It’s not just pandemic-era rates, but years of low rates keeping people from wanting to move
Mortgage brokers continue to battle the effects of the pandemic-era low interest rates, causing potential customers to resist giving up their existing mortgage. These golden handcuffs remain a headwind in the industry, but one broker notes it is more than just the pandemic-era rates causing this effect.
Damon Germanides (pictured top), mortgage broker and co-founder of Insignia Mortgage, has honest advice for hesitant buyers and sellers. If they are waiting for low rates to return, they will likely remain on the sidelines.
“I just let people know we're out of the low-rate environment,” Germanides told Mortgage Professional America. “Historically, if you study these markets, bonds tend to go in one direction for a long time, and then pivot to a new direction. I don't see us in a 2% market again, maybe for the rest of my career, because the aftermath of 0% rates and 12 or 13 years of very low rates has put the country in a position where nobody is moving.”
While some buyers and sellers finally reach a point where they have to move, many sellers who would typically have upsized or downsized into a new home are simply holding tight.
“Seniors are staying in their home, even with their kids gone,” Germanides said. “They don't want to be there anymore. They’re happy to take their capital gains and downsize. But economically, what they had on the mortgage was too good, and so they're sticking around longer.”
An illiquid market
It’s not just seniors who are holding onto their property and a low mortgage rate rather than jumping into a new, higher-rate mortgage. Many homebuyers who want to move out of a starter home are simply making do instead.
“First-time homebuyers who now have a larger family are not able to go into a next-level home because of the costs. All of that is just creating a basically illiquid housing market, as we see with the data, especially in the existing home markets.”
Germanides said he has to be honest with his potential customers when they come to him for advice on jumping into this market. He is also surprised that prices haven’t dipped a bit more to compensate for the higher rate environment.
“You have to be honest when you're talking to clients,” he said. “You can't just say it's a great time to buy. That's very first-level thinking. What we’re seeing is that they need the house. They know it's not the best time, but they need it because they’ve had price appreciation skyrocket, and now higher mortgage rates, which I will argue are back to normal, are coming off a very low level.”
“You would have thought that there would be some adjustment in price to counterbalance the increase in mortgage, which hasn't happened yet. So people are worried about that, because if your cost of financing goes up two or three times, the purchase of that asset should adjust a little bit, and it hasn't really happened.”
Because prices haven’t dropped to compensate for the higher rates, Germanides said buyers are worried that they’re not only paying too much but might also have to pay for costly upgrades.
“People are concerned, like, ‘Am I really kind of buying at the top here?’” he said. “And it's something that doesn't make sense, especially in our markets. There are a lot of existing homes. They're not new homes. Some of them require more upgrades after you buy. So you have to take that into consideration.”
Bridging the gap
Another thing Germanides has seen is complex purchases falling through after a considerable amount of work. He said it’s something they’ve come to accept that there will be a certain amount of loans that won’t work out.
“We've accepted that a certain percentage of loans, no matter how hard we work, will cancel,” Germanides said. “For example, we tied up a very complex type of deal a couple of weeks ago. It was very attractive bridge financing, extracting the cash out of the home that the borrower wanted to sell, and apply that as a down payment to the new loan. The guy was expecting much higher rates given his situation. He was overjoyed with the loan structure.
“What happened? The inspection came back, lousy. The price was high, and much more work was needed than he had thought on the property inspection. He's like, ‘It doesn't make sense to get out of this house for that house.’ A lot of work was done on that, but nothing came from it.”
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Bridge loans are something Germanides has been working on more. As more banks withdrew from the bridge lending business, he founded a boutique bridge lending company called Insignia Capital Corp.
“It's our direct capital and we're helping brokers put their clients into attractive bridge financing through a bond fund that we work with on these loans,” he said. “So we're really excited about that business. It's a nice complement to our mortgage business, because in the event on our direct brokering something comes up short, you can find cash in another property for those clients, depending on the kind of transaction. So it's been very good.”
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