A Tale of Two Markets: How Mortgage Professionals Can Thrive Amid Rising Rates
After the whirlwind boom of 2020 and 2021—when interest rates dropped to record lows more than 15 times and hit an all-time low of 2.65%—it is hard to fathom an era when 4% on a 30-year fixed-rate mortgage (FRM) represented an unprecedented low for mortgage rates.
In reality, though, up until November 2011 when rates fell to 3.99%, mortgage rates had never dipped below 4% in the history of Freddie Mac’s Primary Mortgage Market Survey (PMMS), which began tracking average weekly rates in 1971. In fact, the overall average yearly rate from 1971 to 2019 was around 8%. With that in mind, the elevated rates of the current market, hovering around 5%, seem not only reasonable but even desirable.
Still, anytime there is an upward trend in rates, we can expect the market to cool off as would-be homebuyers reconsider how higher rates will impact overall home purchase costs. For professionals who entered the real estate and mortgage industries when refinances and new property sales were booming, this natural decline in both refinancing and new purchase volume can feel especially concerning.
The good news is, that real estate agents and mortgage professionals can still thrive in a high-rate market. The keys to longevity in these industries are understanding the cyclical nature of the business and adopting strategies for success in every market condition.
Here is what we know about the mortgage cycle, factors that influence the rise and fall of interest rates, and how to keep business flowing during times of elevated rates.
The Cyclical Nature of the Mortgage Business
In 2020 and 2021, the U.S. economy was heavily impacted by the outbreak of the COVID-19 virus and the ensuing pandemic. In response to the economic uncertainty caused by the coronavirus, the Federal Reserve System (the Fed) held interest rates at zero percent while also investing heavily in mortgage-backed securities (MBS) in order to stabilize markets and stimulate economic activity. Together, these moves by the Fed helped to push down interest rates, creating a veritable tsunami of refinances for the mortgage business. Likewise incentivized by record-low rates, existing property owners upgraded to larger or more desirable properties, in turn creating more inventory in the often tightly-squeezed entry-level home arena. It was, as Dickens wrote, the best of times—for the mortgage industry, that is.
Just as the Fed can take action to stimulate the economy by lowering rates, it can also manipulate interest rates to move in the opposite direction when inflation becomes a concern.
In May of 2022, the inflation rate hit a four-decade high of 8.5%. Supply chain issues caused by the pandemic continue to create shortages in an array of goods, while demand for those products has increased as consumers regain their financial footing. Additionally, the Russian-Ukrainian War is driving up crude oil pricing while furthering the supply and demand imbalance for additional goods that rely heavily on resources and materials exported by the warring nations.
Now, the Fed must attempt to drive rates up in an effort to disincentivize consumer spending and allow supply to catch up with demand. It does this by initiating interest rate hikes and also offloading the treasury bond and MBS holdings it previously purchased. These actions drive up consumer interest rates, like those on mortgage loans.
In March 2022, the Fed increased interest rates by .25% and again by .50% the following month. As expected, in May 2022 mortgage interest rates on a 30-year FRM hit 5.27%, the highest they have been since 2009. The Fed has announced its intention to implement six more rate hikes over the course of the year. So, we can anticipate mortgage rates continuing to climb before the cycle brings rates back down again.
And while increasing mortgage interest rates does not forebode the worst of times, it does predict a downshift in volume as refinances wane and new home purchases moderate.
Strategies for Success in a High-Rate Market
The influx of refinances and new home purchases in 2020 and 2021 was like nothing we have ever seen. With rates now on the rise, refinancing will naturally decline and usher in the return of a purchase-heavy market.
Even as rates creep upward, housing markets nationwide continue to remain highly competitive due to limited inventory. Additionally, rent prices are also on the rise, increasing interest from first-time buyers and even further stretching the already thin entry-level home markets. Regardless of the economic landscape, there are always going to be reasons for homes to be bought and sold. Being knowledgeable and prepared will help both professionals and their buyers find success when the right home comes along.
First of all, encourage potential buyers to do their homework on what they are looking for in a home. Knowing which neighborhoods are and are not on the table, what features are wants vs. needs, and any criteria that may be a dealbreaker are all crucial in enabling homebuyers to act fast. The ability to quickly make a decision and put in an offer is paramount when time is of the essence, as it is in most markets today.
Likewise, encourage buyers to get prequalified. This provides proof to sellers that they can secure the funding necessary to complete the home purchase, which will make them a more desirable candidate when contending with other offers.
Similarly, saving for a bigger down payment can help borrowers pay less for their home over time by eliminating PMI, which can tack on additional hundreds of dollars per mortgage payment for borrowers who put down less than 20%.
For many industry professionals, it may be tempting to try to chase the lowest rate in an attempt to help maximize borrower dollars. And while at first glance it may be an appealing strategy, take heed. Many mortgage companies and lenders who advertise lower rates are in fact recouping those supposed borrower savings in the form of added fees. In truth, rates are not controlled by individual companies, so they will not vary significantly from one organization to another within the same market.
Instead, staying apprised of market conditions in your area, educating borrowers, and networking will be the cornerstones that will keep business flowing despite higher rates.