How do we begin trying to find clarity in a market that’s offering, well, not much clarity? As a local loan officer, I’m writing to offer some perspective on the situation and how to navigate the tumultuous waters of the next year or two in the mortgage market.
Let’s start with inflation. What is inflation? Simply put, it is what happens when there are too many dollars and too few goods available.
Given the situation in China, we’ve been experiencing a shortage of goods. This has in turn driven up pricing, causing inflation to spike. Inflation applies to everything from gas to groceries to clothing; I’m even having trouble finding my dogs’ prescribed brand of food.
The Federal Reserve has been trying to bring down inflation by driving up interest rates. If it costs more to borrow money, they believe people will stop buying and inflation will go down. There is a term for this activity – “demand destruction”.
However diligently the Fed tries to quell inflation, we still have supply chain issues. Until China’s up and running and we start getting the goods we need, the rate hikes are only causing us to spend more money on necessities.
There is also a housing shortage, causing home values to increase 32% over just the last twelve months (per CoreLogic’s report just last week).
For the past two years, mortgage lenders have been inundated with more loan applications than they’ve ever seen with low interest rates and nearly every homeowner looking to potentially cash in some of the equity in their homes for everything from debt consolidation to home improvements, or to buy a second home or investment property.
But that boom was short-lived. Now, 30-year mortgages are coming with an interest rate at or near 6% on average and rates expected to continue rising. As an example, the monthly payment on a $425,000 mortgage has increased around $500, as compared to a 4% interest rate.
Lower income families fall out of qualification due to increases in demand, home prices, and interest rates. More down payment assistance programs are coming to help with out-of-pocket costs. But it doesn’t help qualifying for a higher monthly payment when your income isn’t increasing as much as rent and home prices are.
Despite the decrease in loan applications, the mortgage business is still up as
compared to 2019 – so it’s a matter of perspective. Increased home values mean increased loan amounts, so fewer applications doesn’t necessarily mean less business if you didn’t rely solely on refinances in recent years.
Historically, inflation spikes will almost always lead to a recession. Experts say China is expected to get its wheels turning again in October/November. Once we start seeing an influx of the goods we need, demand will level out and we’ll move into this expected recession period.
Recessions cause monetary effects such as tightened credit standards and the Fed will likely bring rates back down. As businesses seek to cut costs, unemployment rates will increase. That, in turn, causes consumption to go down and inflation rates will drop.
A silver lining of recessions is that mortgage interest rates will also decrease, and people will once again be happy to refinance out of their current higher rates and cash in on the equity they’ve built in their homes.
In the meantime, the housing market is extremely healthy, especially in our area.
In the current rate market, prospective buyers have learned that the relationship with their lender is important. They’re looking for lenders who can offer more products to fit their needs such as adjustable-rate mortgages, or rate buydowns for those who would like to keep their payments lower until a refinance is a good idea.
Those who are struggling to find the perfect home are looking into renovation loans. Renovation loans allow someone to create their dream home from a less desirable one and finance the renovation work, saving cash and adding value to the home as a future wealth builder.
If you’re looking to buy a home or even to reduce debt with your home’s equity, find a lender that acts as a financial literacy advisor, not just an order taker, and offers several options and helps you find the most reasonable way to grow your wealth.
Overall, despite the doom and gloom that you’ll find all over the Internet, it really is still and, always, a great time to invest in real estate. Whether that investment is by purchasing a home or an investment property, cashing in on the equity you’ve gained to pay off higher interest debts, or do a few updates to add value to your property, it’s all still a solid plan for the future.
Rates are expected to continue rising through the end of the year, but that shouldn’t deter anyone from investing.
Lacy Dyar is a North Alabama native who was raised in rural Fackler and moved to the Huntsville area in 2001. She began her venture into the Real Estate market in 2010 at a local title and escrow agent’s office and transitioned into the mortgage realm in 2015. She has a history of serving her community, having come from a poor and unstable environment and using her experience and caring nature to help others build wealth and have a secure household where they can feel proud of their accomplishments. Lacy serves mainly in her profession as a Sales Manager for loanDepot’s Huntsville branch, but also helps to support many charities. She’s been a member of the Board of Directors for Big Brothers Big Sisters of the Tennessee Valley and the Rose’ Society, attended Leadership Greater Huntsville and through her position with loanDepot sponsors events and classes for many organizations, mainly working with the Huntsville Area Association of Realtors. When she’s not working, Lacy spends her free time with her favorite people and loves backpacking with her husband Richard. She’s a proud fur mom to seven spoiled and happy pets.
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