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Rising Home Prices & Interest Rates Are Impacting the Loan Market

The U.S. economy continues to move in the right direction in spite of a stock market correction and some threats related to overseas trade wars. The truth is that employment figures are up as is consumer confidence related to housing. While this is good news for now, rising home prices and soaring interest rates are already having an impact on the loan market.

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Housing Market Confidence is Up

Even though Americans are more confident about the state of the housing market, they are still reluctant to take the steps necessary to buy a home. Fannie Mae just released the latest results of its Home Purchase Sentiment Index, which rose 3.4 points in April to 91.7. This is an all-time high for this survey which assesses consumer confidence around owning a home.

More Americans than ever believe that now is a good time to sell a home. Another encouraging part of the survey reveals that fewer Americans are concerned about the prospects of losing their jobs over the next year. There was also an increase (one percentage point) of respondents who said that they had received a significant wage increase compared to the same period last year.

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Loan Market Stalls With Rising Home Prices and Interest Rates

With housing market sentiment at record levels, it would make sense that the loan market would also be booming. Unfortunately, this is not the reality. Home prices, as well as interest rates, are on the rise, which is significantly impacting the loan market.

According to Black Knight's Mortgage Monitor Report, there has been a 1.24 percent increase in median home prices nationally since the beginning of 2018. This is the swiftest start to any year since 2005. There are 11 national markets, all in Western states, that have annual home price appreciation rates of 10 percent or higher. In San Jose, CA, the median home price has increased 24.1 percent over the past year to $1.17 million.

The Mortgage Bankers Association reports that mortgage applications were up just 0.3 percent in the first week of March even though the average loan amount on the applications had gone up to its highest rate since November 2017. Some of the reasons for the stall in loan activity have been related to economic fears, but more concerns relate to an issue with supply.

There may be a higher demand for homes, but the need is for homes that aren't necessarily available. Specifically, the shrinking of the middle class has created a demand for either high-end homes or the most affordable homes. Homes in the median price point may be available, but there is not a demand to match the supply.

As interest rates continue to increase, the appreciation in home prices has continued to accelerate, both of which are creating a squeeze on affordable homes in the U.S. Over the past 15 months, there has been a nearly full percent jump in the rates on 30-year fixed-rate mortgages. Rates on ARMS have not increased nearly as much, which makes a case for the rising popularity of ARMS in this market.

How an Asset Management Company Can Help Lenders

Is there a way to mitigate risk and maximize profits in this uncertain environment? Fortunately, yes.

Even in a strong economy, conditions change and that creates the need for lenders to re-assess risk. Another interest rate hike could create even more unpredictability in the loan market.

An asset management company specializes in loan portfolio sales and locating mortgage note buyers in various risk and asset classes. Lenders can take advantage of these services in order to create the most profitable loan portfolio for current and future conditions.