By: Dan Kelly
2018 was one of the more interesting years for the mortgage industry. For quite some time, we were blessed with a market-friendly combination of a low mortgage rate environment and a steady supply of move-in ready homes. Seemingly overnight, this combination evaporated in 2018. Rates climbed north of 5.0% and for the first time in a long time, inventory was limited. To complicate things further, the mortgage industry was plagued with “margin compression.” This is a fancy term for saying that the mortgage companies had to deliver superior service & execution, all while making cuts due to significant reductions in profit.
These factors resulted in a very competitive market for move-in ready homes and gave sellers a significant advantage. Many buyers responded by being aggressive in their negotiation tactics and wasted no time with their offers. At Kelly Mortgage, we saw new listings receive multiple offers within 24 hours of being on the market; and in many cases, those offers were above the asking price. We also saw buyers trying to sweeten the pot by waiving inspections, removing home sale contingencies, forgoing appraisals, and/or electing escalation clauses.
As 2018 progressed, the industry began to resemble the 2004–2007 pre-market crash landscape. Although worrisome, buyers understood the current market conditions and were willing to limit their aggression. Luckily, they remained patient and waited until the market corrected itself.
Now that Q1 2019 is almost over, it appears that a correction has arrived…or at least is entering the picture. As we analyze the factors below, we predict that the 2019 market will improve for buyers and remain strong for sellers.
Inventory
According to Realtor.com, the amount of inventory increased nationally in December 2018 by 5.0% and approximately 15.0% of homes experienced a price reduction. We saw a similar trend locally and believe this will likely continue in 2019—giving buyers more choices at more affordable list prices. Although competitive negotiating will remain, we anticipate an easing that will enter the market and continue throughout the year. Thankfully, buyers should not feel the intense pressure they felt in 2018 when they were deciding to buy a home. And while sellers will continue to experience a strong market, they will likely list at more compelling prices to attract multiple buyers.
Rates
In 2018, interest rates experienced a sharp increase and buyers experienced anxiety as to whether or not the interest rates they were being quoted at initially would remain the same throughout their entire home search process. Considering the competitive nature of the market, clients were finding the combination of potentially higher rates and higher sales prices to be very stressful. In 2019, we expect more stability in these areas which we feel will translate into additional confidence for buyers. In addition, we’ve already seen rates drop back into the mid 4.0% range, and according to all leading indicators, there are no signs that this will change.
Mortgage Companies
Over the last decade, the mortgage industry has been commoditized. To the buyer’s benefit, long gone are the exotic loan programs and confusing origination structures. Instead, the industry has moved into a ‘vanilla ice cream’ or ‘cheese pizza’ lending environment as loan programs and pricing are more comparable from firm to firm. During the 2018 industry-wide margin compression, many mortgage companies were forced to make cuts to sustain profitability. Unfortunately, those cuts were at the expense of the most fundamentally important thing…loan fulfilment. We do not expect these operational challenges to be limited to 2018, since they are now a part of the industry landscape. Our prediction is that this change will result in consolidation among mortgage companies based on a lack of long-term capitalization. Lending will be tougher for companies that operate inefficiently and/or have a high cost to originate. Stability, consistency of delivery, and excellence in execution have never been more important or more complex to maintain. The competitive advantage will go to the mortgage companies that are well-funded and committed to long-term viability through a blend of people, systems, and technology.
Final Thoughts
We are very bullish on a strong mortgage market in 2019. Sellers with move-in ready homes will likely see a strong market with quicker than average marketing times and a competitive pool of potential buyers. At the same time, buyers will likely see more inventory supplies at a variety of list prices, making the negotiating process less stressful. Finally, we expect to see stability in the market resulting in mortgage rates that will remain consistent.
The housing market and mortgage industry are constantly changing so it’s important to partner with the right service providers to make your buying or selling experience a success. The Kelly Mortgage Team can guide you throughout the entire process and will help you find the best loan option for your specific needs. We have the industry knowledge and local expertise to make it happen.