"While it can be tempting to take all the credit for the success we’re enjoying today, there are underlying reasons for what we’re seeing. Understanding these drivers will allow us to be better prepared for what is coming next."
How might we better equip our businesses knowing our cyclical market favors prepared lenders? What should lenders know when responding to factors drive today's peaking market?
DENVER; Jan. 12, 2021 - Our cyclical market favors prepared lenders. It’s during times like this, when homes don’t last more than a day on the market, pending home sales are breaking records, and this quarter is causing forecasters to predict over $4 trillion in volume for 2020, that we must remember we operate in a cyclical market.
While it can be tempting to take all the credit for the success we’re enjoying today, there are underlying reasons for what we’re seeing. Understanding these drivers will allow us to be better prepared for what is coming next.
Driver 1: Low interest rates
There are two drivers behind the red-hot real estate market we’re experiencing today. First, historically low interest rates. Many previously believed that it couldn’t get any better for borrowers when rates hit 4%. Even more believed this when they fell to 3%. Then after falling a record 13th time this year, Freddie Mac puts interest rates (as of November 23, 2020) at 2.72% for the 30-year FRM.
With mortgage rates lower than they’ve been in 50 years, millions of Americans who were priced out of the market when rates were at 5% can get in the market today and borrow more than they likely expect, such as those with student loan debt.
Driver 2: The pandemic's effects on housing availability
The second major driver of today’s market is in increase of housing availability.
In 2019, many expected a banner year for real estate and while it was good for our industry it would have been better if we had more inventory. You can’t sell homes that aren’t on the market. However, as tens of thousands of families experienced pandemic-related losses of loved ones in 2020, the best and only options many families had was listing their homes for sale.
Many who didn’t contract the virus were negatively affected when they lost jobs and put their homes up for sale in anticipation of a future struggle to dig themselves back out of debt. Even with a temporary forbearance, the writing was on the wall and many Americans saw it there quite clearly.
What this tells us about the future
These two drivers are enough to keep the housing industry strong for the foreseeable future. As long as interest rates remain low, affordability in most US markets will remain high. As long as the pandemic continues, inventory will be available to buy.
However, now is the time to remember that housing is a cyclical business. Two things, at least, are bound to happen. First, interest rates will rise. Second, we will get the pandemic under control. When these things happen, our market will change.
Lenders who are prepared will come out ahead. I’ll write more about what I think that means next time.
Knowing our cyclical market favors prepared lenders, contact us today to schedule a live demo of the Mortgage Cadence Platform (MCP) to learn how we help lenders harness innovation to get ready for what's ahead.
By Joe Camerieri, EVP, Client Account Management at Mortgage Cadence
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