How often are your buyers’ mortgage applications facing denials compared to last year?
- Mortgage applications are denied more often (75%, 9 Votes)
- Mortgage application denial rates are unchanged (25%, 3 Votes)
- Mortgage applications are denied less often (0%, 0 Votes)
Total Voters: 12
Mortgage loan availability fell in July 2023 to its lowest level in a decade for non-qualified mortgages (QMs), according to the Mortgage Bankers Association (MBA).
The last time mortgage availability for high end homebuyers and owners was this low was in 2013, when the economy was rushing into a recovery from the Great Recession. For a better and more recent comparison, the MBA’s mortgage availability index is roughly 50% below pre-2020 recession levels — and continuing to fall.
The mortgage products most impacted by reduced access to lenders are jumbo loans, followed by conventional loans. The QM mortgages for low-tier purchases, typical for financing first-time homebuyers, are government insured.
In fact, QM availability is relatively high with relaxed standards of credit in an effort to support the home sales market as sales and mortgage origination volume declines. This QM condition adds some amount of support to seller pricing in the low-tier home market.
The reality is that homebuyers needing mortgage financing all face rising interest rates. In turn, their buyer purchasing power produced by the amount their wages and salaries permit them to borrow plummets, to what are essentially unusable levels. Thus, mortgage demand will remain low until seller resistance to price adjustments ends and property prices reflect the tradeoff in the lender’s increased share of a buyer’s earnings — higher interest rates.
Related article:
Press Release: Despite steady gains, Q2 2023 Buyer Purchasing Power Index still negative
With interest rate increases, 11% less mortgage money is available to an employed homebuyer than a year earlier. The result: most willing homebuyers are simply unable to match the seller’s pricing for the quality of home they expect to purchase. Add more mortgage application denials on tighter creditworthiness standards for mid- and high-tier property buyers and you will see high end property prices drop faster in the near term than low-tier property prices.
Panic at the bank
Lenders are clinging to caution in 2023, the result of:
- reduced mortgage originations slashing earnings;
- rising mortgage delinquency rates and uninsured losses; and
- bank failures, all conditions of a recession.
Further, lenders expect more of the same in 2024-2025. Accordingly, mortgage lenders are padding their risk premium rate margins with a hefty cushion to induce greater profits per origination on the premium spread, necessary to build up reserves in anticipation of additional delinquencies and mortgage foreclosures which will cause losses.
For example, as of September 2023, the spread between the 10-year Treasury Note and 30-year fixed rate mortgage (FRM) is a significant 3.0 percentage points — twice the historical average margin spread of 1.5.
Related charts:
Thus, while lenders may technically have the leeway to lower mortgage rates by squeezing their generous risk margins to help buyers borrow greater sums of purchase-assist mortgage funds, to cover their risks of loss they will not. It’s all about lender profits and reserves.
The only player in the equation with the latitude to make moves and break up the ice in the housing market?
The seller, of course!
Mathematically, home prices received by sellers absorb the change in borrowed funds available to buyers — based on (rapidly changing) FRM rates and (the generally static) 31% of a buyer’s gross income.
When FRM rates drop — as in 2020-2021 — seller pricing moves up rapidly, taking around 12 months to fully absorb the additional funding leaving no financial benefit to remain for buyers. On the other hand, when FRM rates increase — as in 2022-2023 — seller pricing moves down adjusting more gradually, taking 24-to-36 months to absorb the reduction in funds available to their prospective buyers. This abnormality hurt the income of everyone in the real estate business, including, ironically, the sellers of property who are financially most affected.
Related article:
This seller delay in falling prices is called the sticky price syndrome.
Classically, property sellers are slow to adjust to market dynamics when the result is lower prices. This tendency to cling to past price expectations in recessionary periods results in sellers listing at yesterday’s (higher) home prices. Listing brokers and their agents are often accomplices to this money illusion.
It’s not until all players in real estate sales acknowledge the reality — how much price buyers are able to pay for shelter as controlled by lending in the mortgage market — that they accept the fact prices must be cut to attract a buyer.
But, often, it’s too late for sellers: the home has already acquired that sticky price stigma. The stigma leads homebuyers and their agents to wonder what’s “wrong” with the property (or the owner or their agent) to cause it to sit on the market far longer than nearby recent sales of comparable properties. A clue is in the “priced right” nature of recently sold properties as necessary to attract buyers.
Ultimately a time suck for the seller’s agent. Unless the seller is willing to price the home at today’s market value the first time, the listing employment is a waste of time.
Related article:
Form-of-the-Week: A comparative market analysis for setting prices and rents — Forms 318 and 318-1
With home sales volume in the basement and mortgage credit tighter for buyers seeking the uninsured conventional or jumbo mortgages used to fund purchases of mid- and high-tier priced properties — not to mention the recession taking hold of jobs in the broader economy — seller price cuts are expected to accelerate heading into 2024, not slowing to find a bottom until 2025.
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