Understanding Market Dynamics in the Current Mortgage Environment

It’s a challenging time for the mortgage industry as it faces higher interest rates, low housing supply and a tightening of credit availability. What lies ahead for the mortgage industry and how do these headwinds impact consumers?

Joel Kan, vice president and deputy chief economist for the Mortgage Bankers Association, joined us on Episode 27 of the Market Pulse podcast to provide insight on what lies ahead and answer audience questions from the May 17 Market Pulse webinar on the same topic.

Listen to our podcast for the full interview or continue reading for an excerpt from our conversation.

Let’s begin with a brief overview of the mortgage industry and where you're seeing things as they stand today.

Kan: It’s shaping up to be a challenging year for lenders. Mortgage rates are around 6.7% right now. They were just below 4% at the beginning of 2022. As you'd imagine, that's taken many potential borrowers out of the market. And what I mean by that is, if you look at the purchase side of the market, higher rates have significantly reduced purchasing power for many potential home buyers and the for-sale inventory is still really low. So, we're seeing the current pace of purchase application activity well behind the pace of the last three years. 

Additionally, we saw lots of refinance and purchase activity in 2020 when mortgage rates were in the 3-to-4% range. So, really there aren't many people looking to refinance either because they have these low rates. And again, with rates over 6% right now, there's not a lot of incentive for them. 

This year, we expect about a 20% decline in origination volume for 2023 relative to 2022. But we do expect a 25% increase in 2024 if we see the demand or a return of demand, and we also see additional housing inventory. And if we see mortgage rates finally start to settle back down, perhaps even hitting the 5% range.

We received several follow-up questions from the webinar audience. One participant wrote: What are your thoughts on investment (non-owner-occupied) mortgages?

Kan: We did see spurts of activity in the investor purchase segment in 2020 and 2021 when people had extra savings from not being able to do a whole lot of discretionary spending during the pandemic. Everyone was stuck at home, and we got some fiscal stimulus. Rates were low obviously at the time. And there was also this realization that there was a demand for short-term rentals as remote workers wanted to venture out during the pandemic and work from somewhere more exciting, perhaps. That has cooled off since then. 

I think now we're at a time where maybe it's shifted to more unintentional investors. And what I mean by that is we have a lot of homeowners who locked in low rates over the last two, three years and don't want to sell their homes because they're going to give up 3.5%, 3% fixed to buy a new house. So, what they're doing is they're keeping these homes with the current mortgages on them and they're renting them out. 

So yes, we did see a change in the non-owner occupied segment of the market, but I think we're seeing more unintentional landlords, if you will, because of the rate environment.

Subscribe to the Market Pulse Podcast

The Market Pulse podcast is available wherever you listen to podcasts. Be sure to check out past episodes, including:

• Optimizing Your Marketing Strategy in an Uncertain Market

• How Lenders can Navigate This Credit Tightening Environment

• Why Financial Institutions Need a Deposit Growth Strategy

 

You can access our Market Pulse webinars on-demand and sign up for our next webinar.