Demand for mortgages now lower than during Great Recession

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Demand for mortgages has dropped lower than at any time during the Great Recession more than a decade ago, while a severe housing shortage in Michigan and beyond continues to choke the availability of existing homes, driving up prices.

Data released Wednesday morning by the Mortgage Bankers Association, a Washington, D.C.-based industry trade group, shows demand for home lending services has essentially fallen off a cliff as surging inflation and soaring interest rates take a bite out of the mortgage market.

At the same time, a study from the group Up for Growth showed an ever-expanding dearth of housing. It estimates Michigan is nearly 87,500 houses shy of where it should be; the number in metro Detroit is more than 51,000.

And recent data from the multiple listing service Realcomp shows record-high sales prices in June for Wayne, Macomb and Oakland counties, as well as in the city of Detroit.

Together, the trends show a housing market that is experiencing narrow demand for available properties, driving prices up, even as fewer people are able to participate in the market as interest rate hikes reduce their buying power.

“The rising prices are not a sign of a booming economy, they’re a sign of a perverse economy,” said Tom Goddeeris, the chief operating officer of Detroit Future City. “It’s a sign of inequality.”

Indeed, the current environment makes for something of a perfect storm, said Lee Smith, president of mortgage at Flagstar Bank in Troy, among the nation’s largest banks for home lending.

In short, the rising interest rate environment that’s been playing out over the last few months as the Federal Reserve tries to cool demand has not yet caught up with the real estate environment of the last two years or more. The COVID-19 pandemic helped fuel a home-buying and refinancing frenzy, due largely to the rock-bottom rates being offered at the time.

Now those days are over.

Homebuilders, Smith points out, are also feeling inflationary and supply chain pressures, adding to the storm.

Smith told Crain’s he hopes it’s a temporary situation.

“I think everything will sort of correct itself in time,” he said. “But it’s going to take time for the interest rate environment … to catch up with the real estate environment.”

Amid that mismatch, demand for mortgage loans has fallen greatly from the peak pandemic years of 2020 and 2021, when loan origination volume topped $4 trillion.

The MBA’s Mortgage Composite Index, which measures mortgage loan application volume, last week decreased 6.3 percent on a seasonally adjusted basis from one week earlier, putting the index at its lowest level since 2000, according to Joel Kan, the MBA’s associate vice president of economic and industry forecasting.

In a statement, Kan said buyer demand has been hampered by high inflation, affordability challenges and a weakening economic outlook. The decrease in mortgage applications, he said, is in line with slower building activity as home builders deal with higher costs, materials shortages and reduced buyer traffic.
Refinancing, usually done during a period of lower interest rates, is 80 percent lower than the same week one year ago, according to MBA data.

The current environment has mortgage industry veterans like Tim Ross feeling like they’re walking straight into a strong rainstorm with the wind in their face.

Ross, CEO of the Troy-based mortgage banking company Ross Mortgage Corp., said he’s also feeling the mismatch of shrinking loan volume alongside still stellar demand for housing.

“There’s no question that people have pulled back from the home-buying decision because of rising interest rates, coupled with high prices,” Ross told Crain’s. “They have taken a step back, but there is still such a demand for housing that we’re not seeing a reduction in new mortgage opportunity or applications because of a lack of demand.”

Rather, people are largely delaying those decisions, Ross said. He acknowledged that like many lenders, his company has had to lay off staff in recent weeks, after having beefed up for the boom years.

David Hall, president and CEO of rival Troy-based lender Hall Financial, said the rising rates have made for a shock to the system, but something consumers will adjust to.

“I think that people just have to get used to the new normal,” Hall said. “And anytime rates go up quickly or down quickly, people just have to get their arms around that. There’s a certain digestion period.”

The gaps in the system continue to widen, said Mike Kingsella, CEO of Up for Growth. He said the cost to build continues to rise, as materials and land prices become more expensive and communities expect impact fees or other payments to allow growth. That comes as home prices jump and incomes fail to keep pace.

“You have real housing needs on one hand and housing needs the market can deliver, and you’ve got a gap between the two,” he said. “It’s the economic disconnect. … You still have more buyers than available homes.”

In Detroit, where homes are still being demolished, Kingsella said uninhabitable units are a big part of the problem. More than 60,000 units are uninhabitable, the study said. Often, Kingsella said, the cost to rehabilitate those homes is more than they are worth. But if those houses are fixed up, he said, they could solve a lot of the city’s underdevelopment problems.

Still, he said, “it’ll take a good long time for Detroit to catch up to its housing needs.”

The challenges are national in scope and Robert Dietz, the chief economist at the National Association of Home Builders, said builder confidence declined for the seventh straight month — now lower than at any point since tracking started in 1985, save April 2020.

High materials costs have driven new home prices 35 percent higher than they were before the start of the pandemic, he said, and building is taking longer. Diets said there is a “really dramatic lack of home inventory” that is causing some people to shift back toward renting. Paradoxically, that’s good for some builders — namely, those who build single-family rental properties, a group that now makes up 10 percent of national home starts, triple its historical norm.

Dietz said while the NAHB calculates its under-building numbers differently, he thinks Up for Growth’s figures are realistic. And he thinks it will get worse before it gets better.

“We are clearly in a housing downturn,” he said.