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Home mortgage demand impacted by higher interest rates and other factors

By BECKY GILLETTE

Home building is one of the pillars of the American economy, so there has been concern that increases in mortgage interest rates could have an impact not just on homebuilders, but the greater economy. Yet there may also be reasons for optimism about 2019.

Joe W. McNeese III, a longtime mortgage industry expert who is managing partner with Global  Recruiters of Jackson, said an uptick in mortgage rates started being seen in about the third quarter of 2018.

“That certainly did have an impact on the consumers’ mindset,” McNeese said. “I think pretty much all the lenders I spoke to saw their lending activity start to take a dip in the third quarter of this past year and that remained so going into the fourth quarter. However, rates are historically very low. So, I think there were some other things at play during that time including mid-term elections in November and the partial government shutdown.

“It created a lot of uncertainty,” McNeese said. “For people looking to make a large investment, the last thing they want is uncertainty. A lot of factors create lower demand for home financing. We saw home purchasing numbers fall off to a certain degree. The good news going into the new year is that rates seem to have settled down. They have dropped back into that 4.5 percent range for a 30-year fixed rate.”

Going into the spring, there seems to be a consensus that the Federal Reserve is backing off on any more interest rate increases.

“That doesn’t directly impact mortgage rates, but it does have an effect on the home market,” McNeese said. “And the fact is that month after month, we continue to see strong employment numbers and the economy is on a good footing. All of those things together speak for a pretty good 2019 as far as home sales and mortgage financing.”

The Fed has been steadily raising interest rates, but mortgage rates are linked to the ten-year Treasury bond, said Don Potts, broker-associate, Nix-Tann Associates, Inc., Jackson.

“The ten-year bond got up to more than 3 percent at one time, but more recently it has been around 2.7 percent,” Potts said. “Everybody thinks since the Fed has been increasing interest rates that mortgage rates have gone up considerably. But they have not gone up that much. They went up from 3 and ¾ to 4, and now they are 4 and 3/8 to 4.5. That is not bad. The interest rates have gone up, but not as much as people think.”

Potts has seen little impact in the areas where he works, northeast Jackson, Rankin and Madison County. He said it is a typical market. Some houses are selling and some are not.

Affordability can be another issue. Potts said while Jackson housing is more expensive than most of Mississippi, but is still affordable compared to most of the rest of the country.

“I think there is affordable housing in Jackson,” Potts said. “New construction starter homes out in the suburbs are high, $130 to $140 square foot. That is pretty expensive for a first-time home buyer. The first-time home buyer might have to buy something older where the price per square foot is less. And first-time home buyers are important because the person selling a home to them buys another home and it reverberates up.”

Chevis Swetman, president and CEO of The People’s Bank, Biloxi, is no fan of the Federal Reserve and is critical of their rate hikes.

“Remember the big row about the President taking on Federal Reserve and saying it was wrong to raise interest rates?” Swetman asks. “Since Pres. Trump has been in office, the Federal Reserve has raised the rate eight times. The president knew more what was happening to the economy than the Federal Reserve. Jerome Powell (chair of the Federal Reserve) said 12 months ago they were going to have four rates hikes to stamp out inflation. But there were no inflation indicators.

“Every time there is a recession in this country, it is caused by the Federal Reserve getting the markets wrong. That is what happened in the third quarter of this past year. Since then the Federal Reserve has corrected and said they might have been a little too hasty. And they are backing off on their automatic rate hikes, which is good. Trump was right. The Federal Reserve was wrong. We haven’t had inflation for eight to ten years going back to the recession which began in 2009 and 2009.”

Swetman said there was a slowdown in mortgage demand going back to September. And he said that has the result of causing a decrease in home building.

“The higher the interest rates, the lower the number of home sales and that translates to the economy,” Swetman said. “Home building is a major portion of our economy.”

Swetman said he feels jealous when he travels to Jackson, Madison and the surrounding areas, and sees all the home building going on.

“They are building out subdivisions,” Swetman said. “Down here, we are lucky if we get three to four houses in a subdivision. Oxford is booming, Mississippi State is building, and Jackson is building. We’re the ones suffering. We are building, but nothing like those other areas.”

Dawn Robbins, mortgage retail division manager for Renasant Mortgage Lending based in Tupelo, said based on data from their Mississippi market, rates are about a full point higher than in January 2016.  Yet they experienced no decline in the number of units or dollar production for 2018.

“January 2019 has been a little slower than normal, but it is typical for January and February to be slower months due to the time of the year,” Robbins said. “We are already beginning to see inquires, pre-quals and applications pick up in our market.

“Rising interest rates can certainly have impact on what a borrower can qualify for. Lenders are looking at credit scores and total DTI (debt to income). Rising interest rates might not affect the borrower’s ability to purchase a home, but it does affect the maximum purchase price/loan amount. If a potential borrower is budgeting for a monthly housing payment based on a 4.5 percent interest rate and rates rise to 5.25 percent, the budgeted monthly payment could go up $50 to $125 per month based on the loan amount. Higher interest rates can also affect minimum monthly payments on Home Improvement Line of Credit’s, minimum monthly credit card payments, etc. This could cause the necessity for the borrower to have to increase their down payment or pay off debt to qualify for the same loan amount due to interest rates just being .5 to 1 percent higher.”

Robbins said one of the most important things lenders can do for first-time homebuyers is help prepare them for home ownership.  First-time homebuyers should be encouraged to contact a local mortgage specialist and ask for their educational assistance in helping them walk thru the process.

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