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By: John Gibson, SVP, TPO Lending at Flagstar Bank
The industry developments we foresee in the coming year can seem many and profound. Refinancing is anticipated to decline by 62% year over year in the concurrent estimates of Fannie Mae, Freddie Mac, and the Mortgage Bankers Association, shifting the mortgage landscape toward a purchase-centered market more than in recent memory. The Fed is now expected to begin a gentle tapering of interest rates, which will likely start in November and wind down by next summer. The effects will be felt in most segments of the homebuying market, as well as in the demand for refinancing.
What a Longer Perspective Reveals
A low interest rate environment has been so enduring that we are sensitive to the fact that a whole generation of loan originators may feel unfamiliar with a rising-rate environment. As a mortgage lender with almost 35 years of experience serving third-party originators, we have some perspective to offer. We see the size of the mortgage market remaining remarkably robust, even when today’s pace subsides somewhat.
From a mortgage market of approximately $4 trillion in 2020, the industry is on track to end this year at around $3.8 trillion. Informed estimates suggest that forecasts of $2.9 trillion and $2.5 trillion for 2022 and 2023, respectively, keep us in a range that is still substantially more than just healthy. For comparison, consider that in our industry a $2 trillion mortgage market is considered by many to be a very good year, and $1.6 trillion to $1.8 trillion is a reasonable benchmark.
In other words, the foreseeable future remains bright, although it calls on mortgage professionals to see opportunities within this dynamic environment.
The Durability of Demand
Among the strongest indicators of continued success in the industry is the persistence of demand among homebuyers. Demographic and societal forces promise to mitigate any dampening that might result from changing rates of interest. Millennials – currently 37% of homebuyers – have arrived in the marketplace at last, and in force, and their influence is growing rapidly. The high percentage of first-time homebuyers in this burgeoning segment adds to the shortage of home inventory, as they often buy without selling.
However, the demographic power behind the demand we foresee comes from a broad spectrum of buyers, including segments beyond millennials. Hispanic homebuyers are expected to account for 70% of new homeowners from 2020 to 2040, and several factors support this. In fact, during the 10 years before the pandemic, Latinos were responsible for 50% of the growth in new household formation. With a median age of 29½, one-third of Latinos are in the prime homebuying years of ages 25 to 44.
African American and Asian American homebuyers are expected to account for 2.0 million and 2.2 million, respectively, of the 13.6 million new households formed in the 10-year span leading to 2025. Our dedication to serving the communities where we do business leads us to be resourceful in approaching these important segments.
A Higher Standard of Home
Adding further fuel to homebuying is a factor that is coming to be called Quarantine Influenced Demand (QID). Precautions prompted people to see their homes as more than a hub, and many raised the standards for satisfaction that they apply to it. Work-from-home adaptations proved so successful that millions of homebuyers no longer feel tied to commuting distance, and with the freedom to locate more to their liking, many are exercising this newfound option to live where they long to be. As a result, although the events that stimulated this aspect of demand are temporary, the effects of QID can be expected to be a factor for some time to come.
Savings and Equity
Unusual rates of saving helped fuel the surge in homebuying. With fewer opportunities for out-of-home spending, nest eggs grew rapidly. Then, with the proceeds from their home sales appreciating steeply, homebuyers entered the market with a great deal of liquidity. Not only were down payments available in amounts that afforded buying up, but 30% of home sales in the first half of 2021 were also cash-only.
A surge in home equity brought liquidity to these transactions. In fact, homeowners gained an average of $26,300 in equity during 2020. This equity continues to entice many homeowners to refinance as a means of putting that equity to work in the here and now.
These underpinnings of demand are not fragile. Further, we expect the mismatch between demand and supply to persist because the motivations of today’s homebuyers are more than circumstantial. Supply chain difficulties and a shortage of labor mean that new construction inventory is likely to grow gradually.
Questions about the impact of a new presidential administration on housing are being answered, week by week. The new leadership of FHFA brings 23 years of experience at the FDIC and already has put policies in place that expand access to credit for first-time homebuyers.
Beyond Interest Rates
Our confidence in the vitality of our industry – in the face of coming changes – is based on a long perspective, a wide array of resources, and our observation that the demand behind homebuying is driven by much more than low interest rates.
Our relationships with business partners are another source of confidence. We are surrounded by mortgage professionals who, like us, seek to make everyone they do business with successful.
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John Gibson is the senior vice president of Third Party Originations. He has more than 18 years of experience in strategic planning/execution towards exceeding corporate goals and retail and wholesale start-up expertise.
