We know rates are going to move away from this post-recession life support phase and that that means we may have to change how we work with customers and how we sell mortgages.
My question is: Where are rates going and what does that mean for the mortgage broker business?
Rates Are Going Up and Sooner Than You Think
We’ve been hearing about interest rate increases for months now. The economy is improving so rates are going to go up — as long as things stay on track — and right now we’re waiting to make sure they do stay on track. This might take a bit longer than we thought. Though the Fed hasn’t acted yet, we’re already seeing mortgage rates start to move.
That’s right, they’re moving now. Thirty-year fixed-rate mortgages are already moving above 4% and that trend is probably going to continue. As Forbes said recently, the credit markets have been dancing around the subject with the Fed for months, but at this point the markets seem tired of waiting.
How high are we talking? In May, the Mortgage Bankers Association was betting we’d see 4.4% averages on 30-year mortgages by the end of the year, with 5.3% averages at the end of 2016. They also told us we should expect rate volatility to be “heightened.”
These are fairly middle of the road predictions, meaning mortgage rates could be pushed higher, or they could fail to rise to this level. I think we know how to handle rates that stick close to what we’ve seen over the last few years, but what if the market climbs higher than these predictions? Or what if the Fed pushes too hard too fast and the housing market stalls? What then?
The question for folks in the mortgage lead business is: Are you ready for these changes?
Why Higher Rates Are an Opportunity
If you are ready for the change, your business stands to do better financially.
Despite higher rates hitting consumers, housing prices are expected to gradually keep moving up. Currently, demand is still strong in many of the bigger markets across the country. As wages and job growth improve, people are still going to be able to buy. And they will buy.
Though higher rates may mark the end of an era, it doesn’t mean the end of business. Brokers should think about how they want to approach this new playing field. Is it selling more borrowers on buying down their rate with discount points? Focusing on rate and term refis for those borrowers who want to lock in before rates go any higher? Catering to jumbo and super jumbo loan borrowers? Or seeking out low-risk borrowers at the top end of conforming loan limits?
In other words, there’s more than one way to make more money in a higher-rate market.
Why Higher Rates Are a Challenge
That’s not to say it’s all going to be easy money. Take a look back at where rates have been for the last 10–15 years. For some people, higher rates are going to be a hard sell.
Think about the 20-somethings with good jobs looking to buy in a year or two. Some of these younger mortgage buyers today might not even realize how high interest rates climbed back in the 80s. Now I don’t think we’re going to see interest rates in the 12–16% range in the next couple years, it’s just not going to happen. But that doesn’t mean that today’s buyers aren’t going to be shocked — shocked — if we get to 7% rate averages for 30-year fixed-rate mortgages.
Remember, rates haven’t been that high since 2002, back when some of these buyers would’ve just been starting high school. Also realize that a rate in the 7% range is nearly double what the going rate has been over the last couple years.
It’s going to be a challenge to sell the younger generation on these kinds of rates. I have a feeling mortgage brokers are going to have to be history teachers for some of their clients.
Another possibility is that rates could climb too fast. Add together higher rates, high house prices, tighter lender restrictions, and a declining middle class and things may stall out. If that does happen, mortgage brokers will still have to figure out a way to survive.
How Do You Think Mortgage Brokers Can Win Big?
Still, I’m optimistic. I think the potential for a growing economy and a healthy housing market — the reasons behind hiking rates to begin with — are going to make for a good couple years for mortgage professionals.
Discount points may well become more popular. Buyers with more money may decide it’s time to take action. Younger borrowers can get over their initial rate shock and decide to buy.
And aged leads are always an option — especially for those borrowers who might need some time adjusting to the new normal.
What do you think? Are younger borrowers going to have a hard time with higher rates? Are rates going to go up as much as the experts say? Or even higher? What’s your plan to grow you business in these new conditions?