We’re At A Pivotal Moment

After nearly a decade of deliberate downward trends, interest rates are now put on an upward trajectory, with 30-year fixed now at a 4-year high. A decade long housing recovery is now putting many markets in an affordability crisis, one in which wage growth, even in this healthy economy, cannot keep pace with home price growth. Amid record-breaking report after report of high home prices, we have declining trends in home sales volume, indicating that while those who are willing to pay the possibly overvalued prices push up the median home price figures, those who are not stay on the sidelines and bring down closing volume.

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The Fed is planning another three to four rate hikes this year. Median home prices are now in the 20 to 30 percent above pre-bubble peak of the last housing correction in many top markets. Bubble talks are getting more rampant, including by renowned money manager James Stack, who predicted the last one.

We’re no doubt in a pivotal moment in housing. Are you watching it erupt in slow motion, or are you doing something about it?

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So far, many of your peers seem to be taking the do-nothing route and carrying on business as usual, except for the part of likely making less money. As fewer Americans buy homes, and among the ones who do get more self-reliant and shop for the lowest points and rates, mortgage lenders’ profit margins have continued to narrow. As Wolf Richter, CEO of Wolf Street Corp., puts it: The mortgage industry is going through all kinds of headaches.

But there is a quiet revolution brewing. Recently, a mortgage leader in the western region that focuses on many scorching-hot markets, such as Seattle, Portland and Las Vegas, began offering mortgages with down payment protection. The new offering is positioned as ”mortgage plus,” a better and smarter loan for more informed and savvier homebuyers. With a mortgage including down payment protection, loan officers and realtors now have a solution for cold-feet buyers who worry about buying at what could likely be the top of a typically seven to 10 year real estate value fluctuation cycle. Even if these buyers are buying high, if they sell later at a loss after an expected correction, their loss in their down payment is reimbursed *. Refinance borrowers have a similar option, in equity protection. They can essentially lock in the appraised value of the home at market high when they refinance, when they sell later at a loss after a downturn, their loss in equity can be reimbursed. Pacific Union Financial and First Heritage Mortgage – also operating in states with overheated home prices – are among other proactive lenders offering the same new“mortgage plus” products.

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Notice that mostly non-bank lenders are taking the bull by the horns (pun not intended) to carve a new point of differentiation for themselves and a new profit revenue stream. This is perhaps one of the few bright spots in the mortgage industry which is struggling with negative perceptions and downward profit trends. Big-bank lenders’ market shares and margins have continued to decline, while more nimble non-bank lenders are taking the lion share of the mortgage market. It is not a surprise that these lenders represent the only growing segment.

A healthy economy has also propelled a record-breaking stock market, on a parallel ascent so far with the housing market. Earlier this week, Goldman Sachs warned there is a “high probability” a stock market correction will happen in the coming months. Goldman Sachs and other oracles of the housing bubble may be crafty with their timing; after all, it’s safe to call for a correction in almost anything after a long bull run. Even if they were all wrong, as their bubble alarms get louder, now is the time to consider what consumers will do and most importantly, what will you do in order to survive the next downturn.

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