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The housing market has been experiencing an unprecedented rise in home values. At the same time, major events like the pandemic and the war in Ukraine have affected inflation and caused the government to raise mortgage rates. With so much flux in the financial and housing industries, it can feel like an unstable and unpredictable environment. That is why we are going to take a moment to examine some of the biggest headlines in mortgage industry and housing market news and try to make sense of what these events mean for the rest of 2022.


Will Home Prices Drop?

You might have thought that the housing market would take a hit during the pandemic. After all, many people were out of work and buyers couldn’t even tour houses in person in many states. However, economic aid packages from the government helped to drive the housing market into a state of rapid growth.


At the same time, supply has been low and affordable housing has been hard to come by. This has also helped to increase home prices by 34%. Of course, that kind of growth isn’t sustainable, so the big question on everyone’s mind has been when will home prices drop and by how much.


Currently, the Federal Reserve is dealing with inflation rates that have reached a peak that hasn’t been seen in 40 years. To try and keep prices stable, they are also trying to slow down the housing market. In just the past two months, mortgage rates have jumped from 3.11% to 5.1%. This has already had a cooling effect on the housing market. Mark Zandi, chief economist at Moody’s Analytics is predicting that housing prices won’t grow at all over the next year.


Homeowners with properties in overvalued markets could see home prices drop by about 10%. The top 10 most overvalued cities include:


  1. Boise, Idaho – 76.39%
  2. Austin, Texas – 62.33%
  3. Ogden, Utah – 59.19%
  4. Las Vegas, Nev. – 53.68%
  5. Atlanta, Ga. – 52.34%
  6. Provo, Utah – 52.23%
  7. Phoenix, Ariz. – 51.95%
  8. Spokane, Wash. – 51.37%
  9. Salt Lake City, Utah – 49.66%
  10. Detroit, Mich. – 48.31%

While growth will continue in some of these cities, homeowners should prepare themselves for a market that will soon level out. Sellers may not get the premium prices they were expecting in the coming months. Zandi expects that changes in the market will actually be a correction and not result in a housing bubble that will inevitably burst. However, buyers will still have to contend with a shortage of houses on the market.

Non-QM Lending is on the Rise

While mortgage rates are on the rise, there is good news for non-traditional borrowers looking to secure loans. Private lenders are expanding their non-QM loan offerings in an effort to capture more of the market and support development that will eventually bring more balance to the issue of housing supply and demand.


After the financial crisis of 2007, Congress went to work creating regulations to help avoid similar problems in the future. The bill was eventually passed into law and named the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new regulations targeted mortgage lenders, credit rating agencies, and banks. The goal of the act was to protect consumers and ensure that large and influential financial firms were acting responsibly.


The act also created what is known as qualified mortgage (QM) loans. To secure a QM loan, borrowers must provide a variety of documentation that shows that they will be able to repay the loan. At the same time, lenders are banned from offering risky loans, charging excessive fees, and providing loan terms that exceed 30 years. It is also illegal to extend loans to borrowers who have a debt to income (DTI) ratio that exceeds 43%. While QM loans offer protections to all parties involved, it can be difficult for people to provide the necessary documentation and meet strict standards.


The main reasons why borrowers will apply for a non-QM loan are:


  • They are self-employed
  • They have a poor credit history
  • They have limited documentation of their finances
  • Their DTI is higher than 43%
  • They are an investor looking to secure rental properties
  • They live off their investments or have another form of non-traditional income


While QM loans offer lenders more security, many lenders are expanding their non-QM loan offerings. Technology and documentation automation products are helping to drive this segment of the market. This will allow more people to become homeowners and developers and investors to create more rental homes and affordable housing units. Non-QM loans will be opening the mortgage industry to a significant portion of lenders in the coming months.


Housing Foreclosures are Increasing

The data is showing that more Americans are delinquent on their mortgage payments or have had their homes filed for foreclosure. In the first quarter of 2022, foreclosure filings jumped 39% from the last quarter, which is also 132% from the same time one year ago. Mortgage delinquencies of 90 days or more are also up 70% compared to pre-pandemic numbers. So, what does this mean for homeowners, the market, and buyers interested in purchasing foreclosed homes?


First, let’s break down the numbers. An increase of 132% in foreclosure filings sounds catastrophic, but keep in mind that there was a moratorium on foreclosures during the pandemic. The CARES Act offered a variety of financial relief for Americans, including a halt on foreclosure activities. If you take a step back and look at the larger picture, foreclosure rates are actually below historic norms.


The reality of mortgage delinquencies is also much more positive than the numbers might first indicate. While more homeowners are behind on mortgage payments since the start of the pandemic, this number dropped by 12% in March. In addition, there are over 1.2 million fewer delinquencies compared to a year ago. While the pandemic certainly caused financial hardships for many people, people are now getting back on track. It helps that student loan payments continue to be deferred, employment numbers are on the rise, and refinancing is helping to lower payments.


During the housing collapse of 2007-2008, investors were able to take advantage of a distressed market and purchase foreclosed homes for a fraction of their peak values. Since today’s foreclosure statistics don’t necessarily provide an accurate picture of the market, investors shouldn’t expect to be able to find the same kind of deals on foreclosures. In fact, demand is still far outpacing supply, so it is a seller’s market for the near future.


The markets will continue to change, especially as current events unfold. Fortunately, the government is working to stabilize pricing so that homes aren’t overvalued, and more people can afford safe and secure housing. Something to consider, statistics don’t always tell the full story. A lot of different variables go into shaping market behaviors, so try to avoid jumping to conclusions and don’t panic if the initial numbers don’t look good.