Why equity products will be critical to brokers in today’s affordability squeeze
While many homeowners are still hesitant to get back into the housing market due to affordability challenges, more of them are turning to equity products in the meantime.
Brokers have been talking about this battle in the equity space for a while, and it is likely to continue to heat up until rates slide a bit farther to entice those with low-rate mortgages to move, or housing inventory increases to give buyers more options.
A new study released by Citizens on Thursday continued to drive home the point that many homeowners believe that getting back into the market is not possible right now.
Only 13% of respondents said they felt buying a home was achievable in the current economic landscape. In the same survey, 44% of homeowners said renovation was likely their most realistic option over the next few years.
Fabien Thierry (pictured top), head of home equity lending at Citizens, said the 13% statistic was the most staggering to him.
“The stunner for me was the 13% of those homeowners who said buying a new home feels achievable right now,” Thierry told Mortgage Professional America. “That’s obviously low. That number captures the sentiment out there right now, with affordability, the elevated rates, and compressed inventory all converging. That’s what to me was the most surprising.”
Adapting to current conditions
Thierry said homebuyers are adapting their way of thinking about the current market conditions. Instead of just lamenting the affordability challenges they face, they’re looking to tap into equity products to try to either improve their current home or consolidate debt.
“It is, indeed, affordability challenges, but it’s also what makes financial sense at the moment,” he said. “I think this is why people will be looking into tapping into their own equity and looking for more productive ways to leverage their equity in their home. Affordability is still a challenge overall, but it’s showing how clients or homeowners are adapting to that reality. It’s a better, more rational financial decision.
“It’s been interesting to see how resilient the concept of renovation is for those homeowners. You have nearly half of the respondents who are actively planning renovation work. And to me, it signals something. It says that homeowners are now not sitting, they are adapting, and they’re choosing to invest in their existing homes.”
While there are homeowners still sitting on low mortgage rates from the pandemic era, a recent report stated that there are now more mortgages on the market with rates higher than 6% than with rates lower than 3%. Thierry said that this has started to move the market a bit.
“If you look at, for example, a consumer with a 3% mortgage rate, looking at the 7% existing mortgage rate, that was something that was difficult for clients to overcome,” Thierry said. “In 2022 and 2023, as rates started moderating a little more, closer to the 6% range, I think that trade-off started diminishing a little more.”
It’s the cost, not just the rate
Another interesting stat from the survey noted that for those who were planning renovations rather than moving, 36% said the cost of buying a home was the primary deterrent, and just 19% said it involved not giving up their current mortgage rate.
Thierry said it’s not just the home price that impacts the affordability challenge of moving, but all the other costs that come along with it.
“It’s all about the raw affordability of the purchase in itself,” he said. “It’s everything that comes with that decision. It’s the down payment, it’s the closing cost, it’s the price level, and all those things are adding up. There’s still a cost barrier up front in the process. So to me, it’s definitely something that clients have to weigh.”
Because of those costs weighing on the overall affordability picture of moving into a new home, the idea of renovating what a homeowner has using a home equity loan or line of credit becomes a more enticing option.
The survey reflected the desire for renovation, as 71% of respondents were planning a home improvement project in the next two years, and 66% were willing to sacrifice other major purchases to make those improvements.
“This is why people are now looking to stay longer in their homes,” Thierry said. “They’re looking into their existing homes and looking for ways to make it work for them. Renovation is most likely a more savvy financial decision altogether.”
While the market is still working through challenges, Thierry said there are deals out there to be made. Having access to home equity products will be important for loan originators to continue helping past customers until they’re ready to move on to their next home.
“There are some challenges out there with the housing market and overall rate situation,” he said. “Still, it’s good to see homeowners being resilient and staying very engaged in the way they think about their life and priorities, rather than waiting for the perfect condition and the perfect rate to make those financial decisions.”
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