Financial technology (Fintech) has revolutionized how Americans save and spend since the dawn of the ATM machine, the evolution of online banking and the emergence of mobile wallets. But the effects of Fintech on the U.S. housing market have been surprisingly limited.
A recent study of Fintech’s influence on the housing market by the Urban Institute identifies areas where Fintech has simplified and automated portions of the homebuying and selling process, and several areas where there is plenty of room to improve.
Overall, advancements in Fintech have increased the efficiency of the homebuying process, from saving for down payments and qualifying for a mortgage through locating and purchasing a home. Some post-home purchase activities have also been made more efficient, such as applying for home improvement loans, reaching mortgage servicers and finding home insurance providers.
However, Fintech has done next to nothing to reduce barriers to homeownership.
The authors of the Urban Institute address the question of why Fintech hasn’t achieved the goals of increasing:
- housing affordability; and
- access to credit.
One way the study sees Fintech potentially disrupting the housing market is by making real estate agents irrelevant. Cutting out the middleman — and thereby cutting out some of the costs associated with buying and selling a home — by giving consumers direct access to listings and sales data may seem like a logical eventuality for Fintech. But the study’s authors admit that the vast majority of buyers and sellers seek out professional help. Thus, online buying and listing sites like Redfin remain a niche market and far from the norm.
Likewise, the mortgage market is somewhat served by Fintech, as the initial process of applying and pre-qualifying is often automated. But a real person eventually has to step in and perform — and charge for — personalized services. In contrast, consider taking out an auto loan or credit card, which is an entirely automated process from start to finish.
The average loan origination cost is $8,000, a number the study’s authors consider too high. These high origination costs, absorbed by the buyer, are one of the barriers to homeownership that has the potential to be lowered by Fintech, but has yet to change.
For example, lenders rely on credit reporting from major bureaus like FICO. These automated services are unable to capture data on a potential buyer’s rent or utility payments, information that could significantly influence their credit score and purchasing power. Instead, any buyer wishing to use non-traditional credit history to qualify for a mortgage needs to rely on manual underwriting, a process that is time-consuming and avoided by many lenders.
The Urban Institute study doesn’t offer any straightforward solutions to Fintech’s disinterest in helping more qualified homebuyers enter homeownership. Rather, the authors suggest Fintech will gradually improve enough to begin to reduce some of those homeownership barriers mentioned. Eventually.
In the meantime, real estate agents can do their part to break down barriers and make homeownership more accessible for their clients, both current and potential.
One positive step agents can take is distributing informational materials to known renters. These materials may contain information on:
- saving for a down payment;
- improving their credit score;
- local first-time homebuyer programs;
- becoming financially literate before buying a home;
- Federal Housing Administration (FHA)-insured mortgages;
- determining how much home they can afford; and
- calculating how much money they will need to buy a home.
An agent’s most valuable tool is their knowledge of the housing market and its inner workings. The best way to gain more clients and help renters cross the many hurdles that stand between them and homeownership is to share that information, regularly and often.