As spring arrives, lenders adjust to a changing marketplace

The mortgage industry is largely expecting to encounter a challenging, but improving, 2024 spring buying season. 

While rates and prices remain higher than what many consumers would prefer, aspiring buyers are still searching, home lenders and Realtors say. But there are questions about how the mortgage community can best accommodate them. Limited affordability and inventory have led many to try different customer-acquisition strategies than they did a few years ago, as buyers become more discerning compared to recent years.

At the same time, sentiment is tilting in a more positive direction following a challenging two- year period, according to Michael Linger, senior vice president of the financial services group at global investment bank Houlihan Lokey.  

"There are pockets of optimism," said Linger, who covers the mortgage industry. "The questions are around inventory freeing up and any real meaningful rate movement."

Mortgage companies hoping for a more profitable environment compared to 2023 may use as a benchmark the level of activity seen in the years preceding the Covid-19 pandemic, as they were characterized by growth at more affordable levels. 

"When you think about where interest rates were, where inventory was, it was still tight. We still had an appreciating market, which is historically good for homeowners," said Christy Soukhamneut, chief lending officer at University Federal Credit Union in Austin, Texas.  

"We particularly want the underserved borrower to be able to get into a home and not have it go down in value. We want to see them have some price appreciation. We want to see that in an affordable range," she said.

By some measures, market conditions are starting to more closely resemble those of later in the last decade. "When you look at mortgage sector employment following the pandemic, it is now just crossing the same level that it was pre-pandemic," Linger said. "However, volumes are, on a run rate basis, lower than they were," 

Volatility has not disappeared, though, as exhibited by recent interest rate spikes. As a result, lenders are coming into spring armed with new approaches to reaching borrowers, applying lessons of the past few years.

Consumers both cautious and eager
While contradictory, current trends are leading both to a sense of urgency among some buyers who fear missing out on the benefits of homeownership and a wait-and-see attitude among others hoping for lower rates. 

"I think a lot of the consumers are being pretty strategic about how they are going about buying and selling homes and how that progresses," said Ron Berry, senior vice president of retail mortgage sales at Carmel, Indiana-based Merchants Bank. 

Potential buyers, to a degree, are "sitting on the sidelines waiting for the opportunity — the right opportunity to come along," he said.

The most recent measure of home purchase sentiment from Fannie Mae shows consumers expect buying conditions to improve as the year progresses. But the rate of price appreciation is also driving others to jump in sooner. 

"I think the fear of missing out a few years ago was interest-rate driven," said Roger Steur, partner and senior loan officer at Birmingham, Alabama-based Method Mortgage. But any urgency now is more likely to revolve around "grabbing an investment before it really starts going up."

"I think that's the FOMO that could happen right now. It's just — 'I've got to do something now or else I might not be able to a year or two or three from now because prices seem to continue to be on an upward trend,'" Steur said

Pre-approvals, marketing outreach help originators stay ahead
Because lenders are now seeing customers at both the ready-to-buy and willing-to-wait stage, relationship-building is more crucial than it has been in the past few years, especially if interest rates head downward.

"When the market does turn, it presents another opportunity for you. You build trust, you build a partnership with a client, with a referral partner," said Tony Grothouse, founder and CEO of Revolution Mortgage, based in Westerville, Ohio.

"Acquire customers, win relationships right now. That's really the key message for us from a philosophical or a strategy standpoint."

And for buyers who might be mortgage-ready, a lending partner can also help demonstrate that there is still a "viable product to be distributed," given current rent levels and rising home equity.

"You can still make an incredibly appealing story," Grothouse said. 

A component of relationship-building frequently involves helping clients understand their finances and buying potential and then preparing to act when ready. At Merchants Bank, it means a spike in pre-approvals over the last two years, according to Berry.

"I think that's one of the most important things that any home buyer — but especially first-time home buyers — can do is reach out to your lender and get pre-approved. So that way you know what you're looking for from an affordability perspective, from a purchase amount perspective from a payment perspective," he said.

"We see, especially in the spring, a lot of pre-approvals come through."

Consumers and Realtors become more educated about mortgage options
The volatility of 2023 has made home buyers particularly rate sensitive, leading them to explore all possible ways to reduce monthly payments. As a result, buyers expect lenders to present varied options available, including products with different terms or buydowns. They are often guided by their Realtors. 

"We're anticipating we're still going to see a market in which supply outtrends demand," said Bill Bill Lublin, CEO of Century 21 Advantage Gold in Philadelphia and president-elect of the Pennsylvania Association of Realtors. "We're going to rely on the mortgage industry to provide financing vehicles that make sense."

Adjustable-rate mortgages and buydowns are among the products with benefits for home buyers today, according to Preston Moore of Howard Hanna Real Estate Services near Pittsburgh. During last fall's interest-rate surge, the share of adjustable mortgage applications increased to as high as 11%.

"We have resurrected mortgage products that we hadn't used in six, seven, eight years," said Moore. His firm also offers mortgage broker services, while Moore currently serves as president of the Pennsylvania Association of Realtors. 

In the Philadelphia area, "we're seeing people leaning perhaps into the shorter-term to get a better rate, or leaning into an adjustable mortgage," Lublin added.

"Because we had interest rates at 2% or 3%, none of those products made any sense. But now those products are actually coming back," Moore said

Moving beyond the tried-and-true purchase mortgage
With affordability and still-low inventory levels top of mind among buyers and lenders alike, companies are introducing or leaning into products and programs outside of the traditional purchase mortgage.

"I think that new construction is going to be a big piece to what's going on in that near to immediate future to catch us up on supply," said Grothouse, whose company offers an in-house building project.

Depending on the research source, the U.S. is experiencing a shortage of available housing totaling 1 million units or more, and homebuilding and construction industries are reaping some of the benefits of low existing inventory. Until supply meets demand, newly built homes should trend higher in the foreseeable future.

"It's going to be a staple of the next few years," Grothouse said. "So we've invested a lot of resources, talent into that department in general in looking to build that up."

In the near term, this spring also holds potential for increased construction lending if rates fall as expected, said Steur. Method Mortgage offers a one-time close loan for borrowers in its Southeastern markets.

"One of the pushbacks in the past was the final interest rate wasn't locked in until 60 days prior to completion. A couple of years ago that wasn't very popular," he said.

"Given the fact that every economic pundit is saying that rate should drop in the second half of the year, this product allows you to try to catch that lower rate six months from now, eight months from now."

While not new, discount programs aimed at various professions also could also bring borrowers to the table. To entice buyers this season, Method also rolled out a new discount this spring to help bring down closing costs for members of various professions, including educators, first responders and nonprofit employees. 

Seasonal patterns still apply even as borrowers and moving patterns change
Although many home buyers may be willing to hold out longer for a better rate this year, the upheaval caused by the pandemic does not appear to have dramatically altered seasonal influences.

While lower interest rates, work-from-home trends may have led to an "anomalous market" in the past few years, the effects of those factors have dissipated, with normal seasonal patterns returning, Lublin said.

"I think they were just obscured by some of the 'noise,'" he said.

Instead, school and work calendars continue to have a larger effect on when buyers choose to enter the housing market. 

"People's psychological habits haven't really changed. They're more interested in moving when they feel like they have more time available to do it," UFCU's Soukhamneut said. Typically, that mean springtime home searches before summer relocations.

"One of the biggest pieces of seasonality is the school year," Soukhamneut added. "A lot of people that move have children, and either they're the ones that are selling or they're the ones that are looking to buy or some combination thereof. So you see a lot more towards the end of the school year where kids are allowed to finish out."

But local trends can still steer mortgage lending in different directions from the national course. "I think that the seasonality of it is — probably at least here in the Midwest — is probably more elongated," Berry said. 

"That buying season now feels like to me like it does come out of hibernation in the spring, but we're seeing a consistent amount of what I would call purchase applications, really all the way up until back-to-school time."