Lenders, Consumers See Challenges Ahead in the Mortgage Market
Written By: Joel Palmer, Op-Ed Writer
Mortgage lenders and potential buyers are feeling pessimistic about the near term housing market, according to a pair of recent Fannie Mae surveys.
About 75 percent of mortgage lenders responding to Fannie’s first-quarter Mortgage Lender Sentiment Survey® (MLSS) expect profit margins to decrease in the next three months. That’s up from 65 percent in the previous quarter survey. Only 9 percent of surveyed lenders expect margins to increase.
Competition from other lenders, market trend changes, and consumer demand were the top reasons cited for the decline in profitability expectations.
Mortgage lenders also grew more pessimistic about the larger economy, with 59 percent now reporting that the economy is on the wrong track, compared to 29 percent a year ago at this time.
Compared to last year, across all loan types, more lenders this quarter reported reduced consumer demand over the previous three months for both purchase and refinance mortgages. Looking ahead, again across all loan types, fewer lenders than last quarter expect purchase mortgage demand to grow in the next three months, while the vast majority of lenders continue to expect refinance demand to decrease.
"For the sixth consecutive quarter, mortgage lenders expressed bearishness about near-term profit margin expectations amid headwinds from declining refinance activity, slower purchase mortgage demand growth, and narrowing spreads," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Numerous uncertainties, including heightened inflation and the Fed's monetary policy reaction, which must now also account for the inflationary impact of Russia's war on Ukraine, suggest increased market volatility, but the general underlying, upward rate trend aligns with lenders' expectations.”
The primary-secondary mortgage spread averaged 127 basis points in Q3 2021, 9 basis points above the 2019 average, though down from the peak of 174 basis points seen in Q3 2020.
Fannie Mae’s Home Purchase Sentiment Index® (HPSI) continues to show consumer pessimism toward home buying.
In the latest survey, more than two-thirds of respondents said now is a bad time to buy a home, compared with 29 percent believing it’s a good time. This is slightly more favorable than the previous quarter, when 70 percent responded that it was a bad time to buy and 25 percent believed conditions were favorable.
On the flip side, 72 percent of respondents believe it’s a good time to sell a home. The percentage of respondents who say home prices will go up in the next 12 months increased from 43 percent to 46 percent. The percentage of people who think mortgage rates are going up increased from 58 percent to 67 percent, and only 3 percent of respondents expect a decline in mortgage rates anytime soon.
“High home prices continue to be the most commonly cited reason by consumers for their belief that it’s a good time to sell (and a bad time to buy) a home; notably, the ‘good time to buy’ sentiment among renters dropped to a new survey low. This suggests that homeowners and higher-income groups may recognize the importance of getting ahead of the rising rate environment, while renters are keenly feeling the double constraint on home purchase affordability of rising house prices and rising interest rates,” said Duncan.
“With recent geopolitical events creating additional economic uncertainty – including likely increasing inflationary pressure – we believe the additional headwinds will compound existing affordability constraints to further soften mortgage demand in the coming year.”
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
