We are in an unprecedented housing market in 2022, one that presents a dilemma to the Federal Reserve as it combats rising inflation. While stocks and bonds are primarily owned by the wealthy, the middle class holds its wealth in their home equity. In fact, sixty-five percent of American households own their homes, and right now that wealth is higher than it has ever been. As some perspective, at the housing boom’s peak in the mid-2000’s, home equity wealth rose by $450 billion per quarter. In the last three quarters from 2021 through the beginning of 2022, it has risen by more than one trillion dollars per quarter.
You’ve probably heard from a friend or family member, or maybe you have experienced it first hand, of the competitive home buying process – over-asking-price offers, buying via FaceTime, and sellers making concessions. The reason for this? Low inventory and increased demand given historically low rates. As rates rise and the market slows down, we’ve taken a step back to analyze how the relationship between low inventory and supply chain issues affect the mortgage industry’s production.
Elevated Demand
Unpacking the pandemic, changes in lifestyle coupled with historically low rates ushered in a home buying boom, which kept realtors and mortgage lenders busier than ever – and drove up home prices. In 2021, home prices rose 18.8 percent, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, the biggest increase in 34 years of data and ahead of 2020's 10.4 percent gain. However, completions of single-family homes have been unchanged since August 2018, on a seasonally-adjusted basis. They want to buy it, but we don’t have it.
Home Buying Sweet Spot
The unique circumstances driving new home consideration was fueled by Millennial home buyers, representing thirty-seven percent of homebuyers. Millennials have entered their prime home-buying years. This ‘coming of age’ is going to cause strong home-buying demand for the next several years.
As Millennials decided to ditch the apartment digs or cohabitating dwellings for greener pastures, they were met with a lack of inventory. The U.S. doesn’t have enough homes to go around, especially moderately priced ones for first-time homebuyers.
| GENERATION | BIRTH YEARS | PERCENTAGE OF HOMEBUYERS |
| Gen Z | 1999-current | 2% |
| Millennials | 1990-1989 | 37% |
| Gen X | 1956-1979 | 24% |
| Baby Boomers | 1946-1964 | 32% |
| Silent Generation | 1928-1945 | 5% |
Persistent Supply Chain Issues and Oil Hikes
What makes this time especially unique is that this rising generational demand comes on the heels of a global pandemic that has caused consistent supply chain issues across industry verticals. First-time homes and moderately priced homes are not as profitable for builders either, so they are focused on high-end luxury homes. The supply issue is further compounded by a Russian-waged war on Ukraine that has been met with global sanctions on Russia and rising oil prices. Among the many industries this is affecting is new home building — from the inability to get windows and cabinets, to the cost of electrical wire, to the rising cost of diesel fuel to run construction machines.
Stagflation and the Fed’s Dilemma
Stagflation refers to high inflation and stagnant output. While these supply chain and oil cost issues are bad for homebuilders and their ability to supply housing to meet this new buyer demand, the circumstances have created incredible wealth for the middle class. And, therein, lies the problem for the Federal Reserve as it seeks to lower inflation, fueled by the expanding spending of the middle class.
Two Options
There are two options. The ideal scenario would be to address the supply chain issues and the rise in oil prices. Unfortunately, the government doesn’t have the tools to address these issues in the short term. The second option is to restrict credit and raise mortgage rates high enough to reduce home buying demand — reducing home values and the wealth of the middle class.
Low Mortgage Production and Margin Compression
During the historically low-interest-rate period, despite the low inventory, the mortgage industry was kept busy while existing homeowners refinanced. This interest rate hike, however, is causing a drop in demand for mortgages of any kind. This is causing mortgage lenders to experience margin compression and lay off employees. One pattern on the horizon that the mortgage industry may see is a rise in home-equity loans. At a rate of 4% or 5% to support spending when your income is being undermined by inflation, home-equity loans are still cheaper than a credit card and has greater appeal.
What Lenders Can Do
All is not doom and gloom. While there are many external factors at play, the market hasn’t dissolved. Prepare your organization to combat margin compression. Consider cost arbitrage by offshoring and time arbitrage by turning your team into a 24/7 global operation with your dedicated offshore team working while you sleep. Here are five concrete ways:
| 1. | Focus on labor optimization by conducting a high-performance activity (HPA) calculation that will ensure that your high-value employees are performing the highest value tasks. |
| 2. | Consider your geographic workforce allocation. In today’s global economy, some tasks can be sent offshore, turning your team into a 24/7 global workforce. |
| 3. | Think outside the box. You can lean on outsourcing for other areas you may not have considered like mortgage accounting and ICE Encompass® Help Desk Support. |
| 4. | Determine repetitive, checklist-based tasks that can be automated. |
| 5. | Consider your attrition, hiring and recruiting expenses, and what methods you can deploy to reduce them. |
If you want to learn more ways that lenders, watch our full video here to explore these solutions in greater detail.
