Market reports, forecast data, industry insights, and more from iEmergent.
Today, fewer Americans are able to join the Homeowner Dream Club that my father, market intelligence pioneer Dennis Hedlund, wrote about 11 years ago.
This “club” is the culmination of the American Dream, where members swim and splash yearlong. It seems idyllic. So why are so few jumping in? It would seem some hesitate to apply for membership, having been turned down before. Others find the initiation fee to be a barrier or simply have lost their desire to join. While still others fear an unforeseen event could cancel their membership or the club could go belly up.
This is not the first time the mortgage industry has struggled with demand. More than a decade ago, my dad’s study of post-recession mortgage market challenges explained how and why housing supply was outweighing demand. That was all the way back in 2011, so why are we talking about it again?
The current situation is both eerily similar and completely different.
The primary housing market challenge Dad sought to untangle is now inverted. In 2011, lenders struggled to reconcile low-interest rates and inflated housing inventories with a dearth of qualified, mortgage-ready borrowers. As he wrote then: “Despite low rates and low home prices, the growing home-for-sale inventories and the number of banks flush with cash and reserves, many American households –- homeowners and homebuyers — are staying out of the pool.”
Clearly, the environment he described will be different now. Today, we’re facing a low housing supply and high home prices, therefore adding the challenge of housing affordability to what is already a complex situation.
What’s more, the booming labor market is still failing to keep up with the high cost of living. The Bureau of Labor Statistics reports that while average hourly earnings climbed 2.66 percent between October 2022 and October 2023, consumer prices are up 3.2 percent from October 2022 so everything we purchase, from gas to groceries, costs a little bit more. As a result, it’s become harder for people to save for a home or think they will be able to manage the costs of homeownership, especially with interest rates around 7 percent and home prices still rising in most housing markets.
Yet, much of what my dad wrote back in 2011 still holds true: “Houses can’t buy themselves. Low interest rates can’t shop for homes to buy. Available credit won’t spontaneously buy homes. Low housing prices don’t buy homes. Secondary markets by themselves don’t incent people to buy homes. Big inventories can’t write a check for the mortgage. Households buy homes.”
We need to find ways to restore the American dream of homeownership. This truth is challenged by prevailing gaps in trust, education and credit, which are just as wide as they were decades ago.
In September 2023, the average 30-year fixed-rate mortgage (FRM) rate was 7.19%, according to Freddie Mac. It could be that they'll stay in that range for a bit longer. The Mortgage Bankers Association (MBA) had expected the 30-year fixed rate to fall below 6% by the end of 2023, but recently revised its projections to predict the average rate will stay above 6% until early 2024. Fannie Mae predicts mortgage rates will average 6.6% in 2023 and 6.3% in 2024, and doesn’t expect rates to dip below 6% until 2025.
At the same time, home prices are expected to continue to rise in 2024, according to Freddie Mac, Zillow, and the National Association of Realtors (NAR). With too few homes for too many buyers, NAR expects home prices to rise by 2.6% in 2024.
The housing pool will likely remain shallow as long as home prices and interest rates stay high and affordable housing inventory remains low, making it even more difficult to close longstanding homeownership disparities.
Current homeowners can at least benefit from rapid equity appreciation. However, because of large gaps in homeownership rates, the recent equity gains have increased overall disparities in net wealth between white households and households of color. According to Harvard’s Joint Center for Housing Studies, the most prominent forces limiting the pool of available homebuyers include credit history, student loan and credit card debt, racial wealth gaps, economic uncertainty, and consumer distrust of financial institutions.
I think that the biggest limiting factor for the homebuyer pool’s expansion is that our industry does not know how to equitably serve the needs of households of color and is interested in shorter-term transactional success than in laying the groundwork for years of sustainable expansion and growth for the next 5-10 years.
It’s going to take all of us, working together, to overcome the impact of decades of discrimination and systemic racism.
Fortunately, the pool has not been closed entirely. Despite fragile economic conditions, there still is opportunity for many consumers to purchase a home. Homes are sitting on the market for an average of 54 days, up from an average of 36 days at the start of last spring, says NAR, and many sellers are reducing sales prices.
To make homeownership a truly achievable goal for more families in 2024 – and especially for unserved and underserved communities, the mortgage industry needs to reimagine how it identifies and serves would-be homebuyers. Of course, there is no one-size-fits-all solution. To effectively grow the kiddie pool of current homebuyer opportunities to an Olympic swimming pool, mortgage industry stakeholders must take a deep dive to determine the true size and demographic makeup of the homebuyer pool.
Once those parameters are understood, the behaviors of the pool amid shifting economic conditions can be analyzed to help anticipate their behaviors going forward. Doing so empowers lenders with a forecast of the size, density, growth rate and distribution of future home-buying opportunities for several years. With this insight, lenders can protect their organization’s bottom lines during market downturns and ensure organizational longevity.
According to current market analyses, the overall size and depth of the pool of U.S. households who are qualified and ready to purchase a home is 129.4 million, made of of three segments:
While that’s the total potential pool, however, the actual homeownership pool has to exclude more than 50 million households due to recent home purchases, credit issues, unemployment, and more.
The size and profiles of available household pools are unique for every market and household segment. That is why homebuying demand is inherently unique from market to market. Once lenders know where the demand is, they can better assess why those consumers are not jumping into the pool and how best to serve them.
For example, in our analysis of the Philadelphia market, we found that there is a high percentage of opportunity to lend to low- to moderate-income (LMI) borrowers.
In the Dallas-Fort Worth market, there’s growth in lending to Asian borrowers.
Mortgage opportunity in each market is ever-evolving, and data is the best way to pinpoint where growth will be, to which borrowers, and of what loan types.
Income distribution has always been a primary driver of mortgage demand as economic conditions change. Low-to-moderate income (LMI) households hold far less borrowing power than today’s top earners, and this disparity is not improving. The income gap has actually widened over the past several decades, causing severe financial stress in American low-income communities. In fact, as of the second quarter of 2023, Statista reported that 69 percent of the total wealth in the United States was owned by the top 10 percent of earners. In comparison, the lowest 50 percent of earners only owned 2.5 percent of the total wealth.
Homeownership prospects of young households have been particularly stunted, even though they make up the fastest-growing homebuyer market. More young people than ever are saddled with student loan debt, with EducationData.org reporting that the average student’s federal loan debt balance currently sits at $37,338. This common financial obligation has been made even more difficult by inflation, post-pandemic economic uncertainty, and a widespread lack of financial education.
Young people today are also waiting longer to reach the most common and financially demanding life milestones, such as getting married, having kids and buying a home. Many NextGen consumers also report feeling underprepared and even completely unprepared for the financial obligations of homeownership. This decelerated rate of household formations in the past decade and the age distribution in individual markets have a strong impact on the size of both current and future household pools.
Inflation has spurred the Central banks to increase their interest rates, which influences interest rates charged by commercial banks for mortgages. These rates may be slowing some borrowers from entering the purchase market but here’s how to put that into perspective. Although interest rates on 30-year FRM are higher than in the recent past, mortgage rates are still within average levels over the last 30 years. Few may remember but in October 1981, the 30-year fixed mortgage rate reached 18.4%, according to Freddie Mac.
Industry groups, including the MBA, are advocating to policymakers that interest rates need to stabilize or better yet start to tick down in 2024 to make homeownership appealing once more. ”We’re taking this message to leaders in Washington every day. And right now, the most important battle we’re fighting is on interest rates,” Bob Broeksmit, CMB, MBA President and CEO, told members gathered for the group’s annual meeting in October 2023.
Rate hikes are not the only tactic being used by the government to curb widespread home affordability challenges caused by inflation. On Oct. 16, 2023, the White House announced a series of new initiatives designed to boost U.S. homeownership, particularly for LMI and historically underserved communities. These initiatives include allowing homebuyers to leverage income from accessory dwelling units (ADUs), expanding mortgage finance opportunities for Native Americans and launching a USDA pilot for alternative eligibility criteria and additional home retention assistance programs for U.S. Veterans.
It’s evident that until challenges like insufficient savings, widespread debt, damaged credit scores and consumer financial education are properly addressed, a huge portion of American consumers either cannot or will not buy a home. What’s worse, any available supply will go unoccupied or get bought up by an institutional investor to be rented or sold for an even higher price.
So, what more can the mortgage industry do to address the many roadblocks to affordable, equitable homeownership?
To effectively open up the club and its housing pool to previously underserved LMI and minority markets, the mortgage industry must focus on three main goals:
There is plenty of homebuyer opportunity in today’s high-rate, low-demand, inflated mortgage market. Lenders just need the right market intelligence and forecasting tools to find it.
Using “zoomed-in” housing market data — insights at the county, city, and even neighborhood level — offers many benefits over only looking at the “big picture” of national housing pool data. Every market is different. To serve a community effectively, you must look at THAT specific community. Not just national-level housing data.
For example, let’s look at Las Vegas and Miami over a 20-year span ending in 2028. Up to the present, both of these markets are down similar trajectories from their peaks. However, they’re forecasted to look very different over the next 5 years.
Las Vegas could be back to its peak by 2028:
While Miami is forecasted to stay relatively flat through 2028.
Lenders in these two markets need to approach their goals and strategies very differently from each other, and forecast data is the way to drive strategic decision-making.
Looking to the future with your data is crucial. That means not only looking at how market opportunity shifted in the past and will shift over the next month, quarter, or year, but also surveying how the housing market’s tectonic plates will slowly shift in the long term. Forecasts that provide a reliable picture of long-term changes in homebuyer markets also help lenders better adapt and remain profitable even as the markets evolve.
Whether or not you agree with our mortgage opportunity forecasting model's outputs, this market analysis framework provides a reliable way for decision-makers to measure the current uncertainty in the market and prepare for the most probable outcomes. Once the market turns back around, lenders that leverage community data to determine eligible housing pools in their service region will be the best equipped to engage and serve prospective homebuyers.