Buyers have fueled a red-hot housing market over the last
year as they rushed to secure record-low mortgage rates. But shifts are
underway, which may affect borrowers planning for their next home.
1.
Rising
rates. “Interest rates below 3% on a 30-year fixed-rate mortgage aren’t
likely to be around long”, says chief economist of the National Association of
Realtors. Rising inflation and a strengthening economy are expected to push
rates up. It is predicted that by as early as year’s end—but likely by next
spring—30-year fixed-rate loans will average 3.5%. Higher rates and home prices
could push some would-be buyers out of the market.
2.
Strict
qualifications. Lending standards tightened during the COVID-19 pandemic as
lenders looked to avert risk. Standards could ease a bit as the economy keeps
improving and refinancing’s become a smaller share of total mortgage lending.
Still, the most favorable rates will go to borrowers with stellar credit
histories—scores of 750 and above—and large down payments. Lending criteria in
the hot vacation and second-home market could be a different story. Due to
tightened underwriting criteria, second-home buyers could face steeper rates.
3.
Larger
mortgages. Higher home prices are leading to larger loan amounts. In March,
the average mortgage taken out on a new-home purchase reached a record-setting
$374,000. Up from the about $332,000, two years earlier, according to Mortgage
Bankers Association. As more people upsized their space in the pandemic, sales
in upper price brackets outpaced those at lower price points. Applications for
mortgages larger than $766,000 jumped 55% year over year in February, the
largest jump in any price range, according to the Mortgage Bankers Association.
By contrast, mortgages in the $150,000 -- $300,000 range decreased by 2%.
4.
More
nonbank lending. Borrowers have more options as nonbank lenders gain market
share. Nonbanks are competing more on rates and underwriting than banks have
been, and that’s particularly been true over the past year. That likely will
continue. As of now, banks appear to be content competing from the sidelines.
The top five U.s. banks—Well Fargo, Bank of America, JP Morgan, Chase, US
Bancorp, and Citigroup—comprised only 21% of total mortgage originations last
year, a decline from their 50% combined market share in 2011, according to the
Business Insider Intelligence’s Online Mortgage Lending Report. Alternative
lenders are offering traditional financial products often at lower costs, with
more relaxed eligibility criteria, and expanded digital options in loan
processing.
