Will lower mortgage rates lead to a surge in home buying?

Lack of affordability may be an issue

Will lower mortgage rates lead to a surge in home buying?

Even the possibility of lower mortgage rates this year doesn’t guarantee a banner year for beleaguered brokers.

The Fed last month opted to leave rates untouched – a departure from the 11 hikes it had implemented since March 2022 in efforts to curb inflation. In opting not to raise the interest rate again, the Federal Reserve chairman ushered in waves of optimism that mortgage rates – which largely mirror interest rate activity – may finally start to come down this year.

But elusive affordability remains the elephant in the room that may disrupt a smooth transition into increased homeownership. The Housing Affordability Index measures the degree to which a typical family can afford monthly mortgage payments on a typical home – with a level of 100 meaning a family of median income has enough to qualify for a mortgage.

But here’s the rub: The index assumes that typical family of median income can afford to put down a 20% down payment. With inflation still not fully tamed, many are hard-pressed to come up with that size of a down payment. As a result, the latest index from the National Association of Realtors sits at 91.4.

A broker-focused snapshot into the future

Given that rough calculus, RentSpree CEO/co-founder Michael Lucarelli (pictured) provided broker-focused predictions for 2024. Bottom line: Potentially lowered mortgage rates are no panacea for brokers recovering from a tumultuous 2023.

Lucarelli views the market from a macroeconomic perspective: “Even though we’re seeing a softening a bit on rates, look at the overall environment of affordability,” he told Mortgage Professional America during a telephone interview. “In the past 20 years, you’re seeing an increase in home prices of about 250% - but over that same span of time, salaries have increased by 60%. So there’s really a widening gap with people’s compensation. It doesn’t keep pace with how quickly home prices have been growing.”

Lucarelli added that while mortgage rates could come down later this year, they will still be relatively elevated than what they were in the recent past. “Those are still high, and unlikely to go back down to 5% or 3%,” he said.

Against a backdrop of unaffordability, a growing number of people are forced to rent: “What this does is push more people toward renting,” Lucarelli said. “That is something we’ve seen really across the board, and I think it’s an important point. The more these people are renting and having to rent for longer and longer, you’re posting a steady uptick in the proportion of renters.”

The upshot: More than 40% of all households in the US are rental households, he said. “And this trend is not going to change,” Lucarelli added.

Institutional investors snapping up single-family homes to rent out

Exacerbating the trend is the growing emergence of institutional investors buying single-family homes for the rental market, he said. “What I do see is more of the institutional and even property management companies that have been sort of scooping up more and more of this single-family inventory. They have more capital at their disposal compared to a consumer, and they’re not really beholden to where people’s income isn’t keeping pace with home prices.”

Working closely with landlords, Lucarelli said he’s seen this higher demand for rental units firsthand. “One of the metrics we look at is rental applicants per property,” he said. “We’ve seen that number steadily growing over time. For me, that’s an indication that you are seeing more people ending up renting and the competition for those rentals that are available is heating up.”

He pointed to another telling statistic – the median age of the average first-time homeowner at 36 years old. The prior two generations, he noted, were able to buy homes while still in their 20s.

Lucarelli has seen a recent sign of the times emerge from his Los Angeles base illustrating efforts to enhance the possibility of homeownership from the renting masses. California Senate Bill 1157, which went into effect in July 2021 requires operators of subsidized multifamily units in the state to provide the option for tenants to have their rental payments reported to a credit bureau. The bill aims to help low-income renters build their credit history without having to resort to opening a new line of credit.

The bill is one of the first in the US that focuses on using rent payments to aid lower-income individuals and families in improving their credit scores. Lucarelli noted his platform enables renters to have their payments reported to a major credit bureau if they choose to do so.

But even such a groundbreaking bill isn’t likely to solve the lack of affordability. For one thing, SB 1175 has a limited shelf life, set to last until July 1, 2025. “This is rather limited in scope,” Lucarelli said. “And this is only for landlords that have 15 units or more.”

Again, there is no panacea in solving the housing affordability crisis.

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