Where is the mortgage market headed? Mike Simonsen and the team at Altos Research can tell you sooner than anyone. Since before the meltdown in 2008, Mike has been collecting, analyzing, and interpreting the most real-time real estate data available. And in this episode of Batting 1,000 with Dale Vermillion, he shares exactly what the data is indicating for future housing inventory levels, home prices, and more.

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Know, look, capitalize

By Dale Vermillion, CEO @ Mortgage Champions

Know your markets

Take the time to understand the trends so that you can share that knowledge with both your customers and partners to make a more informed decision.

Look for the positives

We must stay informed as to where the market trends are going and look for the positives in the data

Capitalize on the opportunities

The rapid pace of property value increases is finally slowing. Values will flatten and even reduce in some cases, so we must capitalize on the opportunities today. In other words, carpe diem!

The only way is through

Why embracing high rates is the only path back to an affordable housing market

By Jake Vermillion, CMO @ Mortgage Champions

TLDR

• While up 39% at present, YoY inventory gains will pull back to 20% by EOY

• While every state has more inventory than this time last year, only 5 states have more inventory than in 2019

• Given the direct relationship between rates and inventory, if rates recede, inventory can be expected to dip as well

• Simonsen believes that in order to return to pre-pandemic level of inventory, the market needs multiple years of 6%+ rates to allow new supply to outpace demand

For over two years, phrases like “savagely unhealthy” have featured prominently in headlines describing the state of the US housing market. And while inventory is improving, experts like Mike Simonsen remain concerned over the imbalance between supply and demand—especially considering broader economic trends and a sensational election cycle will likely precipitate rate cuts in the coming months. And while that may seem like a long-awaited god send for struggling lenders and originators, Simonsen argues that what may benefit the industry in the short-term will harm it in the long-term.

In today’s Plus 1, we’ll dive into the reasons why experts like Simonsen believe that in order for unsold inventory to recover to normal market levels, the industry needs multiple years of 6% rates to allow supply to outpace buyer demand.

But first, a WWII analogy on the choice before lenders, which you can read here or skip past using the table of contents below.

Table of contents

• The choice before our industry

• The current state of housing in America

• The only path to an affordable housing market

• A three-prong strategy for enduring higher rates

The choice before us is clear: cower to our natural instincts, or find a way to take ground

80 years ago, an amphibious force of American, British, and Canadian soldiers spearheaded one of the most consequential military operations ever undertaken: a hundred-thousand-man assault on German-controlled France. Within hours of the first landings, June 6th, 1944 had become one of the bloodiest days of the entire Second World War—a day that would permanently alter the course of human history.

A lot has been said about the landings over the past several months. Countless podcasts, shows, and books have detailed every aspect of the invasion, saturating my feeds with stories of courage, resolve, and—in some cases—sheer dumb luck. One of those stories came to mind when reflecting on Dale’s conversation with Mike Simonsen: the story of Brigadier General Norman Cota, lovingly known as Dutch.

Before Dutch strode onto Omaha Beach himself, the infamous first wave of American infantrymen had suffered catastrophic losses. As many as 50% of the soldiers assigned to breaching the beaches first were killed, injured, or lost in the carnage. Watching from the USS Charles Carroll, Dutch could see men from his 29th Infantry Division diving to the sand for cover. But it was there, on the sand, that they were most exposed to enemy fire.

In that moment, Dutch knew he had to find a way to spur his men through the fire. The choice was clear: get his men off the beaches, or the invasion would fail. Joining the forces of the second wave, Dutch summoned every ounce of courage he had. And, when the ramp was lowered some 150 yards from the shoreline, Dutch led his men into the water. Once ashore, Dutch spent at least an hour—perhaps as many as three—moving across the beachheads, encouraging his soldiers to remember their training, get off the beaches, and take it to the enemy.

While the courage Dutch demonstrated at Omaha can’t be learned, the wisdom of his conviction can be. Sometimes, the only way is through. And rather than cowering to our natural instinct for self-preservation, we have to remind ourselves of our training, refocus on our mission, and simply press forward. Doing so doesn’t guarantee that all will be well, but it gives us the best odds for realizing the desired end—in Cota’s case, defeating Hitler.

While our desired end may not mean as much to the fate of humanity, it means something for ourselves, our loved ones, our colleagues, teammates, companies, customers, and partners, and our industry as a whole. Without comparing the fate of the mortgage industry with the fate of the world, the choice before us is clear: cower to our natural instincts, or find a way to take ground.

The current state of housing in America

Having the most real-time real estate data available, Mike Simonsen’s team at Altos Research has a unique insight into the current state of housing. Needless to say, he shared a wealth of data over the course of his conversation with Dale, which can be summed up in three overarching categories: inventory, pricing, and the state of homeowners.

Inventory is growing, but not fast enough

Inventory in a snapshot

• YTD inventory is +39%, but should recede to +20% by EOY

• All 50 states have more inventory today than this time last year

• Only 5 states have more inventory today than in 2019

• If rates fall in the coming months, unsold inventory will fall as well

• New construction listings help, but are not all immediately available

• With 625,000 est. at EOY, inventory will end 40%+ below healthy levels

Describing the state of unsold housing inventory in the US right now is like describing a snapshot of a teeter-totter at equilibrium—you can assume it’s in motion, but without the benefit of time you can’t know in which direction or how fast. In the same way, the factors that drive housing supply (rates, construction, consumer confidence, etc.) are in motion, but predicting which factor will outweigh the others and how quickly it will move the market from its current status quo is an exercise in educated guessing.

Thankfully, Simonsen correlated the levers in his conversation with Dale: if rates dip, inventory will dip as well. If rates rise, inventory will rise. Similarly, if the economy strengthens, demand will pick-up and inventory will fall. Conversely, if the economy weakens and unemployment spikes, distressed inventory will eventually hit the market, adding more options—especially for constrained borrowers.

Regardless, the current rate of replacement will only restore US housing inventory to normal levels (roughly 1M unsold homes in the middle of summer) if 6%+ rates prevail for another 24-36 months. Barring that, inventory will continue to sit near historic lows, driving prices higher and perpetuating the affordability “crisis,” as some in the industry have labeled it.

Home prices are basically flat, but shouldn’t crash

Prices in a snapshot

• At $450,000, the median US home price has not changed in over 2 years

• Home prices are expected to grow less in 2024 than in 2023

• Up 3% YTD, price gains are forecasted to end between +0-3% by EOY

• Price reductions are currently growing at 30bps/week

• Homes sold with price reductions is expected to be 39% at EOY

• There are 8% more price reductions expected in 2024 than normal

Home appreciation will end essentially flat in 2024, with the median home price in America remaining unchanged at $450,000 since 2022. With price reductions increasing modestly week-over-week, higher-than-normal numbers of homes sold with a price reduction in 2024 is expected. That said, while home prices may not be rising, Simonsen sees no indication of home prices crashing, not even in the most regressed markets (e.g., Austin, TX).

Unlike inventory, prices typically have an inverse relationship with rates. So, if the FED executes one or more rate cuts in the coming months, home price appreciation could end closer to +3-5% than Simonsen is currently predicting at +0-3%. Regardless, significant changes in home prices up or down seem unlikely, with no data supporting legitimate concerns of a price crash.

Homeowners are split in two camps: haves, and have nots

Homeowners in a snapshot

• At just 48%, the national average LTV is down 31% from its peak in 2014

• Average equity amongst US homeowners sits at $305,000

• The average DTI ratio, however, has risen to 40%

• Late cycle borrowers have significantly higher LTV and DTI ratios

• In contrast to 2008, rising LTVs are driven by higher rates, not falling incomes

Let’s start with the haves. Borrowers who took advantage of pre-pandemic home prices and intra-pandemic rates may be—on paper—the best positioned homeowners in American history. They’re debt-to-income ratios are the lowest ever, their LTVs are exceptional (well below 50%), and their equity saw the highest increase in reported history.

On the flip side, borrowers who entered the market in 2022 or later have some of the highest DTIs on record (in the 40% range), high LTVs (driven primarily by 7%+) rates, and in many cases bought homes at their peak listings—some in markets that are now underwater.

To Simonsen’s point on the podcast, the contrast between borrowers who purchased as little as 18 months apart in some cases is stark. That said, even late-cycle borrowers in the most depreciated markets are unlikely to remain underwater for more than a few years, with many already having positive equity.

On paper, the American homeowner is strong; but, that strength (combined with demographics) may be contributing to the continued lack of unsold inventory. While the evidence for a rate lock-in effect is debatable, the evidence for a payment lock-in effect is hard to ignore. Simonsen summed it up like this:

Americans enjoying some of the most-affordable mortgage payments simply don’t want to give them up. And so, until they’re either forced by extreme circumstances or unavoidable life events, they’ll do what they can to retain their remarkably cheap financing and historic levels of equity.

Why Mike Simonsen believes the only path back to an affordable housing market is high rates

Ultimately, unsold inventory is a reflection of supply and demand. Meaning that with the supply chain mostly recovered from the pandemic, the sole impediment to inventory returning to normal levels (roughly 1M unsold homes in the middle of summer) is heightened demand.

Demographically, we know that more prospective home buyers will enter the US housing market over the next 25 years than ever before in a similar timeframe. Which means conditions that invite activity above and beyond that anticipated by Generations Y and Z will result in demand continuing to outpace supply. Foremost among those conditions is lower rates.

In other words, no single factor impacts the supply/demand relationship more than the direction rates head over the next 12 to 24 months. If the FED continues to reduce rates and drive higher levels of buyers into the market, inventory gains will fall to anemic levels, prolonging a truly unaffordable housing market that will hurt homeowners lenders more in the long run than 6%+ rates for another 18-36 months.

A three-prong strategy for enduring higher rates

So, inventory’s growing but vulnerable, home prices are flat, homeowners are positioned either really well (or not), and experts like Simonsen believe we need multiples years of 6%+ rates to fight back to an affordable housing marketing…. what’s the strategy?

1. Train your people to handle high rates

First and foremost, you have to equip your team to be able handle rate concerns. If your salespeople cannot prove the benefits of homeownership—even at 6% or 7% rates—your competitors will.

If you’re not actively drilling your team members rate responses, workshopping scripts, testing messaging in marketing materials and automated communications, you need to build a foundational level of competence for exploiting opportunities in high-rate markets.

2. Leverage equity and debt

Both in terms of training and products, you need to equip your people to be able top leverage historic levels of equity to consolidate historic levels of personal debt—especially if rates dip during the election cycle. Proactively communicating with past customers about the possible benefits of leveraging the equity in their home is a must for every lender in this environment.

And that can be as simple as old-school call campaigns, or as slick as vertical video ad campaigns on social. You have borrowers in your lending ecosystem who could benefit from tapping the equity in their home—and not just through a HELOC. If you’re not reaching those borrowers with a compelling, timely message and offering free consults to explore their options, you’re leaving transactions on the table.

3. Invest in the next generation of homebuyers

Lastly, you have to be cultivating the borrowers who are going to fill your pipelines 5, 10, 15 years from now. There are innumerable strategies for reaching future Gen Y and Z buyers, but regardless of which you choose to deploy, you have to focus heavily on the long-term benefits and costs of renting vs homeownership. If for no other reason than to prepare your salespeople for having quality conversations n the topic in the future, you should be requiring your loan officers to perform rent vs buy calcs and develop compelling talk tracks. And if you’re in retail, that should be done in partnership with your referral partners through co-marketing materials, cohosted, events, etc.

In summary

Dale often says the most common mistake most borrowers make is focusing on short-term benefits instead of long-term gains. I’d argue, and I’d submit that Simonsen is arguing, that lenders are committing that same mistake. Rather than treading water, lenders need to give up on hoping for lower rates and begin working toward a healthier, more-affordable housing market for every day Americans.

That starts with serving borrowers who need homes today, despite the rates, and getting creative with available equity to reduce ballooning DTIs. With a data driven approach, a highly trained salesforce, and an expertly crafted product suite, lenders and loan officers who have summon the courage to do more than just duck-and-cover can gain ground—even in today’s market.