Traverse City Business News | ‘Hold on tight’: Mortgage lenders weigh housing market ups and downs

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‘Hold on tight’: Mortgage lenders weigh housing market ups and downs

The Traverse City real estate market has been a ball of chaos for two years in a row.

Homes selling way above asking price, dozens of bids on a single home, all-cash sales, invisible bids, bidding wars, escalation clauses, valuation gaps, Soaring real estate values ​​and shrinking inventory: these trends have all become commonplace in local markets. real estate since the start of the pandemic.

If there’s an under-examined side to this story, it’s what all the chaos has done to the mortgage side of the market.

Certainly, the preponderance of cash offers in today’s market has completely eliminated lenders from many transactions. According to real estate broker 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 had a front row seat to the stratospheric rise of the market and the challenges important that the upheaval has posed for countless potential buyers.

As Northern Michigan’s housing market finally begins to slow – the five-county area (Antrim, Benzie, Grand Traverse, Kalkaska and Leelanau) recorded 182 home sales in April 2022, compared to 261 in April 2021 – the TCBN spoke with three local mortgage lenders to learn more about interest rates, buying power, loan pre-approvals and what’s to come. Here are three takeaways.

Real estate investors and deep-pocketed buyers are distorting the market – for now

In a recent New York Times article, journalist Sophie Kasakove examined a growing market trend where investors and corporations are buying homes — especially those “at the bottom of the market” — and turning them into rentals.

Nagy

While Kasakove’s article looked specifically at how this real estate investment trend is affecting the housing market in Charlotte, North Carolina, local mortgage broker Mike Nagy said the problem is universal and affects virtually every desirable market in the states. United States, including northern Michigan.

“There’s a lot of news right now about these nationwide investment companies going into single-family residential communities,” said Nagy, vice president of mortgages for State Savings Bank. “All of a sudden the houses are being swept away by investors, who then start putting tenants in there that they haven’t even fully vetted.”

Nagy says the shortage of inventory will continue to push prices up until a bubble bursts, where no one sees (real estate) as a great investment anymore.

Right now you can sell real estate to people as a great investment because you can say, “Last year, (this house) got 20% appreciation,” he said. he declares. “Those days will pass, and when that stops, even the people who have bought all the investment houses will have to start lowering their prices, because they will generally have to sell to end customers and end customers are not going to pay these inflated prices.

Nagy sees rising interest rates as the thing that eventually slows real estate activity and ends the current “anomaly” of home values ​​appreciating in double digits year over year. As the Federal Reserve seeks to tame inflation, he said, the days of cheap money lending are likely over.

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

“I can just see the writing on the wall right now,” Nagy told the TCBN. “Those rates are going to keep going up until the economy slows down and people stop paying too much for cars and stop paying too much for houses.”

Nagy points to the labor market, layoffs and unemployment that follow.

“…(T)they’re going to start losing jobs because prime rates are going to go up, and the cost of doing business is going to go up, and companies are going to have to look at themselves and say, ‘Can we afford this new machine? who would add three new workers? And when they can’t, business slows down even more, and maybe they have to start laying off some people,” he said.

“Curing” inflation, says Nagy, comes with these markers.

“Then you get layoffs, and you get unemployment growing, and you get a situation where, yes, you’ve cured inflation,” he said. “And maybe it happens over a long period of time; I’m not saying it’s going to be played out next year.

“But that’s where I see things happening.”

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

Over a long enough period, rising mortgage rates could be enough to bring the real estate market back to “normal”. In the meantime, those hardest hit by rising rates are not investors or wealthy cash buyers, but first-time buyers.

Holmes

Just ask Bill Holmes, Vice President of Northern Michigan Sales for Front Street Mortgage. Between rising rates and rising real estate prices in the Grand Traverse area, Holmes said his clients’ average mortgage payment has doubled over the past year. The result is an accessibility issue that plagues many buyers.

“I think the main thing we’ve seen recently 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 are still out there under the impression that they can afford a certain price of the house. ‘interest.

“They probably need to come back and be re-approved.”

Mortgage pre-approvals, Holmes continued, have become one of the most confusing parts of the process for new buyers. For one thing, due to the local market trend, many buyers are finding that their pre-approval amounts don’t give them enough leeway to compete. On the other hand, because buyers often don’t find success quickly – and because rates rise in the meantime – many home hunters find that their buying power has since dropped significantly. they started looking for.

Brown

According to Randy Brown, broker and owner of Versatile Mortgage LLC of Traverse City, it was rare to write more than one or two pre-approval letters for a client.

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

Brown says a recent challenge has arisen due to rising interest rates: Purchasing power has declined by 25%.

“I’ve never seen this happen before,” he said.

Realtors who have been looking for properties in the $300,000 range since the first of the year now have pre-approval letters in their hands that are essentially “worthless,” he said.

“Now you need to narrow your price range down to $225,000,” he said. “And if you thought finding accommodation was difficult at $300,000 – well, pack your lunch.”

Despite the challenges, all is not catastrophic

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

For Brown, a lot of attention has recently been focused on the bond market, which he says is often a good indicator of where inflation is heading 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 look for other places to put their money,” Brown explained. “Where do they put it?” They put him in bonds. What does this do to yields? It knocks them down. When this happens, rates improve.

Brown’s prediction, based on the bond market and some interim mortgage rate cuts in mid to late May, is that some relief will occur on the mortgage rate front, likely in the last quarter of 2022. This rebound would be , ideally , provide a happy medium – restoring struggling buyers’ purchasing power, while cooling the market long enough to rebuild housing stock, temper appreciation rates and slow investment activity.

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

In the meantime, Holmes offers some simple advice to clients who have burned through a dozen pre-approval letters and found themselves bidding on every corner.

“Save what you can,” he said. “Reduce your overall debt; pay off some of the credit cards; don’t buy the RV or boat if you don’t need it; pay all your bills on time to have a higher credit score and get the best rates; and perhaps check with family members to see the availability of a monetary gift (to help with a down payment).

“Just hang in there; something will happen.

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