Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
One of the more well-known idioms in real estate is “location, location, location,” but when it comes to the most fundamental principle of the industry – it is the law of “supply and demand.” Specifically, the prices of homes in a given area rise and fall based on this concept. When the demand for real estate is high, prices of homes increase. Conversely, when factors such as the number of available properties increase, prices usually drop.
Similarly, if the demand for employment is up in a given area, the demand for housing might increase as well. There are other factors of consideration that can be included amongst the concept of supply and demand. Overly aggressive real estate agents, over anxious buyers, and speculators who manipulate market perceptions are a few of the common market movers that we are seeing today as a consequence of this concept.
When it comes to the mortgage market in relation to the supply and demand concept, similar theories hold true. There are many examples of how the mortgage markets might be impacted, but here are a few lesser known examples, with some insight on how to take advantage when applicable.
When interest rates are low, and everyone is looking to finance quickly, rates are actually kept artificially higher by many commercial banks to slow production. The smaller lenders or brokers, if able to manage their volume efficiently, wouldn’t necessarily need to slow down their business. That is a great opportunity to keep in mind, and one way to avoid getting an above-market rate.
Similarly, when rates spike and productivity slows, banks look to attract more business. Depending on the bank and their capabilities, attempting to spur activity can be achieved in several ways. For example, if you were to work with a smaller local lender who was able to adapt to the changing market quicker, rates might be lower than market, because they will reduce their pricing margins to attract new business quicker.
Additionally, when supply or demand is down, that is a great time to re-explore your financing options again, if you were once turned down for a loan. Banks, the good ones at least, try to be more flexible with some guidelines, or might be more eager to grant “exceptions” when the demand is slow. Concessions to minimum credit score requirements, and reconsiderations to complex qualification policies are able to be revisited when demand is down. Your local mortgage lender or broker would be first to know which banks and investors have increased their appetite in such an environment.
Specific to the interest rate markets, we are about to face a critical test to the supply and demand concept at the upcoming Federal Reserve meeting. One of the ways that the Federal Reserve has been able to help the housing market with its recovery has been to artificially manipulate mortgage rates lower. They have successfully done this by being the largest buyer of mortgage backed securities. When the Fed is buying most of the bonds out there, that is what has helped keep rates down over the past few years since the housing crash.
A common misconception is that when the Fed “raises rates” they are increasing mortgage rates directly. They aren’t. They don’t control mortgage rates. However, at this upcoming Fed meeting when it is expected that they will in fact raise the “Fed Fund Rates” by at least 25 basis points – one of the key questions that is looming is – if and how they will alter their current bond-buying allocations. Should the Fed choose to reduce the amount of bonds they purchase going forward, that will cause the demand to drop, and thereby increase mortgage rates. The supply and demand theorem will be in full check.
Again, an agile local and direct lender might be able to help navigate through these changes and challenges. Take advantage of the low rates while they are still here. Find a good local lender and capitalize on the supply and demand theory to its fullest…Supply them with all of your information in a comprehensive manner, and demand the best rates and terms. The good ones can accommodate.
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