Feb. 7, 2023 5:30 am ET

Home-Buying Companies Stuck With Hundreds of Houses as Demand Slows

Ribbon Home Inc. had a fast-growing business during the housing boom. The New York City-based startup purchased homes with cash on behalf of buyers. Then it sold the homes to the buyers at the same price, plus a fee, once the buyers got a mortgage.

This approach made their clients’ offers more appealing, since sellers often prefer all-cash transactions that can close quickly and are considered more reliable. Ribbon has been active in hot markets such as Atlanta and Charlotte.

But last year as mortgage rates surged, some Ribbon customers backed out of their purchases or needed more time to get financing. That left the company owning nearly 400 homes, according to property records analyzed by research firm Attom Data Solutions and confirmed by the company.

Ribbon is one of a handful of young companies known as power buyers. These firms created a niche business around helping home buyers gain an edge during the hypercompetitive housing boom. Now that the market has cooled, some of these companies are stuck with hundreds of homes they acquired on behalf of clients.

Orchard Technologies Inc., another power buyer that has been active in places such as Denver and Dallas, helps customers buy a new home and move before selling their previous home. If clients can’t sell their homes after four months, Orchard agrees to buy them.

The company now owns about 200 homes its customers were unable to sell, said its Chief Executive Court Cunningham. Mr. Cunningham said Orchard has had to buy homes from customers three times as frequently over the past six months.

Some executives said they don’t expect every power buyer to survive. Many relied on venture capital to grow during the height of the housing market, but they are unlikely to raise as much money now. Between January and late November 2022, venture investment in proptech companies decreased 21% compared with the same period the year prior, according to a report from Keefe, Bruyette and Woods Inc.

“People were doing all sorts of things to outbid or be the most competitive offer,” said Diane Vanna, a real-estate agent at Baird & Warner in Chicago, who in 2021 represented a buyer who won a bidding war against 36 other offers. “Now it’s really leveled off.”

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Home-Buying Companies Stuck With Hundreds of Houses as Demand Slows - WSJ

Falling mortgage rates are beginning to stir demand in the housing market.

The average 30-year home loan rate has come down by just about a full percentage point from a 20-year high above 7% in November, largely in response to signs that the Federal Reserve is nearly finished lifting rates. That has brought some new buyers into the market.

Mortgage applications are up by about a quarter since the end of last year. A measure of signed real-estate contracts rose in December after six months of declines. And the number of people contacting real-estate agents to start the buying process has rebounded from a November low, according to brokerage Redfin Corp.’s internal data.

Rates are still well above the 3% range from a year ago, but “the fact that they are a percent lower—no one is complaining about that,” said Michael Menatian, president of Sanborn Mortgage Corp. in West Hartford, Conn. “If anything, they are pleasantly happy.”

The housing market is a barometer of how the economy is responding to a loosening of financial conditions in recent weeks. Stocks and bonds have both rebounded strongly to start the year on the premise that inflation is coming down without putting the U.S. into a deep recession.

Yet the Fed has indicated that it is committed to keeping rates high until inflation is lower, and it is willing to risk a recession to do so. High rates alongside a recession could be a one-two punch for any rebound.

No matter what happens, it is likely to be a slow year for the housing market. Housing activity remains down sharply from a year ago, when the Fed began to lift its benchmark rates to curb inflation. That pushed up mortgage rates at record speed, forcing buyers and sellers out of the market. Home sales fell for most of the past year, quickly snuffing out a boom from the height of the pandemic.

The slowdown has pulled national prices down from their peaks last year, though the S&P CoreLogic Case-Shiller National Home Price Index is up 40% from three years ago. The decline, which stretched into its fifth month in November, is expected to continue, hitting once-hot markets such as Boise, Idaho, especially hard.

But Goldman Sachs Group Inc. economists said this past month they expect the worst of the downturn has passed and housing is poised to exert less of a drag on economic growth going forward.

Executives at D.R. Horton Inc., the largest U.S. home builder by volume, told analysts in January that they have seen heightened sales activity in the first few weeks of the year. Net sales, they said, are expected to increase significantly from the first quarter to the second, when the traditional spring selling season happens. Spring tends to bring out more buyers and sellers, particularly families looking to move before a new school year.

Real-estate agents say buyers have adjusted to the reality that higher mortgage rates will eat up more of their monthly housing costs.

“They are less focused on the specific rate than they are on identifying a window of where they are comfortable with their monthly spend,” said Steven Centrella, a Redfin real-estate agent in the Washington, D.C., area.

Heather Cruz, an assistant superintendent in a school district, started looking to buy a house with her boyfriend in Phoenix in the past few weeks. After touring about a half dozen homes, they made an offer that was accepted last week.

They decided to purchase knowing that rates might fall and they could refinance their current mortgage later on. “I’m thinking this isn’t a forever thing,” Ms. Cruz said.

Home builders have been offering incentives to sell their finished homes. Some buyers are signing up for mortgages with rates that are temporarily lowered for the first few years.

Jack and Cassie Halpin closed on their home in Glastonbury, Conn., last week and started tearing up carpet and getting ready to paint. They used two mortgages, one of them an adjustable-rate loan at 5.375% for the first 10 years and at a floating rate thereafter.

“We expected to be somewhere in the 7% range,” Mr. Halpin said.

Applications for purchase mortgages are up 15% since the end of last year, and refinances are up 50%, though both declined in the week that ended Jan. 27, according to an index tracked by the Mortgage Bankers Association, a trade group.

Refinances had fallen off a cliff last year and remain at very low levels. Millions of homeowners refinanced when rates were hovering around 3% or lower. Far fewer can save money at rates above 6%.

“My clients aren’t necessarily excited about the current mortgage pricing, so the refinance only makes sense if they are taking some cash out to consolidate debt or refinance out of a private loan with higher interest,” said Tom Jessop, a loan consultant at New American Funding in San Clemente, Calif.

Pending home sales—a leading indicator for the housing market—rose 2.5% in December, led by gains in the South and West, according to the National Association of Realtors, a trade group. Contracts signed in January in a few southern California counties are up for the first month since August, according to a report by Douglas Elliman and Miller Samuel.

According to mortgage data and technology provider Black Knight Inc., mortgage-rate locks jumped 64% between the first and the fourth weeks of January, the sharpest climb in at least five years.

Higher rates and still-elevated prices have combined to erode affordability. What’s more, fewer sellers are putting homes on the market, leading to a mad dash for the affordable ones.

Becky Skrypek, a teacher, got serious about buying in the St. Paul, Minn., area last fall when she started to see more listings come on the market. So far, she has found that the homes in her budget of about $300,000 often have high demand that leads to bidding wars.

“It’s just discouraging that they go so fast,” she said.

Nicole Friedman contributed to this article.

Write to Ben Eisen at [email protected]

Housing Market Shows Signs of Thawing - WSJ

Mortgage rates are climbing and have hit their highest level since 2002 as the Federal Reserve works to crush inflation.

Data released on Wednesday by the Mortgage Bankers Association found that the average 30-year fixed-rate mortgage popped to 6.94% in the week ended Oct. 14, the ninth straight increase. Mortgage rates, gauged by Mortgage News Daily, grew to 7.15% — nearly 4 percentage points higher than this time last year.

“The speed and level to which rates have climbed this year have greatly reduced refinance activity and exacerbated existing affordability challenges in the purchase market. Residential housing activity ranging from housing starts to home sales have been on downward trends coinciding with the rise in rates,” said Joel Kan, MBA’s vice president and deputy chief economist.

The news is yet another sign that the housing sector is getting walloped by the Fed’s historic tightening cycle. Housing is perhaps the sector most responsive to interest rate hikes, as mortgages rise in tandem. House prices have stayed high, meaning that, combined with higher mortgage rates, housing affordability has dramatically declined.

The central bank has hiked rates by 75 basis points during its last three meetings, analogous to nine traditional increases in just a span of months.

As a result of rising mortgage rates, housing starts, which measure the annualized change in the number of new residential buildings that began construction, have also tumbled. Housing starts dropped at a seasonally adjusted 8.1% in September to 1.44 million, according to a report from the Commerce Department on Wednesday.

Home builder sentiment has also fallen in October in anticipation of interest rates, and thus mortgage rates, continuing to rise.

There is much reason to believe that interest rates will keep rising as well. Inflation, as gauged by the consumer price index, punched in hotter than expected at 8.2% last month, meaning the central bank isn’t likely to take its foot off the gas anytime soon.

Additionally, the September employment report was stronger than expected, which shows the economy is weathering the rate hikes and likely gives the Fed more confidence that it can keep jacking up rates without immediately knocking the economy into a recession.

https://www.washingtonexaminer.com/policy/economy/mortgage-rates-rising-two-decades