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  • Writer's pictureMichael Harris

How the Real Estate Market is Impacting Home Purchases & Loan Origination

In previous months we have discussed the relationships between the interest rates, the real estate market and loan originations. This month I would like to focus on the how the current real estate market is negatively impacting home purchases and thus loan origination.

 

The current real estate market plays a pivotal role in influencing loan originations, as it dictates the demand for mortgage financing. In a thriving real estate market characterized by rising home prices and strong buyer demand, loan originations typically increase. This is because more individuals are looking to purchase homes, necessitating mortgage loans. Financial institutions benefit from this trend, seeing higher volumes of mortgage applications and originations, which bolster their revenue streams. We have seen buyers continue to purchase from 2020 through the end of 2023 even though the home prices were at all time highs. As we have discussed the obvious big driver for this activity was the historically low interest rates. 

 

Conversely, in a sluggish real estate market where home prices are stagnating or falling, the demand for new mortgages tends to decrease. Potential buyers may be hesitant to invest in property, fearing further declines in home values. This cautious approach results in fewer home purchases and, consequently, fewer mortgage originations. The inventory levels in the real estate market also significantly affect loan originations. In a market with low inventory, there is fierce competition among buyers, often leading to bidding wars and higher home prices. While this can increase the size of individual loans, the overall number of transactions may be limited by the availability of homes. To that note April pending sales (defined by contracts signed) were down 7.7% from March and 7.4% year of year.

 

Interest rates and real estate market conditions are closely intertwined. In periods where the real estate market is booming, demand for mortgages can remain strong even if interest rates are relatively high, as buyers rush to secure homes before prices climb further. On the other hand, in a cooling real estate market, even low-interest rates might not be enough to spur significant loan origination activity if buyers are uncertain about future property values or economic conditions. I large number of homeowners currently have fixed rate loans under 4% placing them in a position where it doesn’t make financial sense to make a move.

 

 

Investor activity in the real estate market also impacts loan originations. When real estate is seen as a lucrative investment, there is an increase in demand for investment property loans. This can lead to higher loan origination volumes, particularly in markets experiencing rapid appreciation or rental demand. However, if the market becomes saturated or if regulatory changes make investment less attractive, investor demand can wane, reducing the volume of investment property loans and overall loan originations.

 

  


  

Inconclusion, we have a historic mix of high interest rates, low available inventory and high home prices impacting originations.  The federal reserve will obviously have a tremendous impact depending on their decisioning this year. Home inventory has been increasing leading to a potential stabilization if not deflation in pricing. More to come next month.


Michael Harris is Managing Director and Partner of the Servicing Practice at BlackFin Group. Michael has over 20 years’ senior executive management experience in default servicing and mortgage servicing. He and his team are subject matter in all aspects of servicing strategy, investor relations, process, compliance requirements. Prior to BlackFin, Michael was the President & CEO of Jennick Asset Management and was responsible for developing the pilot outsourced management program for Fannie Mae, Freddie Mac, and HUD while working with the top 10 mortgage servicing and capital markets firms. For more information contact info@blackfin-group.com

 

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