Many homebuyers feel shut out of the market. How can banks help?

A version of this article first appeared in the BAI Executive Report. You’ll find more insights on the value of building deeper banking relationships through loan markets in the April Executive Report: Innovations in lending services.

Last year was challenging for virtually every segment of the residential real estate market, especially for people trying to break in on the lower rungs of the property ladder.

This spring and early summer offer a mixed, thus improved, picture, though one that still strongly favors home sellers with a lean inventory of property for sale in many regions of the country and all-cash competition crowding out those who must finance their purchase.

What’s more, the interest-rate picture is in flux, though bankers are always wise to advise clients against trying to time a rate market with any precision when it comes to big life purchases like home-buying. For one thing, rates rarely comply with life’s demands, like expanding a family or accepting a new job. Further, there’s been a generational bombshell in the real estate world: a new fee structure.

That change, for homebuyers who look to a real estate agent for guidance during their home search, may add to the list of expenses. As the result of a lawsuit settlement by the National Association of Realtors, agents’ commission structures will change. According to the Wall Street Journal, “For decades, buyers didn’t typically pay agents out of their own pockets. The buyer’s agent commission has been paid by the seller and is baked into the house price. Going forward, buyers might have to foot the bill up front if they want an agent to represent them.”

All told, is it enough to keep would-be buyers renting forever? Not likely.

For determined house hunters, and the bankers hoping to sell them a mortgage, patience, reasonable expectations, digital loan ease and efficiency, plus optimism that rising interest rates have not only stabilized but are projected to head lower, if perhaps more slowly than estimated a few months ago, all mean that the dream of homeownership isn’t out of reach.

“Mortgage rates are staying below 7%. Application volumes are improving, there is strengthening builder sentiment and demand all point toward opportunity,” says Matt Wood, senior director of fintech at Tavant, a Silicon Valley-based provider of AI-powered digital lending technology for the financial services industry, speaking in spring 2024. “In the main, our banks are healthy. Our customers want and need homes.”

No doubt, home buyers have been conditioned in recent months to believe the deck is stacked against them. “Existing home sales slid 19% in 2023 from the prior year,” according to the National Association of Realtors. And at one point in the final months of last year, based on figures from the Mortgage Bankers Association, demand for home loans dropped to the lowest level since 1995.

How do first-time home buyers feel now?

Research shows sentiment is finally looking up. In a TD Bank Annual First-Time Homebuyer Pulse survey, of those planning on purchasing their first home this year, nearly three in four (74%) are optimistic about the housing market. Better still, 97% have started taking first steps toward buying a home.

That early preparation for home ownership – from savings plans to building financial literacy – is where banks and credit unions can play an important and supportive role.

Census Bureau data points to the generation spanning 23 to 41 years old as a key marketable slice of the U.S. population, accounting for nearly 22%. When it comes to homebuyers, 70% of Younger Millennials and 46% of Older Millennials are in the sweet spot to be first-time home buyers, according to the Realtors’ Home Buyers and Sellers 2023 Generational Trends Study. 

“With a big chunk of the population, namely millennials, now having kids and moving into starter homes, there remains low supply [of available real estate], but higher demand,” says Will Bryant, founder and COO of Birmingham, Ala.-based loan-management platform Quantalytix and a former investment banker at Regions Bank.

That’s a formula for higher listing prices and it positions home sellers firmly in the driver’s seat, which may leave many buyers feeling blocked from the market. What it really means is the more banking customers know about their available borrowing range heading into their house hunt, given the uncertain interest-rate scenario and tight inventories, matters now more than ever, Bryant and other mortgage-market experts say.

Census and real estate trend numbers go a long way in describing the target market for bankers, equally important is what the study found as Millennials’ areas of concern when it comes to home buying:  finding the right property, understanding the process and saving for a down payment.

The personal savings rate — how much people save as a percentage of their disposable income — is an area where bankers can provide much needed help. Nationally that savings rate was 3.9% in August of last year, well below a decadeslong average of roughly 8.9%, according to the latest data from the U.S. Bureau of Economic Analysis.

The TD Bank survey pointing to positive attitudes about the housing market also sheds light on where bankers can help turn that optimism a home-owning reality.  Among the low-to-moderate income respondents, 79% said they were either confident or neutral when it comes to financial literacy, even though 46% were not aware they could tap into down payment assistance programs.

Closing gaps in financial literacy, for both home-buying and the general financial health of banking customers, is a critical area where bankers can serve as a trusted resource – whether that’s offering one-on-one coaching, bank-sponsored seminars and webinars, or pointing to other available programs. One example that others may model is Freddie Mac’s CreditSmart Homebuyer U, which offers access to credit-building education.

Says TD Bank Head of U.S. Residential Lending Steve Kaminski, “Educating first-time homebuyers about the resources down payment assistance programs can provide, as well as the associated monthly costs of homeownership, can help them accomplish their dream of owning a home and strengthen their financial position over the long-term.”

The TD Bank survey indicates 42% of first-time buyers anticipating use of downpayment assistance program – that’s up from 35% last year. And they have many choices.  According to Forbes, “There are more than 2,500 programs available from state and local governments, charities and private lenders to help meet … down payment requirements.”

Convince home buyers to engage early with bankers

Engaging with customers early in their hunt for a home is key but can be a challenging relationship to establish if the home hunt remains casual. Less than half of those buyers – 42% according to the TD Bank survey – say working with their banker early on is a given.

However, the survey also showed that approximately a third polled think the best time to engage their banker is while they are looking. One quarter didn’t think lender services are necessary until they’ve decided on the home that works for them.

Across all the stages of the homebuying process it is important that bankers guide customers so that they have a good understanding of their finance options, but also their risk tolerance.

For example, while most opt for fixed-rate mortgages, the marketplace has seen a considerable rise in homebuyers who decide on adjustable-rate mortgages (ARMs); that number has nearly doubled in the last year. Bankers must realize that would-be buyers are likely still shellshocked from a rising-rate environment, after such a long period of record-low borrowing costs; they just haven’t cycled through interest-rate eras like seasoned borrowers.

“While there is hesitancy to borrow due to higher interest rates [compared to a few years ago], banks can educate borrowers on the different options available as rates fluctuate,” Bryant adds. “In a broader context of the history of rates, [current levels] are still relatively low.”

Connecting with the target audience

Nervous homebuyers may be soothed and nurtured as returning bank customers when the loan process is as painless as possible. After all, this is the biggest purchase they’re ever likely to make. For Millennials and in the early stages, Generation Z, this means a combination of high-touch advice and digital ease.

In talking to bankers, consultant agency Bounteous echoes this formula: “… most Millennials still see homeownership as a central part of the American dream.  Forward-thinking financial institutions can help them achieve this goal through effective social media outreach, personalized educational journeys and a seamless digital application experience.”

Tavant’s Wood said the challenges of today’s real estate market can be an important test for how banks modernize their lending. He means that banks and their customers must be able to respond fast in a high-demand, low-supply sellers’ market. That calls for smooth loan applications, risk assessments and responsive answers from bankers during potentially tough negotiations.

But it also calls for banks to maintain a tradition of reliability.

“Banks are a trusted source of the guidance any of us in this situation would need. Yet, it doesn’t take too deep of a dive into the socials to find both well-tempered and ill-tempered feedback from posters about how a loan process was handled,” Wood said. “As an industry, the over-focus on transactional expediency comes at the cost of future engagement. Tech has solved some of these problems. Especially in this environment, first-time home buyers need education, advice and handholding.”

Mary Ann Rood is a contributing writer to BAI.