Mortgage industry, homebuyers pinched by high rates, declining cash

The great housing debate today is money is awfully expensive to borrow if you even qualify.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | July 31, 2023

Article originally posted in Orange County Register on July 27, 2023.

Looking for a home to buy? Perhaps it’s time to start knocking on doors to see who’s willing to budge.

In my 37 years in this industry, I’ve seen this play out before. High mortgage rates and declining cash reserves have homebuyers, equity borrowers and industry brokers struggling to land a deal.

Faster than you can say “forget it,” bankers are turning down many self-employed borrowers for home equity lines of credit. Why? It’s largely due to applicants’ declining income over the past year.

The U.S. personal savings rate, according to the Bureau of Economy Analysis, is 4.6%, nearly half its long-term average. Household debt also is up, rising $148 billion, or 0.9 percent, to $17.05 trillion in the first quarter of 2023, according to the New York Fed.

Yesterday, the Wall Street prime borrowing rate ratcheted up to 8.5%. It’s been 22 and a half years since we’ve experienced such a high base interest rate.

So what’s a borrower to do?

Real estate agents often call folks like me because we have exotic and certainly more expensive second mortgages compared with rates offered by banks and credit unions.

Others fortunate enough to own rental property will seek hard money loans to unleash cash from their investments. Hard money mortgages can easily run at rates of 10% or more with 3 or 4 points of loan origination charges.

I did some digging and found one unusually low rate, a home equity line-of-credit on Bankrate’s website starting at 6.24%.

Excluding loan origination points and closing costs, wholesale mortgage lender FundLoans offers closed-end second mortgages ranging in rates from 9.5% to 14.375%, according to its rate sheet.

Jon Maddux, chief executive officer and co-founder of FundLoans, said 9.75% to 10.99% is an average range for second mortgages. “Which is a lot better than a credit card or hard money loan as these are interest-only payments and 30-year fixed loans.”

Full disclosure: My firm Mortgage Grader is a FundLoans client.

The great housing debate today is money is awfully expensive to borrow if you even qualify. How long will that keep a family afloat until the income comes back?

Mortgage industry folks like me are right there with the Realtors. We are suffering. The last 18 months have been horrible. Any mortgage worker telling you otherwise is clearly full of hot air.

Southern California’s unionized entertainment industry workers are another group that may be thinking about posting a for-sale shingle on their front lawns. Given the battle over AI, it might be a long time until the strike ends. When it does end, I’d wager the farm it won’t end well for the workers.

And then there are the tech workers who have been hit hard. A tech recruiter told me for each of his company’s job postings there are as many as 30 internal recommendations and oftentimes more than 1,000 applicants for each job posting.

Fed Chairman Jerome Powell’s actions to raise short-term rates will undoubtedly be killing more jobs in the name of taming inflation.

So, is inflation ebbing? Think rates have peaked? Let’s ask the experts.

“I wouldn’t be surprised if mortgage rates hit 7.5% before the end of the year,” said Jordan Levine, chief economist for the California Association of Realtors. “Revolving debt has increased at a 15% clip, that’s $150-$160 billion in added credit card debt since the pandemic. Savings rates dropped significantly, maybe 15-20% range (but) now in the single digits.”

CAR predicts Southern California home prices will be 5%-6% lower this year.

“By the end of the year I wouldn’t be surprised to see the median price growth on a year-over-year basis to flat or even up by low single digits,” Levine said. He does see mortgage rates dropping to the 5%-6% range by the end of 2024.

The median price of a single-family home was $838,260 in June, 45% above pre-pandemic levels, according to CAR.

Raymond Sfeir, director of economic research at Chapman University’s Anderson Center for Economic Research, sees employment trending downward.

“The number of hours worked is (already) down. Employment will turn negative by the end of the year. The total number of employed will be lower. Companies will be shredding,” said Sfeir. “We’ll see a mild slowdown and mild recession in the first half of next year as the government giveaways will have run out.”

Sfeir sees mortgage rates hitting 7% by the end of the year. He sees home prices at 5%-6% below last year’s numbers.

Mark Zandi, chief economist at Moody’s Analytics, believes the U.S. is going to avoid a recession. “Inflation is moderating. We are at terminal rates (highest interest rates in the cycle),” said Zandi. “Mortgage rates will be at 6.5% through 2024.”

From peak to trough (June 2022 through June 2025) Zandi sees home prices dropping 7% to 8%. “Housing is unaffordable. Affordability needs to be restarted by lower mortgage rates, lower prices and more income,” he said.

Mike Fratantoni, chief economist at the Mortgage Bankers Association, offered the following observations in part, following the Fed’s monetary policy statement:

“While the market for new home sales has recovered considerably over the past few months, the pace of overall housing market activity remains quite slow. Although the lack of inventory remains a constraint, housing affordability challenges continue to delay many potential buyers from entering the market,” said Fratantoni. “We do expect mortgage rates to trend down once the FOMC (Federal Open Market Committee) clearly signals that they have reached the peak for this cycle, as the reduction in uncertainty with respect to the direction of rates should narrow the spread of mortgage rates relative to Treasury benchmarks.”

My prediction? I think the inventory of homes for sale will be 20%-25% higher next year compared with this year due to job and earnings losses. I see mortgage rates at 7.25% by the end of this year, dropping to 5.75% by the end of 2024.

Freddie Mac rate news: The 30-year fixed rate averaged 6.81%, 3 basis points higher than last week. The 15-year fixed rate averaged 6.11%, 5 basis points higher than last week.

The Mortgage Bankers Association reported a 1.8% mortgage application decrease compared to last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $706 less than this week’s payment of $4,739.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6%, a 15-year conventional at 6%, a 30-year conventional at 6.5%, a 15-year conventional high balance at 6.625% ($726,201 to $1,089,300), a 30-year high balance conventional at 7% and a jumbo 30-year fixed at 6.75%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year fog-the-mirror fixed rate (no income qualifying) at 8.625% with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.