. We are considering it. We have had conversations [with brokers], but I can’t give more details. If the consumer desires a local expert and wants to be handheld every step of the way locally, then a broker might make a better option than what we traditionally deliver today. So we’re thinking about that.
Nunes: What does the path to profitability look like?
Garg: First, we are in the worst mortgage market ever, in a very bad housing market, with a low housing supply. A lot of the issues that we are having today are a result of the macroeconomic environment. That being said, we have to continue improving our conversion rate, which will lower our customer acquisition cost and improve our efficiency,resulting in lower processing costs.
Today, we are about 45 basis points cheaper than the industry average as of Q1. On a $400,000 mortgage, we’re about $1,800 a year cheaper. [We plan] to maintain price competitiveness. That means that we have less money to pay for all the things, and that requires us to be even more efficient in customer acquisition and the processes.
We always guaranteed to the consumer that we would either beat their rate or give them money. We’ve been involved in the price war. As many of the big players in the industry take a step back, that will improve profitability for everyone.
But I can’t say [when Better will be profitable].
Nunes: Would you consider M&A?
Garg: To date, we’ve done three acquisitions, primarily in the U.K. We would be interested in acquisitions here in the U.S. that help us expand our footprint or the range of products that we offer to customers.
Nunes: When the layoff through Zoom happened in December 2020, the board ordered you to take a month-long break from your role, and you went through a mentoring process. Where are you and Better in the journey to recover from that episode?
Garg: Better is a much more mature company, and I’m a much more mature and empathetic leader than I was. I’ve gone through extensive coaching and professional development. With respect to where Better is, the consumers love Better, and we continue to have amazing customer experience scores, and customers come to our doors every day. While there was no other way that we could have done what we did with respect to the layoffs over Zoom, we believe that we’ve learned a lot from it.
Nunes: Where is the mortgage market in the current cycle? Are we close to a market turn?
Garg: I don’t know when the next refi boom will happen. There was a story in Bloomberg about the economist of Goldman Sachs thinking that the first-rate cut is coming in June of 2024. But it’s completely unpredictable. We’ve never had an inflationary environment like what we’ve just had and coming out of it.
Now that inflation is going down, we’ll see what happens — whether we have a hard or soft landing. What is going to be exciting for Better is that One Day Mortgage works well for purchase. One Day Mortgage works extraordinarily well for refinance.
Nunes: What have you learned from the last refi boom?
Garg: We grew our headcount way too quickly. We underestimated how high the rate increases were going to be. This time, we’re going to do a much better job.
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Home sales drop in July as high interest rates spook buyers
The housing market continues to cool amid high mortgage rates, low inventory and rising property insurance rates.
The National Association of Realtors (NAR) suggested a 2.2% month-over-month drop from June, a seasonally adjusted annual rate of 4.07 million, according to its latest report.
Despite a sharp drop in home sales compared to the year-earlier period, the median existing-home sales price rose 1.9% from one year ago to $406,700. It was the fourth time the monthly median sales price exceeded $400,000, according to the NAR.
While all regions saw sales activity decline, the Northeast region saw the biggest drop in home sales, with existing-homes sales down 5.9% month over month and 23.8% compared to July 2022. The median price for a home was $467,500, up 5.5% a year ago. By contrast, the West saw existing-home sales increase 2.7% since June, to an annual rate of 770,000 in July, down 12.5% from the prior year. Median home prices there were roughly unchanged from the same period in 2022.
Elevated mortgage rates and low inventory
As of August 17, mortgage rates surpassed 7% as U.S. bond yields hit their highest level since 2008. Average mortgage rates rose by about a half percentage point in May and June, pricing some buyers out and limiting closed sales in July.
With supply remaining low — with less than three months of supply nationally — some buyers may continue to rent, especially in markets where rents are falling, said Lisa Sturtevant, chief economist at Bright MLS.
Despite market pressures, however, Zillow Senior Economist Jeff Tucker suggested that price trends are “swinging the pendulum of negotiating power back in favor of those buyers who remain in the hunt.”
Others say it will take time for home prices to drop.
Realtor.com Chief Economist Danielle Hale said consumer incomes will need to catch up for the market to recover next year.
“Fortunately, inflation is ebbing, and a further decline in July asking rents will likely help keep that trend on track,” he added.
Homes are sitting on the market somewhat longer. Properties typically remained on the market for 20 days in July, up from 18 days in June and 14 days in July 2022, according to the NAR.
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Home Prices Reached Record Highs Again—Where Are They Growing the Most?
It looks like the housing market is back to breaking records again. According to Zillow, the typical U.S. home value just hit its highest point in July, clocking in at just under $350,000. That’s up 1.4% compared to a year prior and marks the first annual uptick in 16 months.
It’s surprising, given that mortgage rates are currently averaging over 7%, according to Freddie Mac, but also not, considering just how low housing supply continues to be.
In fact, new listings were down 26% in July year over year and 28% in June. Only 336,000 homes went on the market last month—a number more fitting of “a frosty January,” as Zillow economist Jeff Tucker puts it.
Total active inventory was down, too—15% for the year and a whopping 44% compared to pre-pandemic days in July 2019. And according to Tucker, that’s likely the best supply we’re going to see all year.
“July will likely mark the high point for inventory in 2023, if it follows seasonal trends seen in 2018 and 2019,” Tucker says. “At best—for buyers—it could inch slightly higher in August, like in 2021 and 2022, but either way, buyers should not expect to see many more homes available for sale on Zillow at any time this year than they do now.”
Where Home Values Have Jumped the Most (and Least)
Of course, those are only national numbers. If you look at market-level data, some of the changes are even more significant.
All in all, the Midwest and Northeast regions saw the biggest growth in home values from July 2022 to July 2023. In Hartford, Connecticut, for example, home values have increased 5.67% compared to last year. Cincinnati, Milwaukee, Wisconsin, Miami, Philadelphia, and Richmond, Virginia have all seen jumps of 5% or more, too.
That said, the South and West appear to have experienced the biggest drops. Austin, Texas, notched the biggest dip in home values, with a jaw-dropping 10.42% downslide year over year. Phoenix’s values dipped 6.11%, while Las Vegas saw a 5.99% fall. Other cities with notable drops included San Francisco, Dallas, and Sacramento, California.
The Tides May Be Turning
The numbers may have broken records this time around, but it’s unlikely to happen again this year. In fact, the data is already starting to show signs of the typical seasonal slowdown.
For one, sales are low. Pending sales—which mean a home has gone under contract — were down 6.5% in July compared to June. The typical time on the market was 12 days for the month—up from 11 days in June and 10 days in April and May. In addition, the share of homes with a price cut also increased.
It’s not great news for sellers, but it’s certainly good for those considering buying a home, indicating the housing market is seeing less competition, more time to shop, and hopefully lower prices down the line.
As Tucker puts it: “The gradual tapering of sales volume and sales speed together indicate that negotiating power has likely begun to swing in buyers’ favor, and those who remain in the hunt should expect the pendulum to swing more in their favor as the summer wears on.”
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Nearly 40 housing tech firms make the 2023 Inc. 5000 list
The past year hasn’t been particularly good for tech or housing. As a consequence, the number of real estate, mortgage and general housing tech firms to make the annual Inc. Magazine list of the 5,000 fastest growing private companies in America declined in 2023. In all, 37 companies made the cut this year, down from 53 a year ago.
The self-reported list ranks U.S. based firms on percentage revenue growth from 2019 to 2022. To qualify, companies must have been founded and generating revenue by March 31, 2019. They must be U.S.-based, privately held, for-profit, and independent–not subsidiaries or divisions of other companies–as of December 31, 2029. The minimum revenues required are $100,000 for 2019 and $2 million for 2022.
The fastest-growing housing tech firm in 2023 was OptiFunder, which claims to produce the mortgage industry’s only optimization software built to systematically decision warehouse funding allocations and automate the complicated process of funding through loan sale. Based in Missouri, OptiFunder had a three-year growth rate of 4,767%. It was ranked the 98th-fastest growing private company in America in 2023.
Transactly, a real estate transaction platform that provides automation, integrations and tech-enabled services that significantly reduce process time, placed 126th in 2023. Another Missouri-based company, Transactly had a three-year growth rate of 3,852%.
Also appearing in the top 200 list was CertifID, an Austin, Texas-based company that makes software to cut down on wire fraud in the real estate industry. The company, led by Tyler Adams, raised $12.5 million in a Series A funding round in 2022.
Interestingly, none of the top three companies on the 2023 list made the cut in 2022. But several well-established housing tech companies made consecutive appearances in this year’s Inc. 5000 edition.
Homelight, a platform for homebuyers and sellers, was No. 403 in this year’s ranking with a 1,444% three-year growth rate. The company was ranked 351 last year.
LoanStar Technologies, which connects lenders with borrowers who are traditionally underbanked or unbanked, also made the list again. The company was No. 469 in this year’s ranking, up from 958 last year. Its three-year growth rate was 1,241%.
Mortgage origination platform Maxwell, which was in the top 200 last year and a HW Tech 100 award winner in 2021, was ranked No. 658 in the 2023 Inc. 5000 list.
Other established names to make the Inc. 5000 list in 2023 include home equity investment firm Point; co-living platform PadSplit; one-time unicorn Orchard, which operates a digital home buying and selling marketplace and was a 2023 HW Tech 100 award winner; single-family investment property marketplace Roofstock; RentSpree, a rental software platform that connects real estate agents, owners and renters; Curbio, one of leading tech-enabled pay-at-closing home improvement solutions; EasyKnock, a real estate firm that offers homeowners a way to access their home’s equity using a sale-leaseback program; and New Western, a marketplace that serves over 150,000 real estate investors across the country.
Two companies on the list have been on the Inc. 5000 list an impressive five times: Total Expert, which offers CRM and data-driven customer engagement solutions, turning customer insights into actions to increase loyalty and drive growth; and FirstClose, a tech solution provider for HELOC and home equity lenders.
Here’s the complete list of tech firms:
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Additionally, two appraisal firms were named to the Inc. 5000 list in 2023: Kairos Appraisal Services, a national appraisal management company implementing technology to expedite the appraisal process through data, geocoding, scheduling and interactive communication tools. Kairos was No. 1,283 on the Inc. 5000 list with a three-year growth rate of 457%. Miami-based Marketwise Valuation Services, another AMC, was No. 2,629 overall with a three-year growth rate of 205%.
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Sarah Wheeler compiled the list.
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Housing inventory is at its highest point all year
Mortgage rates only kept climbing in the last week. Buyers in this real estate market notice these affordability changes, and so we can see in the data fewer home purchase offers, slightly climbing unsold inventory, and slightly more price reductions for the homes that are on the market. This is the same pattern as we talked about last week. The first half of the year had surprisingly resilient sales, but that is slowing again. Mortgage rates are at their highest level in 20 years because the economy just keeps reporting strong data. And every uptick in mortgage rates leads to a downtick in the number of home buyers in the market.
Rising rates make more inventory. So how much inventory will we add this fall? Well as of now, these slowing signals are subtle. This housing market is much different from last year at this time. Last year, rates climbed dramatically and so did inventory. Now rates are inching up, and so is inventory. If mortgage rates jump to say 8%, that’s when we’d see big changes in inventory and home prices. Keep watching these numbers here.
Inventory
Inventory of unsold homes on the market is ticking up. It now doesn’t look like next week will be the peak of inventory for the season. It looks like inventory will keep climbing into September. There are now 495,000 single-family homes unsold active on the market. Inventory rose by just under 1% again this week.
This inventory climb at the end of August is not unusual. It’s not a rapid rise, but it also doesn’t appear to be leveling off. Inventory often peaks the last week of August, the fall has fewer sellers and it keeps shrinking through the holidays. Now because mortgage rates have been notably climbing for the last several weeks, we also expect inventory to keep climbing into September as fewer buyers make offers on the existing inventory.
There are 10% fewer homes on the market now than last year at this time. Last year inventory spiked from March through July with spiking mortgage rates. Then it leveled off a bit. So this week inventory lost ground on last year. The inventory gain week to week was more than it was last year at this time. That’s the first time this happened in many months. Last week there were 10.5% fewer homes on the market, this week that’s only 10% fewer. This is one of the subtle signals that higher mortgage rates have slowed this year’s home buyers again.
To understand the future of housing inventory in this country remember the Altos Rule. The Altos rule says that the more available inventory of homes to buy is the result of higher mortgage rates. If rates climb, so does inventory. If rates fall, inventory will fall.
There are 365,000 single-family homes in contract now. That’s up a fraction from last week and 10% fewer than last year at this time. New pending sales of single-family homes going into contract this week came in at 63,000 vs 70,000 last year. In this chart, the height of each bar is the total number of homes in contract that week. The light red portion of the bar represents those newly in contract. The sales rate has slowed since rates did their latest jump of over 7%. In fact, I’d expect the NAR headlines to keep falling on the pending sales measure as well. We could see the sales rate tick down to four million annually on their seasonally adjusted annual rate in the next couple of months.
I’m looking forward to the time when the real-time data starts to grow and the sales rates look more bullish than the headlines, but that’s not happening yet. As we watch the new pending home sales data each week, the next trend we’ll be looking for is how quickly the new pending sales rate shrinks this autumn. See in the chart how the light red portion of each bar shrank so quickly last fall. We had some recovery in the first half of this year. We started the year with 30% fewer homes in contract.
That gap narrowed to just 10% fewer. But we’ve been unable to get closer than that. The market was accelerating this spring, but it is not doing so now. I suppose these negative swings are the other side of the coin for what I’ve called a soft landing in housing. Housing demand cratered, but home prices didn’t crash. Home prices declined in July and September last year, and recovered a bit in the first half of this year. Now demand is softening again and that will keep home prices from appreciating much from here.
American homebuyers are very sensitive to mortgage interest rates. And while higher mortgage rates have hurt affordability for so many, it’s really the change in rates that spur changes in demand. Early this year we had more home buyers than sellers, even with rates in the six-percent range. When rates jump to 7.2% that’s when we see the demand data react accordingly. So it’s not the absolute level, it’s the change in rates that we should be paying attention to.
Price
And we can see it in the home price reduction data too. Price reductions are about to inch above 2018 and 2019 again. 35.5% of the homes on the market have had price reductions. Price cuts always tick up late in the summer, and this year’s seasonal increase is speeding up just a bit with the recent higher mortgage rates. Each week we have slightly fewer buyers, making slightly fewer offers, so slightly more sellers cut their asking prices.
Watching this price reduction curve has been so valuable lately. So insightful. In this chart, each line is a year. You can see last year’s light red line started climbing in March. That told us the pandemic frenzy was over. In September last year, price reductions spiked again with mortgage rates. This year, the dark red curve showed us how rapidly the market was recovering. That told us there was a floor on how far home prices could fall. It really highlights how effective this stat is for understanding the future of home sales prices. Right now 35.5% of the homes on the market have had a price cut.
This is a totally normal level. It is rising, not rising fast, it’s not a strong signal, but it is rising faster than in recent years for August. That tells us that sellers are seeing fewer buyers than they anticipated. This buyer slowdown means any home price appreciation we’ve had year over year is weakening and may be in jeopardy.
Tracking price reductions on the listed homes on the market is really insightful at the local level too. Right now we can see for example that Austin Texas has the most price reductions of any big market and that seems to be climbing. You can use the Altos data to understand local differences which are so important right now.
The median price of single-family homes right now across the country is $449,900. That’s basically unchanged from last week and from last year. Prices tend to cluster around the big round numbers, in this case, $450,000, with a big group priced just under that for search purposes. So home prices are at this $450,000 plateau for a while. That’s the dark red line on this chart. See at the far right end the little plateau. Home sales prices in the future are falling because we can see the ask prices are very stable. Much more stable than they were last year at this time.
The median price of the newly listed cohort this week is $399,000 again that’s also unchanged from last week. That’s the light red line on this chart. The price of the newly listed homes is 1.3% higher than last year at this time. This is when homes go on the market, the sellers and the listing agents know where the demand is, where the buyers are and they price accordingly. So the price of the new listings is an excellent leading indicator of where home sales prices will be out in the future.
We’re in this tricky space looking at year over year home price changes now. Last year the market was slowing so quickly that the comparisons now to last year start to look easier. Prices were falling last year with frozen demand. This year the market is slowing gradually. You can expect that the annual home price appreciation would continue to improve even though the momentum is a bit negative right now. It looks like we’ll end 2023 with home prices up a few percent over where 2022 ended.
And when we look at the price trends for the homes going into contract, we can see the earliest proxy for the sales which will actually close and get recorded in September and October. You can see that the last several weeks have put a little downward pressure on what home buyers are willing to pay. See how the dark red line was above last year for a few months and then in recent weeks, the dark red line is compressing closer to the light red line. That’s sales prices giving up their annual gains with higher mortgage rates.
The median price of the homes that went into contract this week is $378,000. That’s up a tick from last week and over last year, but you can see in the chart the dark red line is drifting lower. Now, the sales comparison gets a lot easier in September when we had that big rate spike in 2022. So assuming we don’t have another mortgage rate spike, the annual price appreciation will continue to improve. On the other hand, if we see 8% mortgage rates, there’s no reason to believe that home prices can’t gap down again like they did last year.
Again this is a very clear reaction to the latest surge in mortgage rates. We have fewer buyers and those buyers are willing to pay just a little bit less. The opposite is true too. If rates were to drift lower, you can expect more buyers, less inventory, fewer price cuts and higher prices in data measures like this one the price of the newly pending sales each week. The data is very clear right now.
See you soon.
Mike Simonsen is the president of Altos Research.
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Tom Ferry, “Smart agents stopped complaining about the market”
You mindset impacts your real estate success and successful agents are looking toward the future, no wallowing in the uncertain market. Before you know it, 2024 will be upon us. The time is now to understand the market and some of the trends. We spoke with Tom Ferry, the Founder of Tom Ferry International, before his event in Dallas. Ferry sheds light on the top real estate issues impacting professionals today and gives a preview of some trends covered at the event.
The real estate industry is at a pivotal juncture. With challenges come opportunities. As Tom highlights, the key lies in understanding the trends, adapting to them, and leveraging technology, especially AI, to stay ahead. As the landscape evolves, professionals equipped with the right insights and tools will undoubtedly thrive.
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Higher mortgage rates haven’t increased inventory
Last week, mortgage rates hit a 21st-century high, the 10-year yield closed slightly higher than my peak forecast for 2023, and housing inventory growth was still slow. Purchase application data didn’t budge much on the week-to-week data.
Weekly housing inventory
Mortgage rates have been near or above 7% for the last few months, and active listings growth has been slow during this tenure. I had anticipated active listings growth to be between 11,000 to 17,000 per week with rates this high, and it hasn’t happened. I will keep a close eye to see if the country can achieve some decent weekly active listings data before the seasonal decline in inventory. Last year, the seasonal decline took longer than usual, but 2022 was an abnormal year with mortgage rates.
As noted above, active listings have been negative year over year for some time now, and we are heading toward a seasonal decline. Will higher rates extend the inventory season, or are we going into the traditional seasonal decline?
The new listing data has been trending at the lowest levels ever for over 12 months now. Hopefully, we will have found a bottom in this data line before the year ends. This data line is very seasonal, and we’ve already started the seasonal decline. As long as we see an orderly drop toward the end of the year, I will be happy. The last thing we want to see is more sellers calling it quits faster than the current trend.
Here’s how new listings this week compare to the same week in past years:
Mortgage rates and bond yields
It was a crazy week with mortgage rates as we hit a 21st-century high last week, with mortgage rates hitting 7.37%. To understand how I look at mortgage rates, the Fed, and the 10-year yield, I wrote this article last week to give a more detailed view. This topic was so “en vogue” this last week that CNBC asked me to open their Squawk Box show Friday morning to go over the issue. Here is the video clip of that interview.
With all that’s happening in the market, what should we focus on this week? For me, it’s straightforward — to see if we could break above 4.34% on the 10-year yield, which was the intraday high last year. The 10-year yield didn’t even touch 4.34% last week, and we closed the week at 4.25%.
Purchase application data
Purchase application data was flat last week, making the count year to date at 14 positive and 16 negative prints and 1 flat week. If we start from Nov. 9, 2022, it’s been 21 positive prints versus 16 negative prints and one flat week. While home sales aren’t collapsing like they were last year, they’re not growing with mortgage rates this high. Purchase apps are forward-looking for 30-90 days, which means home sales will be stuck near 23-year lows for the rest of the year.
The week ahead: Home sales and the fed
Next week, we have existing and new home sales reports. These two reports will show one big difference in 2023 compared to last year, new home sales are growing yearly while existing home sales still show negative year-over-year prints. This trend should continue this week.
As we head toward the end of the year, we have to remember that last year at this time, home sales were collapsing. So, the year-over-year declines will be less for existing home sales, and new home sales will show solid growth.
On August 25, we have the Federal Reserve’s meeting in Jackson Hole, which is very interesting. At this point of the cycle, higher rates aren’t something they want to see as they have stated they believe they’re in restrictive policy now. I will be curious to hear if Jay Powell admits that higher rates would not be something the Federal Reserve wants to see now.
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