| According to an analysis by Mark Fleming of Corelogic, we're experiencing an unusual combination of pent-up supply and pent-up demand. On the Supply Side Over the last 4 years, "shadow inventory" has provided a source of low-priced homes for sale that have attracted investors and first-time home buyers. That inventory has become much more concentrated in judicial states (states that require a lawsuit to be filed by the lender in order to |  |
foreclose on the property – a process that both delays and raises the cost of obtaining a foreclosure). Because so much of this low-priced shadow inventory is now found in judicial states, fewer of these homes are coming to market.
Another constriction on inventory is being caused by what has been called the "interest rate lockout effect." Almost half of all homeowners with mortgages have loans with rates of 4.5% or lower. There is a well-founded and widespread belief that interest rates will be rising in the near future. As a result, these homeowners with low fixed rate mortgages have much less incentive to sell and buy another home if that would mean taking on a mortgage with a higher rate than the one they have now.
There is also a high percentage of mortgaged homes with an effective LTV of more than 80%. This doesn't prevent people from selling their home and buying another, but it would likely mean that they would be required to purchase mortgage insurance – thus making their payment higher and the mortgage more expensive.
These 3 factors have all contributed to the perceived lack of inventory.
There are also Constraints on the Demand Side
Historically, while first-time buyers represent a significant percentage of all buyers, the majority of homebuyers are also sellers of an existing home. But because of the supply-side constraints outlined above, we are not seeing as many "move-up buyers" in the mix. Many of the people who might otherwise be thinking of selling their home and buying another have decided to stay in their current homes and wait for conditions to get better. Until these people decide to sell, they won't be in the market to buy either, and that reduces demand.
Demand has also been reduced by the fact that institutional investors have lost much of their appetite for buying homes – largely because home prices have continued to rise (a 7.5% year over year increase in the Home Price Index just reported for June).
Furthermore, the significantly reduced number of loans being originated with credit scores below 640 today, compared to before the bubble burst, means that about 25% of the traditionally credit-eligible population is having a difficult time getting mortgage financing to purchase a home.
And finally, the decline in the national homeownership rate (currently at 64.8% -- its lowest point since 1995) shows a shift from owning to renting. This is particularly true of the Millennial generation. The home ownership rate for 25 to 34-year-old Baby Boomers was 51.6% in 1980. The homeownership rate for 25 to 34-year-old Millennials in 2012 was only 37.9%. (Millennials are also waiting longer to get married, which may be related, and many of them have much higher student loan debt than Baby Boomers did at the same age.)
How Loan Originators Can Proactively Respond to These Conditions
On the supply (inventory) side of the equation, you can work with your Realtor partners to identify homeowners who might benefit from selling their current home.
Begin by identifying neighborhoods where prices are good (from a seller's perspective), and demand is good – as indicated by relatively short "days on market" before a sale, and by relatively high ratios (over 30%) of monthly sales numbers compared to the number of homes for sale.
We know that mortgage interest rates are still relatively low (about 4.25% as I write this for a 30 year fixed rate mortgage). If sellers can make a relatively quick sale of their current home, chances are good they will be able to purchase, and if necessary, finance their next home purchase fairly quickly, and before any significant increase in interest rates.
You also know that every situation is unique. The seller, for example, may have significant equity that can be applied toward the purchase of a next home. Even if the interest rate would be higher than their current rate, the larger down payment and the relatively small mortgage could make a higher interest rate a moot point for the client.
Your strategy would be to put together, with your Realtor Partner, a series of targeted, co-branded postcard mailings to the kinds of neighborhoods I have described. You and your Realtor Partner would be offering a free Market Analysis of the prospect's home (done by the Realtor), combined with a free Financial Analysis (conducted by you). The Realtor helps the potential Seller get a sense of what their house would sell for. Your job would be to interview the potential Sellers to understand what their goals would be, and what they would be looking to accomplish if they were to sell their home and buy another (or simply sell their home). With that information, you could put together a financial analysis that shows the prospective Sellers how likely it would be that they could accomplish their financial and personal objectives by putting your home on the market.
On the demand side, you would also want to work with your Realtor partners. They get leads every day from people who are basically dipping their toes in the water to see what's out there. These people are legitimate buyer prospects. They would not put themselves in the position of having to talk to a salesperson (the Realtor) unless they had a genuine desire to buy a home. But their skepticism and sales resistance is high – as evidenced by the typically very low rates of conversion that Realtors experience.
You (and not the Realtor) are in the best position to speak to these buyer prospects so that you can interview them and discover their reasons for wanting to buy a home – and just as importantly, their fears, obstacles, and concerns about whether this is the right time for them to do so. You can position yourself and act as a home buying coach. You place yourself on their side, and you help them understand and sort through all of the pros and cons of buying a home in today's market. Every situation is different. Whether you're talking to Baby Boomers, Generation Xers, or Millennials, you will find people who have been hesitant to move forward with the homebuying process because they have been misinformed or have been made fearful because of something they've heard from a friend or in the media that in their case, at least, does not apply.
In this way, you are able to help people who really would benefit from buying a home, and at the same time, you will be providing your Realtor partners with transactions they would never have gotten otherwise.
A New Seminar That Addresses This Solution
On Wednesday, August 13th, I will be presenting a new, free online seminar: The Home Buyer Strategy Session -- Your Key to More Originations. You may already be registered for this seminar. If you are, you received an e-mail yesterday with full instructions for joining the seminar. If you're not registered and would like to attend, go here.
You can also watch the latest seminar in the series, "How to Do an Effective Home Buyer Interview" by clicking here. You can access all of the previous seminars in this series by clicking here.
Another constriction on inventory is being caused by what has been called the "interest rate lockout effect." Almost half of all homeowners with mortgages have loans with rates of 4.5% or lower. There is a well-founded and widespread belief that interest rates will be rising in the near future. As a result, these homeowners with low fixed rate mortgages have much less incentive to sell and buy another home if that would mean taking on a mortgage with a higher rate than the one they have now.
There is also a high percentage of mortgaged homes with an effective LTV of more than 80%. This doesn't prevent people from selling their home and buying another, but it would likely mean that they would be required to purchase mortgage insurance – thus making their payment higher and the mortgage more expensive.
These 3 factors have all contributed to the perceived lack of inventory.
There are also Constraints on the Demand Side
Historically, while first-time buyers represent a significant percentage of all buyers, the majority of homebuyers are also sellers of an existing home. But because of the supply-side constraints outlined above, we are not seeing as many "move-up buyers" in the mix. Many of the people who might otherwise be thinking of selling their home and buying another have decided to stay in their current homes and wait for conditions to get better. Until these people decide to sell, they won't be in the market to buy either, and that reduces demand.
Demand has also been reduced by the fact that institutional investors have lost much of their appetite for buying homes – largely because home prices have continued to rise (a 7.5% year over year increase in the Home Price Index just reported for June).
Furthermore, the significantly reduced number of loans being originated with credit scores below 640 today, compared to before the bubble burst, means that about 25% of the traditionally credit-eligible population is having a difficult time getting mortgage financing to purchase a home.
And finally, the decline in the national homeownership rate (currently at 64.8% -- its lowest point since 1995) shows a shift from owning to renting. This is particularly true of the Millennial generation. The home ownership rate for 25 to 34-year-old Baby Boomers was 51.6% in 1980. The homeownership rate for 25 to 34-year-old Millennials in 2012 was only 37.9%. (Millennials are also waiting longer to get married, which may be related, and many of them have much higher student loan debt than Baby Boomers did at the same age.)
How Loan Originators Can Proactively Respond to These Conditions
On the supply (inventory) side of the equation, you can work with your Realtor partners to identify homeowners who might benefit from selling their current home.
Begin by identifying neighborhoods where prices are good (from a seller's perspective), and demand is good – as indicated by relatively short "days on market" before a sale, and by relatively high ratios (over 30%) of monthly sales numbers compared to the number of homes for sale.
We know that mortgage interest rates are still relatively low (about 4.25% as I write this for a 30 year fixed rate mortgage). If sellers can make a relatively quick sale of their current home, chances are good they will be able to purchase, and if necessary, finance their next home purchase fairly quickly, and before any significant increase in interest rates.
You also know that every situation is unique. The seller, for example, may have significant equity that can be applied toward the purchase of a next home. Even if the interest rate would be higher than their current rate, the larger down payment and the relatively small mortgage could make a higher interest rate a moot point for the client.
Your strategy would be to put together, with your Realtor Partner, a series of targeted, co-branded postcard mailings to the kinds of neighborhoods I have described. You and your Realtor Partner would be offering a free Market Analysis of the prospect's home (done by the Realtor), combined with a free Financial Analysis (conducted by you). The Realtor helps the potential Seller get a sense of what their house would sell for. Your job would be to interview the potential Sellers to understand what their goals would be, and what they would be looking to accomplish if they were to sell their home and buy another (or simply sell their home). With that information, you could put together a financial analysis that shows the prospective Sellers how likely it would be that they could accomplish their financial and personal objectives by putting your home on the market.
On the demand side, you would also want to work with your Realtor partners. They get leads every day from people who are basically dipping their toes in the water to see what's out there. These people are legitimate buyer prospects. They would not put themselves in the position of having to talk to a salesperson (the Realtor) unless they had a genuine desire to buy a home. But their skepticism and sales resistance is high – as evidenced by the typically very low rates of conversion that Realtors experience.
You (and not the Realtor) are in the best position to speak to these buyer prospects so that you can interview them and discover their reasons for wanting to buy a home – and just as importantly, their fears, obstacles, and concerns about whether this is the right time for them to do so. You can position yourself and act as a home buying coach. You place yourself on their side, and you help them understand and sort through all of the pros and cons of buying a home in today's market. Every situation is different. Whether you're talking to Baby Boomers, Generation Xers, or Millennials, you will find people who have been hesitant to move forward with the homebuying process because they have been misinformed or have been made fearful because of something they've heard from a friend or in the media that in their case, at least, does not apply.
In this way, you are able to help people who really would benefit from buying a home, and at the same time, you will be providing your Realtor partners with transactions they would never have gotten otherwise.
A New Seminar That Addresses This Solution
On Wednesday, August 13th, I will be presenting a new, free online seminar: The Home Buyer Strategy Session -- Your Key to More Originations. You may already be registered for this seminar. If you are, you received an e-mail yesterday with full instructions for joining the seminar. If you're not registered and would like to attend, go here.
You can also watch the latest seminar in the series, "How to Do an Effective Home Buyer Interview" by clicking here. You can access all of the previous seminars in this series by clicking here.
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