4 Leading Indicators Shaping Today’s Mortgage Market (& What They Mean for Q2 2023)

As early Q1 data emerges, the mortgage industry seems to have reason for cautious optimism. Rates have declined slightly, and pending sales are rising for the first time since last summer. Both these factors have led to a recent increase in loan volume and overall housing market activity. 

In a recent episode of Clear to Close, Alan Parris, Bryan Traeger, and Anthony Ianni discussed some of these leading indicators and offered some opinions about what they mean for the future of 2023. Let’s examine some of the reasons they believe the mortgage market might be headed toward stabilization.

1. Mortgage rates appear to be moderating.

As mentioned, mortgage rates are falling, a fact which reopens the housing market for millions of home buyers, according to Freddie Mac. The average 30-year fixed-rate mortgage inched lower to 6.09% recently, the lowest since peaking at over 7% in November of last year.

While 6% may have seemed outlandish a few years ago, buyers seem to have a new perspective in light of 2022. “We often talk about short-term memory within the mortgage industry,”  Traeger says. Six percent looks really good when you’re used to seeing 7%. 

In fact, that one percentage point reduction in rates can allow as many as three million more mortgage-ready consumers to qualify for a $400,000 loan, which is the median home price. Parris notes that while not all three million may be new net buyers, that estimate does show the potential of what could be unlocked as rates continue to dip lower. 

And historically speaking, rates could very likely dip lower. Looking at past trends, when there’s a rapid rise in rates, traditionally there’s a period of recovery, which will likely play out in 2023. As the market continues to react to federal rate hikes, most forecasts call for rates settling closer to 5% this year.

2. Early mortgage market activity shows promise in 2023.

Ianni recently attended the Independent Mortgage Brokers (IMB) conference, where he had a chance to talk in depth with industry professionals. The atmosphere was positive, with most people feeling hopeful with regard to a recent surge in applications. “Some folks’ pipelines have doubled in the past thirty days or so,” Ianni says.  

January and February have shown promising market activity, according to the following numbers: 

  • At Maxwell, we saw loan volume starting to pick up in January, up around 20% MoM.
  • Median borrower DTI started to tick down again after a steady rise in 2022.
    • Average median DTI in 2021: 37
    • Average median DTI in 2022: 40
    • Week of January 22, 2023: First time median DTI fell below 40 (to 39) since first week of August 2022

Parris speculates that this positive early activity could springboard into normal Q2 seasonal increases to create momentum for the remainder of 2023.    

3. Inventory shows signs of (minor) relief.

Currently, there is an equivalent of 3.3 months’ supply of existing homes available for sale, according to the NAR. Inventory is expected to increase by nearly 23% in 2023. However, that’s primarily because homes won’t be selling as fast, rather than due to sellers bringing new listings to the market.

So while buyers may be poised to start home shopping again, that doesn’t mean they’ll necessarily find the home they want. Ianni says that inventory could be a hurdle to watch in the coming months, as potential sellers refrain from listing due to not wanting to lose the low locked-in mortgage rates they currently enjoy.

Parris agrees, saying, “There’s a massive amount of people who are at a really low rate.” In fact, 70% of homeowners are sitting on a mortgage rate of 4% or less. “They’re going to postpone a shift to a new home.” 

Traeger postulates that some homeowners may actually choose to rent out their primary home rather than lose the low rate. And while we’ve seen some major players in the rental investment market start emptying their portfolios, Traeger says that inventory may “just be backfilling the market.” 

Still, the latest builder sentiment data reflected some cautious optimism, with builder confidence increasing slightly (from 31 to 35) for the first time after 12 consecutive months of declines, according to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report. The way home builders handle short-term drops in demand with a long-term need for housing will be telling in how the market recovers.

In terms of prices, the market is still seeing slight increases, a fact that’s promising in light of a possible inventory dilemma. When commenting on an estimated 3.5% year-over-year increase, Parris says, “It’s a flattening of home prices, rather than a re-correction or a drop.” That’s good news that might motivate sellers who are on the fence about listing.  

4. Economic and consumer health are stabilizing in time for spring selling season.

Ianni notes that in general the economy seems stable. Inflation has come down, COVID is largely over, the labor market is strengthening, and people have a little more money in their pocket. “Maybe we’ve been in a recession, and now we’re landing softly on our tennis shoes,” he quips. 

If rates continue to decline, and the economic outlook stays positive, we could see a busier, more competitive spring selling season. Those who have put off a house purchase in recent years may now be in a position to shop. Ideally, this will help the market continue to re-balance and normalize.

Parris relates sentiments of lenders he’s spoken with. “They’re optimistic, but not planning for the tailwind. They think that it’s going to be better than they expected a few months ago, but they’re not planning on it.” 

Anecdotal evidence

Ianni concurs, after hearing optimist viewpoints at the IMB conference—people are still cautious, but less doom-and-gloom than at the end of 2022. Some companies are looking at mergers; some are looking at expanding to get ahead of the competition. Warehouse banks are seeing good signs, expecting March to be even stronger than January and February.

However, he also reminds listeners that “hope is not a strategy.” He says it’s good to analyze these early data points, but it’s also important to pay attention to real-life surroundings. Listen and look. Buyer behavior in the real world can give you a sense of what the numbers don’t tell you.

Traeger adds that this “cautiously optimistic” atmosphere is a good season in which to make preparations for the future. “Make sure you have all your surfboards ready so when that wave hits, you can ride it out and scale efficiently and capture revenues.” 

With that metaphor in mind, you may be contemplating whether or not your technology “surfboard” is ready for a wave of market recovery. Our team at Maxwell would be happy to help you assess where you stand. We have solutions that address the entire loan process, from application to underwriting and beyond. 

2023 is looking good so far. Let’s take advantage of this season of cautious optimism to prepare for an even better future. 

Want to hear the full conversation? Click here to listen to Clear to Close episode 32: 2023’s Mortgage Market: Reasons for Optimism or False Hope?

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