As 2020 came to a close, there was much discussion about what 2021 would look like from both a housing and a lending perspective. Would the historically low rates of 2020 continue their run through 2021? Would the housing boom be sustainable if rates surpassed 3%?
According to Freddie Mac’s Primary Mortgage Market Survey, the average 30-year fixed rate was at 2.65% during the first week of 2021. As we approach the end of the second quarter, that average hovers right around 3%, down from a year-to-date high of 3.18% in early April. The Mortgage Bankers Association predicts rates to hit 3.5% by year-end.
“Mortgage rates are closely tied to the health of the U.S. economy. The country as a whole is on an upswing, which should lead to higher rates in the coming months,” says Lindsay Poe, division president at BluPrint Home Loans. “Recovery, however, has been a bit uneven. Some indicators, like the inflation rate, are soaring. Others, like the current employment situation, are off to a rockier start than expected. As a result, mortgage rates could continue to fluctuate. Some weeks might bring dips, and others spikes—expect to see an overall upward trend with regard to rates as 2021 progresses.”
Kelley Hailstone, CMB and EVP at FBC Mortgage adds, “Although interest rates seem to be on an upward trajectory, affordability is still currently very good. In addition to the MBA projections that rates will increase by up to a half point by the end of the year, they also project the median sales price for new homes to hold steady for the same period. However, at some price points, we are starting to see home price increases. If rates and sales prices both move in an upward trajectory together, we could see pressure on affordability. Low housing supply could add pressure to that projection and another layer of concern for affordability.”
Although the common consensus is that rates will continue to climb over the next 12 to 18 months, it isn’t set in stone.
“Currently, there are two strong arguments in favor of higher rates and one against,” Poe explains. “In the camp of higher mortgage rates, we’re looking at rising inflation rates and an improving U.S. economy. The big worry on investors’ minds at the moment is inflation. When inflation goes up, so do rates, because investors purchasing mortgage-backed securities need to see bigger returns in order to profit. With regard to economic growth, it almost always leads to higher rates. With almost half of the nation’s adults fully vaccinated, widespread recovery seems more of a question of “when” than “if.” If the markets start to think the Fed is going to start talking about reducing bond purchases, we are going to see rates jump. On the other hand, what could push mortgage rates down? The most probable cause would be a resurgence in coronavirus cases.”
Concerns in the lending industry aren’t limited to rates—margins are also waning. Despite a strong first quarter, production and profits are both down. According to the MBA, the average profit per loan was $3,361 in Q1, down from $3,738 in Q4 2020.
“We could see consolidation in the mortgage industry in the second half of 2021,” Hailstone notes. “There has been a lot of investment in our space, and many companies will use that to gain share as their pipelines come under control and organic growth slows. Mortgage companies are seeing quarter-over-quarter volume declines in 2021, tied to the interest rate moves and slowdown of refinance activity.”
When asked how his team at FBC Mortgage plans to be proactive, Hailstone states, “We remain focused on growing purchase business and meeting our builder partner and customer’s needs. FBC Joint Venture Group builds strategic partnerships with home builders so they can gain better transparency and control of the factors that traditionally disrupt their manufacturing process, allowing them to deliver a more efficient experience for their customers. We believe strategic partnerships create incredible new efficiencies in builders’ prequalification, financing, and closing processes, in addition to generating new revenues for home builders. Second, retention of our best employees and attracting ‘top performers’ continues to be a primary focus for our company in 2021. We are already seeing competition begin to downsize as they shed refinance activity.”
Simply stated, successful mortgage companies will need to be nimble and have the ability to quickly pivot in order to adapt to the shifting market environment.
Lenders striving for longevity will focus on providing high value and invest in growing purchase relationships in 2021 and beyond.