What does 2019 hold for the housing industry? It is a question many people have been attempting to answer. However, some of the perspectives I have been reading don’t quite fit with what I’ve seen in our industry over the past 20 years.
None of us — as far as I know — can predict the future perfectly. Those who have been around an industry for a while can generally read the writing on the wall and come up with a fairly good forecast. But I’m seeing some variance in the projections I’m reading.
In this post I’ll elaborate a bit on what we’re seeing coming down the pike, and how my experience has taught me it is likely to play out.
Affordability continuing downward
Going into 2019, lack of affordability is expected to continue to be an issue in the housing market. In fact, affordability is expected to continue to worsen, with home price rising gently at around 2.2% for the year. This could hurt home sales somewhat. If renters and homeowners know that they are unlikely to find a better deal in a new purchase, they are less likely to look at potential housing purchases.
Inventory and wages moving upward
On the positive side, inventory is expected to rise moderately with a projected increase of less than 7%. We are also seeing full employment, and wages have been on the rise, and are expected to rise further in 2019, especially following Amazon’s minimum wage hike to $15. These factors will all make some potential buyers better able to purchase if they choose to — but that is the big “if,” which will come down to how lenders choose to proceed. I’ll look more at this in a moment.
Interest rates rising, but possibly not much
When I started this article, Federal Reserve Chairman Jerome Powell had hinted that the Fed may slow the rate hikes they were expected to enact in 2019, which has some in the industry celebrating. More recent news has made this look more certain. But we shouldn’t be putting all of our hopes and dreams in the interest rate basket.
The potentially slower rise in interest rates could spell higher loan volume, just as the potential of future rate hikes may also spur potential buyers into faster action — hurrying to close before rates go any higher. Ultimately, however, our focus on interest rates may be distracting us from something more important.
What will really affect the bottom line
When our industry was made up of 70% refinance business, every shift in interest rates had a dramatic impact on everyone’s bottom line. When homeowners are considering refinancing, their decision will depend to a large degree on whether they can get a better interest rate. That doesn’t happen in a rising rate environment.
In addition, we’re not operating in a refi market anymore. In today’s purchase money market, 70% of our business is comprised of purchase money mortgages. And buyers who are considering purchasing a home generally do not base that decision on interest rates.
Home borrowers ultimately base the decision to purchase on necessity and circumstance. Do they need to move for a job, or to be closer to loved ones, or to make room for their growing family? Have they finally found their dream home? These borrowers are not likely to be swayed by shifting interest rates in the same way that refinance borrowers are, and the energy we spend myopically focusing on interest rates will likely be wasted.
So what will have the largest impact on the lender’s bottom line in 2019? I think it will be their approach to the business.
Lenders need to focus on what they do best: making contact with potential borrowers, offering them excellent services, and finding ways to connect prospective buyers with the homes they want and need. None of this depends on the interest rate environment nor even consumer sentiment (which is great right now).
Likewise, lenders can spend time streamlining operations, cutting out unnecessary costs and training personnel to meet the changing needs of today’s borrowers. You don’t need the any external market conditions to engage in these profit generating actions. These actions are always completely in the hands of lenders.
Yes, 2019 is going to be more competitive than 2018, but there will still be lenders that do very, very well next year. If loan volumes for individual lenders do fall in 2019, interest rates are likely not going to be the culprit. Going into the next year — as is often the case — a lender’s bottom line will be entirely up to them.