Market Pulse: November 2023 Strategies

November 1, 2023

Tina Kvavle, Product Marketing Director, TrustEngine

This month’s Market Pulse provides real-world strategies to improve your business in today’s market. Read on for tips to capitalize on the need for ADUs, ways to help first-time homebuyers understand the cost of waiting to make a purchase, and techniques to identify and serve low LTV borrowers with big equity needs.

Make ADUs Part of Your Success Strategy

One in five Americans¹ now shares their homes with adult children, parents or grandparents. When that starts to feel a little cozy, accessory dwelling units (ADUs) are a great way to provide a supported but independent living option.

In a recent survey² conducted in California (but widely relevant), 61% of homeowners cited multigenerational housing as their primary motivation for constructing an ADU. You can also use an ADU for rental income, or as a private guest house for lucky visitors!

As of August 2023³, the typical U.S. homeowner has $199,000 in tappable equity, with over $16 trillion held collectively. To help borrowers leverage this equity for an ADU, consider these strategies:

Move-Up

Suggest a Move-Up to a property that already has an ADU, or a property that can accommodate building one. Leverage the TrustEngine Borrower Intelligence Platform ”Move-Up” Opportunity type to identify this targeted need.
Leverage a Mortgage Coach Move-Up Total Cost Analysis to compare Move-Up loan options. If a rental income stream is anticipated from the ADU, factor that into the analysis, both to offset total monthly cost, and to show the longer-term impact to net worth for this investment. Consider strategies presented in this “Rent vs. House Hacking” presentation with Cody Touchette.

Home Renovation

Suggest a cash-out refinance to fund building an ADU on the borrower’s current property. Leverage the TrustEngine Borrower Intelligence Platform “Home Renovation” Opportunity type to identify this targeted need, or the Sales Boomerang Cash-out Alert.
In this scenario, educate your borrower on the short and longer-term impact of viable loan options using a use a Mortgage Coach Cash-out Total Cost Analysis (TCA).

Target First-Time Homebuyers with the Fear Factor

The median sales price for an existing home decreased to $394,300 in September, but home affordability is still a huge issue. Consider these facts:

The Homebuyer Affordability Index⁴ dropped to 91.7 in August. A value of 100 indicates that a family with median income just qualifies for a mortgage on a median-priced home, so a lower index means fewer Americans can afford to own a home.
A homebuyer must earn $114,627⁵ to afford a median-priced home, up 15% ($15,285) year-over-year. In the same time period, wages only increased 5%. This is almost 3 times what the standard American household makes.
Home prices are projected to rise 2.2% in 2024⁶. If interest rates don’t fall, will your borrower be able to buy a home?
While typical rent also fell to $1,747⁷ (down $29 from its July 2022 peak), rents remain elevated, and on average command 40%⁸ of a resident’s income.

Let’s identify first-time homebuyers and help them understand the value of creating wealth with real estate now:

Use a TrustEngine Borrower Intelligence Platform First-Time Home Buyer Opportunity to identify renters who could benefit from home ownership.
Leverage a Rent vs. Own Total Cost Analysis to educate the consumer with clear and intuitive comparisons of loan offers. A Cost of Waiting TCA also shows the financial impact of putting off a purchase.
Suggest the complimentary resources provided by firsthomeiq.com, a non-profit with a mission of increasing financial literacy for first-time home buyers.

Identify Low LTV Borrower with Big Equity Needs

Homeowners with dwindling loan balances and big dreams can often leverage their equity more cost-effectively with a cash-out refinance than a HELOC, based on current interest rates for both. In fact, cash-outs are primarily being sought by borrowers with more equity (lower balances⁹ – $165K on average) who are looking to withdraw significant equity at a lower interest rate. Keep in mind, however, that there is a tipping point for lower cash-out needs (perhaps $50K or less), at which a HELOC makes more economic sense.

Example:

Consider the example of a borrower who wants to leverage $100,000 of their equity to pay for a child’s college education, while minimizing monthly payments. Meet Mike and Suzie, who bought their home in 2003 for $450,000. Their initial mortgage was $360,000 at 6% for a principal and interest payment of $2,697.86. They still owe $241,523 with 10 years left to pay, and due to appreciation, the house is worth $752,744, making their current loan-to-value 32%.

Let’s compare adding a HELOC vs. doing a Cash-out Refinance:

HELOC: A HELOC for $100,000 would qualify for a rate of 9.05%¹⁰ (as of 10/26/23). To pay the HELOC off in 10 years, it would cost $1,259.96/month. Since the current P&I payment is $2,697.86, the combined payment would be $3,957.82.
Cash-out Refinance: Since they only have 10 years left to pay, let’s propose a Cash-out Refinance for $351,523, with a 15 year term, at 6.852%¹¹ (as of 10/26/23). The payment would be $3,112.80. When rates drop, they could easily refinance again and lower that payment even more (or shorten their remaining term).

Mike and Suzie save $845.02 per month with this Cash-out Refinance.

To identify and serve borrowers like Mike and Suzie, consider these strategies:

Use a Borrower Intelligence Platform Equity for College Opportunity to watch for borrowers who could benefit from a refinance to fund upcoming education costs. You can add specific criteria (maybe a maximum LTV of 50% and a minimum home value of $400,000) to ensure there is adequate tappable equity. TrustEngine sends a Borrower Creative on behalf of the loan officer to gauge interest in leveraging equity in this manner, with no sales friction.
Once interest is established, use a Cash-out TCA to show the options for the refinance, comparing it to a combination of the original mortgage and HELOC to demonstrate the monthly savings of $845.02.

Ask us how to leverage TrustEngine solutions for these and other strategies as we continue to innovate to support our clients’ success in any market.