Traverse City Business News | “Hold on”: Mortgage lenders are weighing the ups and downs of the real estate market

“Hold on”: Mortgage lenders are weighing the ups and downs of the real estate market

Traverse City’s real estate market has been in chaos for two years in a row.

Homes selling well above asking price, dozens of listings for a single home, cash sales, unseen listings, bidding wars, escalation clauses, valuation gaps, skyrocketing property values ​​and dwindling inventory: these trends have all become commonplace in the real estate region since the pandemic began .

However, if there’s an understudied side to this story, it’s what all the chaos has done to the mortgage lending side of the market.

Certainly the predominance of cash offers in the current market has completely shut out lenders from many transactions. According to real estate agent Redfin, 30% of home purchases in the United States in 2021 were paid for in cash — the highest rate since 2014. But lenders have also been caught up in the stratospheric rise of the market and the significant challenges that this disruption brings front row has posed for countless prospective buyers.

As the housing market finally begins to slow in northern Michigan — the five-county region (Antrim, Benzie, Grand Traverse, Kalkaska, and Leelanau) saw 182 homes sold in April 2022, compared to 261 in April 2021 — the TCBN spoke to three local mortgage lenders to learn about interest rates, purchasing power, loan pre-approvals and next steps. Here are three key takeaways.

Real estate investors and affluent buyers are distorting the market – for now

In a recent New York Times Article, journalist Sophie Kasakove examined a growing market trend with investors and companies buying up houses – particularly those “at the bottom end of the market” – and converting them into rental apartments.

Nagy

While Kasakove’s article specifically addressed how this real estate investment trend was impacting the Charlotte, North Carolina housing market, local mortgage broker Mike Nagy said the problem is a universal one, affecting virtually every desirable market in the U.S. — including the North -Michigan.

“There’s a lot of news right now talking about these investment companies going into single-family housing communities across the country,” said Nagy, vice president of mortgage lending at State Savings Bank. “All of a sudden, homes are being swamped by investors who then start bringing in tenants that they haven’t even fully screened.”

Nagy says that tightening inventories would continue to drive prices up until there is a bubble where no one sees (real estate) as a great investment anymore.

Right now, you can sell people real estate as a great investment because you can say, “Last year (this house) went up 20% in value,” he said. “Those days will pass and when that stops even the people who bought up all the investment houses have to start lowering their prices because they usually have to sell to the end customers and the end customers won’t pay those inflated prices. “

Nagy sees rising interest rates as what will eventually slow real estate activity and put an end to the current “anomaly” in home values, which are rising at double-digit rates every year. As the Federal Reserve tries to bring inflation under control, the days of cheap lending are likely to be over.

For example, the 30-year average fixed annual rate at the end of 2021 was 3.069%. By mid-May it was up to 5.321%. For Nagy, who has been interested in mortgage lending since the days of 20 percent interest rates in the late 1970s, the rising interest rates are a clear sign that the market is about to have a wake-up call.

“I can just see the writing on the wall,” Nagy said TCBN. “These rates will continue to rise until the economy slows down and people stop overpaying for cars and homes.”

Nagy refers to the job market, layoffs and unemployment followed.

“…(they) will start losing jobs because interest rates will go up and the cost of doing business will go up and companies will have to look at themselves and say, ‘Can we afford this new machine? would add three new workers?’ And if they can’t do that, business will slow down even more and maybe they’ll have to start laying off some people,” he said.

The “cure” for inflation, says Nagy, comes with these markers.

“Then there are layoffs, unemployment grows, and you get a situation where you’ve, yes, cured inflation,” he said. “And maybe that happens over a long period of time; I am not saying that this will happen in the next year.

“But that’s where I see things.”

Rising mortgage rates are destroying the purchasing power of first-time buyers

In the long term, rising mortgage rates could be enough to bring the real estate market back to “normal”. Meanwhile, the people most affected by rising interest rates aren’t investors or wealthy cash buyers, but first-time homebuyers.

holmes

Just ask Bill Holmes, Vice President of Northern Michigan Sales for Front Street Mortgage. Between rising interest rates and soaring home prices across the Grand Traverse region, Holmes said the average mortgage payment for his customers has doubled over the past year. The result is an overall affordability issue that hits many buyers.

“I think the most important thing we’ve seen lately is that borrowers who were pre-approved a month ago — or two, three, four, five months ago — a lot of them still haven’t found anything,” said Holmes. “But the problem is that these buyers still feel they can afford a certain price for a home. Maybe they haven’t gone back to their lender and talked about rising interest rates.

“They’ll probably have to come back and get pre-approved again.”

Mortgage pre-approval, Holmes said, has become one of the most confusing parts of the process for new buyers. On the one hand, due to local market trends, many buyers are finding that their pre-approval amounts do not give them enough leeway to be competitive. On the other hand, many people looking for an apartment are realizing that their purchasing power has decreased significantly since they started looking, because buyers often do not find success so quickly – and prices are now rising.

Brown

According to Randy Brown, broker and owner of Traverse City’s Versatile Mortgage LLC, it used to be rare to write more than a pre-approval letter or two for a client.

“Now clients want approval letters specific to a property and price,” he said. “So we write a dozen approval letters for each client.”

According to Brown, a new challenge has emerged as a result of rising interest rates: Purchasing power has fallen by 25%.

“I’ve never experienced that before,” he said.

Agents who have been looking for properties in the $300,000 range since the beginning of the year now have preapproval letters on hand that are essentially “worthless,” he said.

“Now you need to narrow your price range down to $225,000,” he said. “And if you thought househunting was going to be tough with $300,000 — pack your lunch.”

Despite the challenges, not everything is doom and gloom

It’s not an easy time to be a shopper in Northern Michigan; Nagy, Holmes and Brown agree on this. But while prices, interest rates and market competition are all major challenges, our panel of mortgage lenders had some positive things to say – either about where the market might be headed next, or what buyers can do to stay in the game.

Brown has had a lot of focus lately on the bond market, which he says is often a good indicator of where inflation is headed and what mortgage rates might do next. As inflation hits large public companies and affects their earnings reports, stock prices fall.

“When that happens, investors are looking for other places to put their money,” Brown explained. “Where do you put it? They put it in bonds. What does that do to the yield? It makes her fall. When that happens, prices will get better.”

Brown’s prediction, based on the bond market and some tentative declines in mortgage rates in mid to late May, is that relief on the mortgage rate front is likely to happen sometime in the final quarter of 2022. This recovery would ideally be , offering a happy medium – restoring stumbling buyers to purchasing power while still cooling the market long enough to replenish housing stock, dampen rates of appreciation and slow investment.

“We’re not going to see a 20% increase in value for the third year in a row,” predicted Brown. “It started out that way, but we’re already seeing a bit more inventory and the market is starting to turn.”

Meanwhile, Holmes offers some simple advice to clients who’ve blown through a dozen pre-approval letters and been outbid at every turn.

“Save what you can,” he said. “Reduce your overall debt burden; Pay off some of the credit cards; Don’t buy an RV or boat if you don’t need it; Pay all your bills on time so you have better credit and get the best interest rates; and perhaps check with family members about the availability of a cash gift (to help with a deposit).

“Just hold on; something will happen.”

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