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Like a river, the economy must keep flowing. Sometimes it may get dammed or re-routed but it’s got to keep moving. It cannot stand stagnant. That isn’t good for anyone.
Based on all indicators it appears the economy is moving (growing) and with the election of Mr. Trump, conventional wisdom is it will grow even more. It seems that should be good.
But as a result, interest rates will rise. Some say the higher rates will stem the flow of mortgage money, hurting the economic growth. Others argue the increased rates will have no real impact. Time will tell us who is right.
The problem as I see it is not the rates, it’s the housing supply. With the crash, many homes were bought up by investors. Those homes are now off the market being rented to many who lost their homes during the crash. One man’s loss is another man’s gain. Many homeowners who refinanced their home and restructured their debts now sit with a low-interest rate mortgage and are not ready to sell, and take on new debt. These homes are also off the market.
This results in fewer homes on the market for sale. As demand rises, so do the home prices. This makes it more difficult for first-time buyers to enter the market. Fewer first-time buyers result in fewer move up buyers. Fewer buyers should decrease demand resulting in a lowering of home prices. Right?
Along come those Millennials to throw a monkey wrench into the works. This group wants to rent keeping rental demand high, increasing rents. So, investors hang onto their rental properties since they provide a positive cash flow.
However, the increased rents drive some current renters to seek affordable housing. You got it. More people out looking for homes, increasing demand which increases home prices.
More people buying and renting increases the need for more housing. But, builders aren’t building low end or entry level homes. They concentrate on the big ticket homes catering to those few who can afford them. I can’t blame them.
As long as there’s a demand, they’ll keep satisfying it and make money doing so. After all, that’s why they’re in business. Why build 200 mid-level homes, when you can build 75 to 100 larger homes and make more money?
Low-interest rates didn’t increase the homeownership rates and high rates won’t hinder homeownership rates. People want to own a home and put down roots. The keys are affordability and supply. That’s where it all starts. At present, we don’t have a decent supply of affordable homes. The question is how do we get there from here?
In the meantime, for lenders, there is some good news. A better economy will get more people to start looking to buy a home. That creates financing opportunities when they find one. Lenders need to position themselves to take advantage of those opportunities while producing more loans with fewer people and lower expenses.
I hope you’ve prepared for the new home purchase market. It’s here. Are you ready?
If not LoanLogics can help. The game has changed. Play different.
