What High Mortgage Rates Did to The Housing Market

Dave:
Hey everyone, welcome to On the Market. I’m your host, Dave Meyer, and today we have a super cool guest for you, Tim Birkmeier will be joining us. Tim is the President of Rocket Mortgage, which you’ve probably heard of because it’s one of the largest mortgage companies in the entire country. And we brought Tim on to talk about the state of the mortgage industry right now, what’s going on in the inner workings of the mortgage industry, but also to help you all understand what loan products are working best in this type of environment.
And Tim has some really interesting data that he can obviously see that none of us can, because he is the president of a giant mortgage company and it’s really helpful and really interesting to learn what is working well, what loan products investors should be considering, and generally where he sees mortgage rates and the mortgage market going over the course of 2023. So, this is a super fun show. Tim is a great and very knowledgeable guy, so I think you’re really going to like this. We’re going to bring him on in just a minute, but first we’re going to take a quick break.
Tim Birkmeier, welcome to On the Market. Thank you so much for being here.

Tim:
It is my pleasure and honor to be here. I’m excited about this.

Dave:
Me too. We have a lot to talk about, but let’s just start with a little bit about you. How did you become the President of Rocket Mortgage?

Tim:
That is a great question. I’m still trying to figure that out just a little bit. About me, married for 22 years now, father of three, and I guess father of one dog named Toby as well. Goldendoodle. Great to be here. But yeah, I’m the President of Rocket Mortgage. I’ve been with the organization now for about 27 years. So, I’ve seen a lot of ups and downs, a lot of shifts in the market. Although we’ll get into what this marketplace is today, it’s been tough. It’s been a tough market, no doubt, but it’s been an incredible journey and our culture inside the organization is to love our clients and love our team members. And that’s what I’ve tried to do as a good leader, and here we are today and every day people are relying on my decisions and I take it very seriously.

Dave:
Yeah. Well, congratulations on your family and your long career at Rocket Mortgage. I’m curious, what was your first position at Rocket?

Tim:
That’s a great question. I was a loan officer.

Dave:
Oh, great.

Tim:
Well, I knew we’re going to get to talk about mortgage rates and talk about purchasing houses and refinancing and cash out and all that stuff. And I spent my first three years doing exactly that. And matter of fact, probably spent the first 10 years of my career very much on the front lines, getting to talk to valued clients each and every day. So, I understand where the client comes from when they say, “What is my mortgage payment going to be?” because that is one heck of a large expense.

Dave:
Absolutely. Well, it sounds like you’ve really done it all at Rocket. I do want to get into what you said about the difficult market conditions that we’re in right now. How would you describe the state of the mortgage industry these days?

Tim:
Well, I’ll tell you, I get to talk to a number of people outside of Rocket, but still in the industry. And when you look at the movement that we saw in mortgage rates over about a year and a half timeframe, there hasn’t been a movement like that north in mortgage rates, arguably in the last 40 years and maybe ever. So, it was an absolute shock. And when you look at the numbers and you look at the amount of mortgage originators in the space based on when rates were at four or so, we probably had 300,000 originators in the space and the math would bear out based on the size of the market.
We think the market this year is probably going to be somewhere around 1.8, maybe two trillion in total. You’ve seen a lot of people come out of the market, you’ve seen pressure on margins, but we’re starting, knock on wood, to see some good news in the marketplace. We’ve seen interest rates shift down a little bit in particular in March, and March we saw purchase locks up 41% relative to the month of February. Even refinance activity increased by about 30% in the month of March. So, even a little shift down in mortgage rate has created some additional volume, which is great. And we really are led to believe and we’ll see, because it turns out it’s impossible to predict the future, but we’re led to believe that mortgage rates will come down a little bit in the back half and maybe fourth quarter of this year.

Dave:
Well, I think all the real estate investors out there listening are hoping that you are correct, but of course we don’t know. But I think we’ll all cross our fingers collectively for that. So, you mentioned that refinances were up, which I’m surprised about, but I’m curious if you’ve noticed a shift in the types of loan products that people are attracted to in this higher interest rate environment?

Tim:
Yeah, there’s no doubt, and we’ll get into how the mortgage payment has been impacted for exactly the same mortgage balance one year versus the next, it has become increasingly more expensive for people to buy houses. So, what we’re finding on the home purchase side is more usage of the FHA product, a product that’s been around forever. But as you’re probably aware, FHA recently made some decisions to drop the cost of mortgage insurance, making that product one that a lot of first time home buyers in particular are very interested in and allows you to put down just 3% on the house.
So, like any time in history, people are looking at the cost of a mortgage today and they’re being very careful about how much money they put forward on the purchase of that house. So, FHA is big, and home equity loans are absolutely back in vogue. I mean we do a lot of them. I know a lot of lenders do. And if you want to take cash out of your house, that’s always worth the consideration. I think the average amount of equity at a home these days is about $175,000.

Dave:
Wow.

Tim:
So, it’s call it found money, call what you want, but there is an opportunity to access cash if people are interested.

Dave:
That’s super interesting. I want to dig in to each of those a little bit. I’m curious about FHA, because from what I had heard previously, it seemed that during the manic stages of the pandemic, it fell out of vogue not because buyers didn’t want it, but because sellers just wouldn’t accept it because they were getting so many offers and there tends to be a longer approval process or there’s more criteria with FHA. Had it been artificially low during the pandemic and now it’s getting back to normal levels, or is it even exceeding that?

Tim:
According to what we know, about 20% of mortgages done today is an FHA product, and that’s up, primarily because of the drop in the cost of the insurance. So, we are seeing that become a larger piece of it. And I think that’s also because although I do believe it’s still a seller’s market, I really do in most places in America today, the average listing time for a home is about 23 days. So, it is a seller’s market, but they are sitting on the market a little longer than they had prior. And I think with that, people are more open to the FHA product as an option. And I think if I’m somebody who’s wondering is now the right time to buy? Is an FHA product the right option? I think you should consider working with a lender that might provide something close to a full underwrite to verify approval, and I think that helps in how the seller sees the seriousness of your offer.

Dave:
That’s great advice and I hope more people notice what a big difference this is, because the insurance on an FHA can be a pretty significant and for investors, it eats into your cash a little bit. And so the fact that it has gone down should appeal to anyone who’s considering an FHA loan. And just for anyone listening to clarify, you have to be an owner-occupant for an FHA loan. So, that would be like house hacking or live in flips is strategies you could consider there. What’s with home equity loans, why is that becoming so popular?

Tim:
Well, I think for a few reasons. First, and I think you know this as well as anybody, we saw massive appreciation in home values over the last 36 months. And even going into this new year, most areas of America have continued to see appreciation. So, we talked about this concept of newfound money and people continue to carry debt and they carry credit cards and some certainly pay those balances down monthly, but many, because life throws you curveballs, aren’t able to do. So, they carry balances on their cards at 20%. And the question you have to ask yourself is, would you rather have a second mortgage at eight, nine, 10%, or would you rather have a credit card balance at 20?
So, there’s a lot of people saving on average about $300 a month by consolidating debts, credit cards, et cetera, which frees up additional disposable income, which as we both know right now can go for a lot of things, including just the price of gas with all of the inflationary concerns we have. And so people are just looking for ways to get cash back in their pocket. And those second mortgage opportunities are there as something to think about.

Dave:
Are you able to take out a home equity line of credit on a investment property, or does it have to be your primary residence?

Tim:
Got to be your primary residence. That’s a fantastic question. Yeah, it does have to be your primary.

Dave:
Okay, good to know. Still very valuable to investors.

Tim:
Absolutely. And some people, they’ll take the cash out of the home and they’ll set that aside for a bit, and some people are using that to buy other houses definitely. Talking to the folks on the front lines who are working with the consumer each and every day, their feeling is with these seconds, probably about 60% of the seconds or so are used for debt consolidation. And then maybe another 30% or so is used for home improvements just because people aren’t ready to buy quite yet and they’re looking for their current domicile to be a little more pleasurable place to reside.

Dave:
Yeah, absolutely. I’ve been hearing a lot about that, that people rather than trading up to a bigger house are instead putting addition on or renovating, which in some instances certainly makes sense. How are rates for home equity loans? Is that comparable to a 30-year fixed?

Tim:
No, higher. Certainly higher. The 30-year fixed, dependent on the day, is probably high fives, low sixes. And the 30-year, fixed mortgage when it comes to a first mortgage, is still the most popular option. I like to say it’s like a pair of blue jeans, never goes out of style. But there are folks out there that just their current mortgage and the interest rate they have on that mortgage, many people refinanced at 2%, 3% and 4%. Those were the days.

Dave:
Yeah.

Tim:
And they still want to access cash, but they don’t want to do a cash-out refinance on a first mortgage, because you do the math and your weighted average interest rate at a six is too high, higher than they’re currently paid weighted average on all of their debts in their mortgage. So, a second allows you to enjoy the savings you need to keep that lower interest rate on your first. So, any good loan officer’s going to walk the client through different options and might be a cash-out refinance on a first mortgage if it makes sense, if the weighted average rate is there, or it could be a second and the math will bear that out.

Dave:
Yeah, absolutely. And that was actually going to be my next question. Given what you said, was it 170,000 on average in equity, which is a huge number, and you also said around that you’ve seen an uptick in refinances. Are those mostly cash out refis?

Tim:
Yeah, they really are. We do occasional rate in terms, but it is like a solar eclipse at this juncture. But when we look at our refinance activity, 90% of that is typically a cash-out transaction. At a second mortgage, the average loan size is typically about $75,000. So, people are taking out a decent chunk. But the nice thing is because of the equity people have in their house, even after they’ve done so, the average loan to value, the loan relative to the value of the house is still hovering somewhere between 80 and 85%. So, I think people are using this new-found money to lever some additional savings, but they’re definitely not putting themselves, in my opinion, at risk in any way, because they are maintaining decent equity of the house even after the case.

Dave:
That’s good to hear. Obviously in this market, you don’t want people to be over-leveraging themselves just as we’re still trying to figure out exactly what direction we’re going in the next six to 12 months. I think it’s hopefully getting better, but we’ll just have to see. So, I’m curious, with interest rates going up this much, I mean it’s having such a negative impact on affordability just across the United States, and I’m just curious how you see the impact of that impacting the broader housing market.

Tim:
Well, I’ve got an incredible stat here for you just to show by how much the interest rates have moved. If you were to look back, call it about two years ago, and you were to say to yourself, “I want a $1,500 mortgage payment,” at the going rate roughly two years ago, you could afford a mortgage balance of $465,000. Now fast-forward to today. Today if you want a $1,500 mortgage payment at today’s mortgage rates, which if you were to talk to our parents, or at least mine, they would tell you a rate of 6% is actually relatively low compared to what was paid in the past, but it’s all perspective. But back to the point, today at 1,500, you’re $280,000.

Dave:
Wow. What was the first one? It was like 480 almost?

Tim:
465.

Dave:
Okay.

Tim:
So, it is quite a swing. And I think really what it’s done is it’s kept people on the sidelines. I think there’s a reason why this is a seller’s market right now, and you can absolutely do very well in the sell of your home. I think I said earlier, or at least want to say now, 80% of the time we think according to the transactions we see, the home is going above listing price.

Dave:
Wow.

Tim:
So, there you go. You’re doing well, but now you’re back in the market and now you’ve got to find a house. And so what people are typically finding is if you’re looking to upsize your home, it actually becomes too expensive to make that leap. So, we have people, and it just depends on your unique circumstance, but I was hearing a story yesterday, a friend of a friend who just sold his place, he sold it at 50,000 above listing price. But you know what he said? He goes, “Now what I’m going to do is I’m going to rent. I’m going to rent for about 12 months. I’m going to wait for those mortgage rates to come down. I’m going to gamble that it becomes a bit more of a buyer’s market, and then I’m going to purchase my house.”
So, in this marketplace, you’ve got to be extra strategic. Maybe that’s an example of it, but we’re seeing purchase activity, but we think 4.7 million or so purchase transactions or so this year, something like that, that’s down from highs a couple years ago of probably closer to six and a half. So, the activity has slowed and most think through the remainder of this year, the activity will probably remain pretty stable, meaning not come up, not come down much. I think the difference that you’re going to see in the mortgage market is you’re going to see refinance activity.
Now, we’ll see. Because, again, we’re predicting the future. But some think according to the MBA, the Mortgage Banking Association, that volumes will pick up in the back half of the year refinance wise, fourth quarter in particular.

Dave:
And that’s based on the idea that rates might come down.

Tim:
Right. And that’s also based on the thought perhaps that we might find ourselves sliding into a recession, but we shall see.

Dave:
I think it’s super interesting and something that people who are casual observers of the housing market don’t always grasp, is that people who sell their home are typically also buying again. And that really factors into this calculation and why we’re seeing, in my opinion, I think it’s a very likely cause of the low sales volume. Is, like you said, people can sell their home. That is not necessarily the problem. It is that buying again is a relatively unattractive proposition right now and why that fits with the narrative that you’re saying, rather than do that, why not take out a refi, get a HELOC and basically upgrade your home, not necessarily for investors, but for homeowners.

Tim:
Yeah. And we find ourself in that type of conversation constantly. Our advice is more and more people are comfortable going online, finding a house they’re interested in. They come into the conversation here with us, they say, “Look, I’m looking at a house in California, it’s $750,000. I’ve got a house in California. I could potentially take cash out of it and have a similar experience. Run the numbers for me and talk to me about what the difference in payments are.” So, this is not to say that people are doing a mortgage transaction, albeit at lower volumes, it’s just the type that they’re doing.

Dave:
So, one question I wanted to ask you in terms of products is we’ve heard a lot on the show about rate buydowns. Are you seeing a lot of that activity and is it slowing down, or is it still as popular as it seems it’s been over the last six months?

Tim:
We, for a period of time, were marketing a product called the Inflation Buster, which really was a buydown on a 30 year, 15 year fixed mortgage. By buydown, I mean you were provided a 1% lower rate in your first year. And there are other buydown options, as you’re probably aware, where with the help of seller concessions you can buy your rate down for a two-year period. So, in other words, rate is six, your first year buys down to five, or in the second example your rate is six, and the first year it buys down to four, and the next year buys down to a rate of 5%.
There’s a cost that is incurred there. Lenders will sometimes eat some of that cost and sometimes that’s shared with seller concessions. It is popular right now. And the reason it is, is because, again, back to predicting the future, if you believe interest rates are going to come down a little bit, you might be okay with buying your rate down in the gamble that on a purchase, as an example, you refinance two years later and you’re back into the fours or the fives.

Dave:
Yeah, I get the logic and I think for home buyers that can make sense. I think for investors my advice is always to make sure that a deal pencils at the higher rate that it’s going to adjust to after one or two years, in case you predict the future wrong and rates don’t go down and you don’t want to find yourself in a situation where you invest in a deal and it only works during that buydown period.

Tim:
I think that’s spot on. I think that’s spot on. And I think you’re referring to the cash flow, but as a lender, what I’d also be referring to, same advice, is you are going to be qualified at the higher interest rate.

Dave:
Okay. Well, that’s good. That’s good for all of us.

Tim:
The debt income ratio, and we’ll typically walk through that with the client. We’re going to be pretty conservative in how the qualifications work, because here’s where we have a shared interest, we also want to make sure that the client is able to make their payments.

Dave:
So, other than potentially rates going down and volume staying down, do you have any other thoughts on what the mortgage market is in store for over the next, let’s just say the rest of this year?

Tim:
Well, like I said, I believe we are going to see a little bit of a shift in refinance activity. I do think we’ll pick that up probably in the fourth quarter of this year. That’s what the projections look like. We’ll see where the size of the market lands, but right now we think it’s a 1.8, two trillion dollar market or so. And by comparison in ’21 you were closer to four trillion. So, you’re really seeing that activity get cut in half. And that’s okay, that’s just the cycling of the market. What we think from the standpoint of consumer interest is going to be big into the future is transacting mortgage digitally. We find, especially millennials, are more and more comfortable finding homes online. I even saw, and who knows whether or not this is true, but I’ll say it anyhow, I saw some information that said a millennial is comfortable buying a house without actually physically being in the home.

Dave:
That’s crazy. I know that happened during the pandemic, but don’t you want to know where you’re going to live?

Tim:
No. I’m a Gen Xer, so I’ve got to get feet on the ground and get a flavor for the area before I buy. But I just think more and more people are getting comfortable with big transactions digitally. And we see a place where not only will people buy houses sight unseen, but what they’ll also do is they’ll qualify for a mortgage and close the mortgage with little to no documentation necessary. We’ll pull that in through other sources. And so we think ease of use is going to be big and digital transactions are going to be big going into ’24.

Dave:
That would be really cool. I didn’t even really think about it, but applying for a mortgage, I’ve done many, it’s a clunky process a lot of the times. It’s not like any one company or the other, it’s just a lot of paperwork and a lot of documentation and that stuff. And that makes sense. I would hope that it heads in that direction.

Tim:
We believe the first company to figure that out is going to make a huge hit, because you’re right, it is a pain in the butt. And so I think ease of use is going to be huge. And ’24 is I think going to be a better market, we believe that to be the case. At this point people believe that it’s probably somewhere around a $2.4 trillion market, so maybe another $500 billion in mortgage activity. And a lot of that div is going to be in refinance activity. That’s how we see it, and we shall see whether or not that is reality.

Dave:
I’m curious, just at Rocket Mortgage, is there anything you all are doing to help either investors ideally or just regular home buyers navigate these specific and challenging times?

Tim:
Well, I think you mentioned or inferred this concept of cash flow for investment properties and key aspect of cash flow, you’re right, is your expense line. And we did see an uptick in mortgage activity, like I said, a 40% uptick in rate lock activity February relative to March, in part because interest rates dropped about a quarter to three eighths of a percent, which to your point earlier, ain’t much, but was enough. And I think what that says is people are on the sidelines and they want to transact, but the time has got to be right. So, they’re waiting for those little increments of time where you see a rate drop.
And so what we offer here is a rate lock guarantee. So, in other words, it’s called Rate Shield, you can lock in your mortgage rate prior to finding your property. And that means you’ve got to work closely with the lender to make sure the timing is right. March was a good example of this, but once that interest rate is locked and you’ve secured that cost of financing, I think it probably becomes easier to go out there and look at what are you going to get for this rental and do the math and feel comfortable with your decision. So, we believe that would work well for investors too.

Dave:
That’s really fascinating, because I’ve heard just anecdotally too, just from friends, people who are loan officers, that kind of stuff, the same thing, that people are waiting on the sidelines and they’re not waiting for much of a shift in mortgage rates, but it’s just a couple. And so it does make sense for an investor if you could lock in that rate and give yourself some time. Because personally I do see the logic that rates might come down towards the back of this year. My guess is there’s just going to be more volatility over the next three to six months at least. And so having that ability to lock in a rate would be really comforting if you’re active in the market right now.

Tim:
And the nice thing about that option too is once you sign a purchase agreement, if the interest rate happens to be lower at that time, you get the lower of the two. So, it’s a nice hedge as well. It makes a lot of sense when a quarter to three eights of a percent matters a lot, such as it does today. I don’t think you’re wrong, I think you’re going to get a lot of gyration in mortgage rates. So, that product may work well.

Dave:
Okay, great to know. I think I just find it encouraging that people are jumping in at six and a half, obviously only buy stuff if it makes sense. But to me that makes it seem that people’s expectations have reset a little bit from these crazy times where it was two to 3%. And as we’ve talked about in the show a million times, historically that’s basically unheard of. Over the last 50 years, I looked this up the other day, the average rate on the 30-year fixed is seven and a half percent over the last 30 years.
So, that encourages me for most of the people I follow and economists who are much smarter than me forecast, they think rates will probably find some equilibrium next year in the high fives, mid fives. And so to me that’s encouraging that people are jumping in at six and a half percent, because if they funnel down a little bit more, that will probably really increase the activity, hopefully, back to a level that’s good for the whole housing industry.

Tim:
Well, that’s one more example of how the pandemic has skewed our perspective a little bit. I think you’re right about that, and I hate to be the guy who says back in my day, but back in my day when I started the industry in 1996, a 30-year fixed mortgage I think was close to 9.5%. So, in the grand scheme of things, if you can see interest rates go back into the fives, that’s not a bad buying opportunity historically.

Dave:
Honestly, in the fives, that’s when I got started after the great financial crisis. It’s not that long ago that fives were pretty normal and even before the bubble is in six, 7%, in the ’08 bubble. So, I think that that’s super important. Tim, thank you. This has been so helpful. Is there anything else you think our audience should know about the mortgage industry or the mortgage market right now?

Tim:
Well, first of all, thank you for the time. It was great talking to you. It was great being on the show. Really appreciate it. And I think the takeaway here for us is we are going to see some nice opportunities to invest. You’ve got to catch it at the right time, and that probably means you’re going to have to be connected with whatever mortgage company you so choose and trust that loan officer. And stay close, because we’ve seen it time and time again of late, you’re going to see a dip of a quarter or three eights of a percent one day and then five days later you’re back to where you were. So, you’re just going to have to keep your eyes wide open and there’s still opportunities out there in this marketplace.

Dave:
Awesome. Very well said. Tim, if people want to connect with you, where should they do that?

Tim:
You can find me on LinkedIn. Just search Tim Birkmeier and love to interact, love to talk, love to talk about the business.

Dave:
All right, great. Tim, thanks again. We’ll have to have you back maybe under some different mortgage conditions and we can talk about what’s going on then.

Tim:
Absolutely. Love that. Here’s to better days. But there’s still opportunity here, we’ve just got to find it. Appreciate the time.

Dave:
All right, thanks again to Tim Birkmeier, President of Rocket Mortgage. We really appreciate his time. I hope you all learned a lot. I did. I thought it was a super interesting conversation, and to me there is a lot of hints and nuggets in what Tim was saying about the direction of the housing market. I was personally pretty surprised to hear that refinance activity is picking up, that origination activity is picking up, and it jives with what we’re seeing in the March and April data in the housing market, that things are surprisingly picking up pretty substantially.
They’re certainly not anywhere near they’ve been over the last couple of years, but they seem to be coming off their lows. And the other thing I want to just call out, which I thought was excellent advice from Tim at the end was about using a rate lock. I know his company has a product, but a lot of different mortgage originators have rate locks. In a market like this where there is a lot of volatility in rates, and frankly as said during the interview, but I think there’s going to be a lot of volatility in mortgage rates for the next at least three months. There’s just too many unknowns with the Fed, with what’s going on with inflation, with the banking issues. There’s just too much going on for mortgage rates to really find stability.
So, because there are these fluctuations and they’re not huge, but they’re a quarter of a point, sometimes they could be 0.3 or 0.4%, which translates to several hundred dollars per month in mortgage payments for the median price home. And so if you are buying right now, I really recommend you look, you don’t have to use Rocket, they clearly have a product, but think about trying to find a lender who has a rate lock that some of them you have to pay for, some of them are free. But if you can find a rate lock, that would really hopefully help you search for homes with the comfort of knowing that you are going to get the best rate on average over the next 30, 60, 90 days, because they are going to fluctuate.
And that takes off the pressure of trying to time at the exact right day and makes you just a little more confident that you’re going to get the best rate that’s available around the time that you’re going to purchase. So, that’s it for us today. Thank you all so much for listening. As always, we greatly appreciate it. If you did like this episode, if you like On The Market, we always ask for a review. If you do that on Apple or Spotify, it would be really meaningful to us. We really appreciate it. So, if you can do that, we’d love it. Thanks again. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Caitlin Bennett. Produced by Caitlin Bennett, editing by Joel Esparza and Onyx Media, research by Puja Gendal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.