Executive on why holding out hope for Fed rate cuts is a dangerous move
A dose of realism and grounded expectations are two of the most important things loan originators need to keep in mind as they gear up their businesses for the coming years, according to a leading executive in the lending space.
Eddy Perez (pictured), founder and chief executive officer at Equity Prime Wholesale Mortgage (EPM), told Mortgage Professional America that living in a state of denial about the market outlook was a dangerous game for the mortgage community – even if interest rates start to fall.
“It doesn’t really matter what happens with interest rates,” he said. “They go a little bit more down, sure – there’s a bit more affordability, or if they go down too much then we don’t have enough inventory to support what’s needed [in terms of] demand. So all of a sudden, you’re going to have bidding wars.
“And that’s not good for affordability either. So I think the biggest challenge right now is everybody gets caught up in volume, and volume is very deceptive. They’ve got to look at units because that’s really what drives how many people you need to staff, affordability, everything of that nature.”
Housing supply showing few signs of soaring
There seems little prospect of a surge in housing supply to required levels in the coming years at the earliest, Perez said – something that should be a key consideration for originators as they weigh up when housing market activity will ramp up again.
“They just need to realize the realities and build their business models around that,” he said. “I think that’s probably the greatest challenge that I’m seeing out there. What’s the greatest opportunity? Well, once you accept that challenge, you can adjust your cost, you can adjust your staffing if you have to.
“You can see which direction you want to pivot or adjust into and really refine how to brand yourself, how to market yourself, how to grow yourself.”
Despite the absence of anticipated drops in mortgage rates in 2024, Melissa Cohn from William Raveis Mortgage suggests that buyers are adjusting to the "new normal" of rates around 6.5%.https://t.co/xSYYujTaAh#mortgageindustry #mortgagerates #houseprices #borrowers
— Mortgage Professional America Magazine (@MPAMagazineUS) April 10, 2024
Plenty of discussion in recent months has centered on the prospect of rate cuts by the Federal Reserve – but setting too much store on those would be an unwise move, according to Perez.
That’s partly because there will likely remain little opportunity for rate and term refinances if rates dip gradually lower, as a majority of homeowners are already locked safely into a lower-rate mortgage.
Why higher rates could be a good thing in the long term
Interest rates in the US remained resolutely low from 2008 onwards as the economy reeled from the impact of the global financial meltdown – and later, the COVID-19 pandemic – before the Fed began an aggressive hiking campaign in response to rampant inflation.
Perez compared that period to baseball’s notorious “steroid era” in the 1990s and 2000s, when widespread doping in the sport contributed to skewed statistics and unrealistic performance levels.
“All of a sudden, they started drug testing really hard. And now if you hit 30 home runs, you’re a stud again,” he said. “It used to be that you were a borderline bench player. The Fed kept interest rates artificially low, and now they don’t have to because when they started that a lot of people were not realizing that we had record-low demand and record-high supply. Well, we flipped.
“Now we have record-high demand, record-low supply. They don’t need to drop interest rates, and it has shown that people are still buying homes.”
What’s emerged now is a more balanced market, he said, that’s providing more opportunities for both first- and second-time buyers able to go about their purchasing plans without getting into bidding wars or having to put down offers on a property many times over the asking price.
“That is a very healthy market. That’s the same market that sustained inflation levels 40 years ago. It’s the same thing,” he said. “Those [2008-22] rates naturally would never have gotten that low. Two percent, 3%, even some of the fours, would never have existed without the government being the biggest buyer. Well, now we have a healthy market. We have a normal market.”
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