We are coming off a tumultuous two years of growth in the U.S. housing market. And now we are facing a tumultuous year of mortgage market normalization. So it’s true to say that turmoil and mortgage outlooks are strange bedfellows, but it’s true. Interest rates are rising, affordability is a challenge, and geopolitical conflicts impact global supply markets. 

It’s only natural that market players might be skittish over what direction housing will trend. In the coming months, you’ll read headlines on a housing “bubble” or maybe even a looming “crash,” but cooler heads can still prevail. That’s why knowing the signs and interpreting them can provide invaluable direction for your clients and your business.

What’s critical is that you know what is moving the market. Runaway headlines that predict housing doom shouldn’t be what dictates your business or your client’s next move. After all, the media would be remiss not to be apprehensive in the current market environment.

Behind those negative headlines is the hot housing market that has contributed to some all-time high housing prices across the U.S. Throw in rising rates and you get is ensuing panic. How can high prices be sustained when a buyer’s buying power is stretched so thin?

Recent bias is driving negative housing headlines

First, it helps to understand why press headlines and your clients might quickly interpret today’s housing trends as fatal. Recency bias is a psychological phenomenon where you give more importance to recent events than taking in the bigger picture, and it’s the main culprit as to why so many people are executing a housing crash.

The housing market has only experienced a crash once in 70 years! That’s a fantastic track record that should speak to the resilience of housing.

Here’s the problem, what we all remember is the housing crash of 2008 to 2009. Because of its recency, that event is what resonates with people today. You don’t think that for the majority of the housing industry, housing has stood the test of economic trials. Here’s how recency bias works in housing — because we experienced a crash in the not-so-distant past and it was brutal, that’s what we remember. We can convince ourselves that it will happen again despite history telling us that it likely won’t.

How data can help you interpret trends

Here’s where you, the real estate professional, can set yourself apart from the negative headlines driving uncertainty in the market today. Knowing where we are standing in terms of the housing industry and the trends that will prevent an imminent crash can be determined through data!

Recently, mortgage rates have been a primary driver of the negative headlines that serve to incite panic over an imminent housing crash. The narrative is that mortgage rates are now at a three-year high, housing affordability will go down, people might panic, and people will buy fewer homes. There will be less demand for homes and that would be one of the big reasons there might be a housing crash.

No document has ever correlated rising interest rates with falling house prices.

In reality, mortgage rates have little correlation to home prices. The data shows us that rates have had no impact on prices in the last 40 years. Historical data shows that house prices have continuously gone up irrespective of where interest rates are; that is because mortgage rates are cyclical, they go up and they go down. Surprisingly home prices are not; they continue to rise.

Imminent wave of foreclosures?

Another culprit behind the negative housing headlines is the so-called imminent wave of foreclosures that will come as the number of people in COVID-19 forbearance exits. In 2006, a flood of foreclosures flooding the market did trigger a dramatic drop in home prices. Today the reality is vastly different.

In 2021, the record increase in home prices helped homeowners build equity to roughly $2.1 trillion, the most significant annual increase in equity. Data shows homebuyers since 1954 built equity for decades; those who did not build equity purchased between 2003 and 2007. That means that in the last 70 years, only for four years, people who had purchased a home lost equity, and it took them about six or seven years to recover. Which other asset class has the same kind of history?

Another misconception is that people believe that equity builds only for those without mortgages. That is not true. You can build equity in your home so long as what you owe is worth less than what your asset is worth. History has taught us that for the better part of the U.S. housing market, home prices keep building, and the data shows us that at this time, less than 2% of U.S. households are underwater.

When talking to your customers, two critical data points highlight why a crash isn’t imminent.

A data point that explains the resiliency of the housing market: the number of households forming vs. the number of homes constructed. Data shows that before 2013 fewer households were forming and more construction was happening, so we had a surplus of homes.

Since then, homebuilders have been so terrified that one of these days, demand will go down that they have constantly looked to keep their construction low, which Covid only worsened because of supply chain issues.

In 2021, we had a shortfall of about 5.1 million homes in the U.S. — this is the gap between how much we need and how much we are building. From 2015 to 2021, average household formation was about 1.5 million and 889,000 homes were built. Even if the building pace were to pick up by two times, it would take seven years to close the existing gap.

Start building your business for the future of housing

There’s a seismic shift happening in U.S. housing and it will reshape how we conduct business. There will be 7 million new homeowners in the next decade, a nearly 9% increase from the last decade. That’s great news!

Even more startling is that 100% of new homeownership growth will come from people of color. The number of white homeowners will decline by 1.8 million. One of the most significant demographic shifts that has happened under our nose was that we saw an increase in single, female household formations.

In 1981, 11% of all homebuyers were single females, which was pretty significant. Today, single females make up 19% – that is nearly double-digit growth. The rise has been pretty substantial. And that will continue to grow given that one of the final battlegrounds that have kept single women from forming households has been the wage disparity – what the males earn vs. females. Pew research shows that females now make as much as males in 22 of the biggest metros.

These changes are a significant shift for the housing industry because, historically, when we think about homeownership, the old white male is the image that comes to mind. How do we prepare for that shift?

One straightforward thing is to have a team that looks like the client community. At InstaMortgage, 70% of our people are people of color 50% are female. It gets displayed in the kind of loans we do because over 60% of our loans are to minorities. Making changes is not just good for the community; it’s good for you as a business owner.

The following 20 years will be driven by single, younger females and people of color. This demographic of consumers has grown up in Amazon’s prime days; they expect predictability in the homebuying process. The ability to provide predictability and transparency is a feature that will set you, the mortgage industry and everyone else apart from the rest.  

Shashank Shekhar is founder and CEO of InstaMortgage.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Shashank Shekhar at at Shashank@instamortgage.com

To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com

The post Opinion: Understanding trends is key to predicting the next housing shift appeared first on HousingWire.

Source link

From the White House and Congress to multiple federal agencies, one of the top concerns is housing affordability. Consumers are worried too. About half of U.S. adults (49%) say the availability of affordable housing is a major problem where they live, up 10 percentage points from 2018. The same 2021 Pew survey, 70% of Americans said young adults today have a harder time buying a home than their parents’ generation did.

While it’s getting more expensive to buy a home, it’s also getting pricier to originate one also. According to the Mortgage Bankers Association (MBA), total loan production expenses increased to an all-time high of $9,470 per loan in the fourth quarter of 2021. This was up from $9,140 per loan in the third quarter as the market transitioned from a rate-term refinancing market to a purchase and cash-out refinancing market.

With the current cost of origination, combined with higher interest rates and low housing inventory on the horizon, the MBA reports that 2022 is likely to see about a 30% decline in overall mortgage originations, as compared to 2021.

With revenue tightening and volume slowing, it is becoming increasingly important for companies to adjust costs. As a result, lenders and title companies are seeking ways to invest and implement solutions that will further streamline operations, grow market share, remain competitive, and improve borrower experience while providing increased ROI.

One avenue to reduce cost and streamline the closing process is to offer digital closings. A recent Marketwise eClose ROI study found that lenders can save nearly $450 and settlement agents up to about $100 per loan due to time eliminated, improvements in transactional quality, and costs associated with printing and mailing documents. Lenders and title agents also reported they can close more loans faster with the same or fewer people, and improve overall loan quality by reducing critical errors, avoiding missed signatures and unnecessary rework. Full e-closed loans also reduce funding time during post-closing to the secondary market and results in an improved, measurable overall return on investment, according to the study. A 2021 digital closing survey by the American Land Title Association (ALTA), found 52% reported closing times decreased utilizing RON due to the number of documents signed ahead of time, while 43% reported cost savings.

“Consumer expectations have shifted to digital-first, and that’s an incredible opportunity for the lender and title industries to be at the forefront of both what consumers want and what is also most financially and operationally efficient,” said Terri Davis, GM of Real Estate at Notarize. “eClose is the final frontier of real estate, and we’re seeing the incredible ROI, both in the numbers and in consumer feedback, of those who fully embrace eClosing mortgages with online notarization.”

To help drive adoption of digital closings, ALTA partnered with the Mortgage Industry Standards Maintenance Organization (MISMO) to be the sole provider of title and settlement agent data for the MISMO e-Eligibility Exchange, powered by Snapdocs. The e-Eligibility Exchange serves as a central source of information on the criteria that impact digital closings. The data will be provided to MISMO under a contributor agreement with the ALTA Title & Settlement Agent Registry (ALTA Registry), a national database of title and settlement agents.

The MISMO e-Eligibility Exchange features information on trading partner requirements, e-notarization regulations, county recording requirements, settlement agent readiness and title underwriter restrictions. The platform helps real estate and finance professionals navigate these factors so each closing can be as digital as possible.

The ALTA Registry is a unique real estate utility created specifically for the mortgage industry and service providers. For the first time, the ALTA Registry will provide data on individual title insurance and settlement services companies, identified by an ALTA ID. The ALTA Registry identifies title and settlement companies that can perform RON closings. This helps mortgage companies identify closing companies that offer this increasingly in-demand service. The ALTA Registry is free and ALTA membership is not required.

“We’re pleased to collaborate with MISMO and provide the e-Eligibility Exchange with the most accurate title and settlement services company data available in the industry,” said ALTA CEO Diane Tomb. “It’s crucial that the title insurance industry urge progress and innovation in the digital closing space. With 9,000 locations already listed in the ALTA Registry and 2,000 of them showing a state of ‘RON readiness,’ now is the time for all title insurance companies and real estate attorneys to register.”

ALTA launched the ALTA Registry in 2017 as the first national database of title insurance and settlement services companies. In addition to contact information and branch locations, each ALTA Registry listing also includes a title insurance company’s or real estate attorney’s unique seven-digit ALTA ID.

The e-Eligibility Exchange is now available to all MISMO members via an online interface and APIs that can be integrated into other technology platforms.

“The MISMO e-Eligibility Exchange serves as a resource for the entire industry and its success relies on the quality and accuracy of the contributed data,” said Seth Appleton, president of MISMO. “The exchange will benefit tremendously from ALTA participation, with its timely and accurate title insurance and settlement services company data. The fact that a title agent can only join the ALTA Registry after its title insurance underwriter has confirmed its information gives us ongoing confidence that we will have data that is unique and up to date. This accuracy, together with the uniqueness of the ALTA ID, will help make the e-Eligibility Exchange a compelling and innovative industry resource.”

The e-Eligibility Exchange draws on Snapdocs’ and MISMO’s respective areas of expertise, with Snapdocs providing the technology that powers the e-Eligibility Exchange, and MISMO working with industry participants such as ALTA to collect and maintain the most robust and up-to-date digital closing criteria possible.

The number of title and settlement companies offering digital closings increased 228% compared to 2019, according to ALTA’s 2021 Digital Closing Survey. The survey of 300 title professionals showed that 46% offered digital closings in 2020 during the COVID-19 pandemic. Prior to the health crisis, a 2019 survey showed that 14% of companies offered digital closings two years ago.

While the number of digital mortgage closings completed continues to rise, industry-wide adoption is still hindered by the complexity and lack of transparency into factors that determine how “e” closings can be. The e-Eligibility Exchange helps to maximize the digitization of closing processes, including shifting to eNote and RON, and increasing these benefits for every participant involved in a mortgage loan’s life cycle.

“eClosing volume has grown significantly in the last two years due to growing acceptance from stakeholders such as investors, servicing buyers, etc., as well as the growing adoption of e-recording and e-notarization at the jurisdictional level,” said Raj Penugonda, product development director at Freddie Mac. “However, since acceptance and adoption are not yet uniform across the ecosystem, lenders need to make a loan level determination of which loan documents can be electronically signed. This makes it difficult for them to scale their eClosings. MISMO e-Eligibility Exchange helps address this challenge. As part of our efforts to help the industry’s journey towards a true digital mortgage, Freddie Mac is excited to work with MISMO in developing e-Eligibility Exchange.”

Balancing high-tech with high touch was a priority for companies even before the pandemic. In a 2020 report by Forbes Insights in association with Freddie Mac, 85% of firms surveyed described their efforts at mortgage digitization prior to COVID-19 as aggressive or very aggressive. During the global crisis, lenders already focused on technological capabilities were the most prepared to help borrowers.

As people have become accustomed to using smartphones for shopping and applying for jobs and expectations for technology continue to increase, businesses are responding by meeting the client where they want to be—on their screens. According to a 2020 study by J.D. Power, 64% of consumers believe that a digital process would make buying a home or refinancing easier than one conducted in person.

In an effort to permit immediate nationwide use of RON, ALTA and other groups continue to support the SECURE Notarization Act, which now has 83 co-sponsors in the House of Representatives. The bill would create national minimum standards and provide certainty for the interstate recognition of RON. At the state level, Maine joined 39 other states to allow remote online notarization (RON) after Gov. Janet Mills signed into law LD 2023. The legislation will go into effect July 1, 2023. 

“There is a need and demand for this approach to notarization throughout the United States,” Tomb said. “The SECURE Notarization Act allows businesses and consumers the ability to execute critical documents using two-way audiovisual communication. Current requirements for a signer to physically be in the presence of a notary are often impractical and sometimes impossible due to social distancing limitations resulting from the COVID-19 pandemic, as well as other roadblocks for in-person signing, like overseas military service and time constraints.”

“Consumers expect greater digitization in the mortgage process like they do with other experiences. From a homebuyer perspective, digital closings can help bring the reality of homeownership to a wider swath of consumers. For businesses, digital closings improve efficiency through reduced operational cost and increased productivity. Solutions like the MISMO e-Eligibility Exchange can help bridge the gap between housing affordability and accessibility,” Tomb concluded.

Diane Tomb is chief executive officer of the American Land Title Association, which represents more than 6,000 title insurance companies, title and settlement agents, independent abstracters, title searchers and real estate attorneys.

The post Opinion: how digital closings can help with housing affordability appeared first on HousingWire.

Source link

As the Federal Reserve aggressively raises interest rates and bond yields climb, we are leaving behind the era of ultra-low mortgage rates that prevailed from 2020 through the end of 2021. 

Over the past several years, we’ve become accustomed to mortgage rates below 4%, with the average rate on a 30-year fixed-rate mortgage (for an owner occupant) dipping as low as 2.65% in January of 2021. Those are extremely low in a historical context. As of this writing, the average rate on the same loan is about 5.3%.

For at least the next several months and perhaps for years to come, we will experience a higher interest rate environment. However, the lingering impact of these years of ultra-low interest rates could be felt for the next several years or even decades to come due to what has recently been coined the “Lock-In Effect.” 

In the short-term, rising interest rates will do what it always does to demand—curtail it. Over the last several months, we’ve seen this happening as mortgage purchase applications are down about 15% through May 13 from the same period in 2021. Rising rates reduce affordability, pricing would-be homebuyers out of the market. As long as interest rates continue to increase, they will continue to put downward pressure on demand—nothing new here. 

However, what is potentially new is how rising interest rates could negatively impact inventory. 

Recent data from Redfin shows that 51% of homeowners with a mortgage have an interest rate below 4%. With so many homeowners locked into super low rates, there could be a disincentive for homeowners to sell. 

Think, if you have a home with a mortgage rate under 4%, why would you choose to sell that home and enter a super competitive housing market with high prices, only to pay more interest on your next loan? It’s not a very attractive proposition. 

To put it in perspective, consider a $425k house. If you had a 3.5% mortgage rate, your monthly payment would be around $1,910. If you rebought a home at a similar price with an interest rate of 5.3%, your monthly payment would be about $2,360. That comes out to roughly $450 more per month or $5,400 per year. 

Or consider someone looking to downsize. Perhaps an aging couple wants to sell the home they raised a family in, get some cash to invest with, and reduce their monthly expenses. 

If this couple downsized from a home worth $425,000 to a home worth $350,000—they would be saving approximately $0 per month. That’s right, they could buy a cheaper, smaller home, and still be paying the same amount. Sure, they’d get some equity on the trade, but their monthly costs would be the same, which is super important for people in retirement. Again, not a super attractive proposition. 

It’s for this reason the term “Lock-In Effect” has been coined. Many economists and analysts believe the number of new listings could remain low for a few years while homeowners feel “locked in” to their unusually low mortgage rates. 

It is worth mentioning that the number of homeowners who may be “locked in” varies considerably. According to the same Redfin report, Utah, Colorado, and Washington, D.C. have the highest proportion of homeowners with low rates. Oklahoma and Mississippi have the fewest. 

While we don’t know if this Lock-In Effect will happen, the logic checks out. If it does materialize, it could have profound impacts on the housing market for years, if not decades to come.

It all comes down to inventory. If fewer homeowners put their homes up for sale, it could prevent inventory from recovering to more normal, pre-covid levels when the housing market was more balanced. 

As I wrote recently, inventory needs to increase for prices to moderate or go down (or whatever you think will happen). 

There are a lot of different metrics related to inventory, so let me explain. 

Inventory is defined as the total number of homes on the market at the end of a given month. It is a very useful metric because it combines both supply and demand. It factors in how many people put their house on the market (known as New Listings) as well as how many and how quickly those homes are being sold (demand). 

This is where inventory is as of March 2022. 

There’s a pretty dramatic story depicted in this chart. Pre-pandemic, we expected about 1.8M units of inventory over the busy summer months. Now, we’re at 600k. 

As other housing market analysts and I believe, this number needs to increase for the housing market to return to a healthier and more normal level (or to crash). Prices were still appreciating when inventory was at 1.8M, so you can bet they’ll go up with dramatically lower supply. 

As demand moderates, inventory could start to pick up, but we’ll likely need to see more new listings. As of now, that’s not happening, as New Listings are down on a seasonally-adjusted basis. 

But, New Listings could increase from three places: homeowners selling, new construction, or foreclosures. 

New construction could add to new inventory, but supply chain issues have suppressed completions, and new permits started to drop as of April 2022. 

Many people believe a wave of foreclosures is coming and will add inventory, but that’s not going to happen. You can watch my other interviews and videos about that, but to put it shortly, mortgage delinquencies have dropped for seven straight quarters. Homeowners are not defaulting. Could a recession change this? Sure, but the inventory from a potential increase in foreclosures would be gradual and take years to play out. 

The last and the most important source of New Listings are homeowners. Normally, as COVID-19 becomes a receding part of our lives, I would think that New Listings from existing homeowners would increase. But this is where the Lock-In Effect could come into play. If over 50% of homeowners with a mortgage have ultra-low mortgage rates, we may not see many homeowners list their homes for sale. 

If fewer homeowners put their homes up for sale, that will put upward pressure on housing prices. Of course, some, or maybe all of that upward pressure, could be offset by the downward force of rising interest rates, but the impact of years of ultra-low rates will be a super important factor in the housing market, likely for many years. 

I can even see a scenario where this Lock-In Effect impacts the market for decades. Again, interest rates during the pandemic were the lowest they’ve ever been, and it’s not clear if rates will ever get as low as they just were. Ever. And even if it does happen, it could be a long time before it does. 

Personally, I think rates will rise for another year or so, but then we’ll see a gradual easing of interest rates. After all, the Fed has pursued easy money policies for about 15 years under four different administrations. While the Fed is temporarily raising rates, I don’t currently think we’re going back to an era of double-digit mortgage rates. At the same time, I also don’t know if we’ll see a 2.7% fixed-rate mortgage again in our lifetimes. It’s only happened once and took a very unique set of circumstances to get there. 

Of course, no one knows what happens next. But if you’re like me and want to get a sense of where the housing market is heading, keep an eye on the Lock-In Effect. It will be very interesting to see if the predictions of lower inventory come true. To keep track, just look at new listing and inventory numbers each month. 

If you want more data-driven information about the housing market, investing, and the economy, check out On The Market, BiggerPockets’ newest podcast, where I’m the host. Every Monday, you can find new episodes on Apple, Spotify, or YouTube. 

On The Market is presented by Fundrise

Fundrise is revolutionizing how you invest in real estate.

With direct-access to high-quality real estate investments, Fundrise allows you to build, manage, and grow a portfolio at the touch of a button. Combining innovation with expertise, Fundrise maximizes your long-term return potential and has quickly become America’s largest direct-to-investor real estate investing platform.

Learn more about Fundrise

Source link

This week’s question comes from Aaron on the Real Estate Rookie Facebook Group. Aaron is asking: What paperwork do I need to close an off-market deal? If presenting a cash offer, can it all be done between me and the seller? Do you typically ask for an inspection period?

Off-market real estate deals can seem tricky when you’ve never done one before. For the most part, investors only deal with on-market deals where their real estate agent walks them through the closing process. When you’re pursuing off-market deals, you’re on your own (for the most part), but that doesn’t mean that closing on a new deal has to be complicated.

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Source link