Mortgage Bankers Association Chief Economist Mike Fratantoni and Realtor.com Chief Economist Danielle Hale join Yahoo Finance Live to discuss the housing market, mortgage lending and rates, and profitability for mortgage firms.

Video Transcript

DAVE BRIGGS: Mortgage rates continuing to cool this week. The average 30-year fixed falling for a fifth straight week, albeit very slightly in this case, to 6.27%. That's according to Freddie Mac.

So where are we headed, and what is the collateral damage the past year on the mortgage industry? Mike Fratantoni is the Mortgage Bankers Association chief economist and Danielle Hale, Realtor.com chief economist. Nice to see you both.

Danielle, we'll start with you. It has been a difficult start to the year, but rates are, as we mentioned, coming down. How optimistic are you that things are turning around as we enter the spring and then the peak summer season?

DANIELLE HALE: Yeah, I think we've seen the low in existing home sales. So I think we're going to see home sales go up from here, especially if mortgage rates remain in the lower end of the range that we've seen recently, but it's not going to be a quick climb. I think it's going to be a pretty slow climb and probably a little bit uneven too.

So as consumers, buyers, and sellers get used to these lower-- slightly lower mortgage rates that are still much higher than they were-- almost double what they were at the start of last year. So it's a different environment, but the consumer is slowly getting used to this new normal.

DAVE BRIGGS: Yeah, and Mike, where do you think rates level out? I think people were expecting them to get below 5%. It does not appear to be the case.

MIKE FRATANTONI: Yeah, typically we think about mortgage rates as a spread over 10-year Treasury rates. Ordinarily that would be about two percentage points above a 10-year Treasury, but lately they've been three percentage points above. A lot of that reflecting the incredible financial-market volatility, uncertainty about where the Fed's headed. We've had a banking mini crisis as well, concerns there how that's going to impact the MBS market.

We do think that rates will drop below 6% as we get through the year though, and that certainly will bring more buyers into the market.

DAVE BRIGGS: Yeah. Will it be enough to unfreeze both sides is the question. To the broader damage, MBA data shows banks and mortgage firms lost money on home loans last year. How significant was the damage, Mike?

MIKE FRATANTONI: So if we go back to 2021, your typical mortgage lender had a profit of about $2,300 per loan. Last year they lost about $300 per loan, and this is despite the fact that lenders were doing everything they could to cut costs.

Peak employment in the industry was late '21. Lenders have cut about 18% of their staffing thus far, but, you know, industry volume fell 50% last year. So still more consolidation. Still more cuts likely to come. And the purchase market remains about 30% below where we were last year at this time, so a really challenging environment for mortgage lenders.

DAVE BRIGGS: Those are some shocking numbers. Danielle, when you're losing $300 per loan, what's the impact on buyers, on sellers, on the industry?

DANIELLE HALE: Well, I think the report highlights that it wasn't just buyers and sellers that have had to adjust to some really seismic changes in the financial landscape. So the industry had to shift too, and everyone has had to be pretty nimble.

And, you know, as the market was going through this transition, made it really difficult to know what to expect. How high were mortgage rates going to go? What did that mean for affordability? For buyers and sellers, does that mean do I hurry up and try to buy now? Do I wait it out and try to buy on the flip side as mortgage rates eventually come down, which many expect?

What's interesting is that even though we've seen mortgage rates start to ease, you know, as inflation seems to be getting under control, the labor market is still largely chugging along. Consumers are still expecting mortgage rates to be a bit higher. So that may mean as we see these dips in mortgage rates, some buyers are going to try to take advantage of these opportunities to get into the market.

And, in fact, we saw that with the February existing-home sales data, that home sales surged in response to lower mortgage rates to start the year. And so we may see this up and down as mortgage rates fluctuate up and down in the sales environment in the year ahead.

DAVE BRIGGS: Of course, inventory remains a massive issue. Some more stunning numbers from MBA there, Mike. Just 32% of mortgage firms were profitable last year, down from 98% two years prior. What does this mean moving forward for loan conditions, for buyers and for sellers?

MIKE FRATANTONI: Yeah, so, you know, 2021 was a record refinance year. And given that so many homeowners refinanced at rates of 3% or below, there's just not that refinance opportunity right now. So that's the major scaling factor for the industry.

But as I mentioned, with rates more than doubling last year, as Danielle said, purchase volume is way off too. And some of that is affordability, but I totally agree with where Danielle was going where we're seeing in our purchase-application data any week you get a drop in rates, homebuyers are back in and putting in applications for a mortgage. And, really, the constraint is on the supply side, the only 2 and 1/2 months of inventory on the market with existing homes.

So it's been a very challenging environment for lenders. I think from the consumer perspective, that means you've got a lot of lenders out there who are more than ready to help you and help you get that right loan for that home purchase.

DAVE BRIGGS: That's interesting. When you take this all into perspective with the SVB collapse, how much more difficult-- or maybe to Mike's point there, Danielle, is it going to be easier to get a loan in the next several months as we get into the hot summer season?

DANIELLE HALE: Yeah, I think, you know, this year you're not going to have the same refinance demand. As Mike was talking about, lenders are eager. They're looking for business. So as a consumer, it probably makes sense to shop around. That's always a good idea but especially now in these market conditions where you might find lenders that are more or less willing to work in your situation.

As Mike noted, inventory is still a problem. Even though we see that the number of homes on the market is up about 44% compared to a year ago, they're still down about half from where they were before the pandemic. So it's a bit of a glass half full, glass half empty. Depending on your comparison point, things are a bit better, but there's still more room to see improvement in the market to get things back to where we were before.

The other thing that I would note that's sort of a good news, bad news story for buyers, homes are sitting on the market a little bit longer. That gives them more time to make decisions, which is especially important for first-time homebuyers who want to take the time to make the right decision.

On the flip side, we're not seeing as many homeowners decide to sell, and so there's not as much churn or refresh in the housing market. A lot of the additional homes that are on the market today have been sitting for a while. So if you're looking for something very particular as a consumer, you might have to wait a little while to find it or loosen up your criteria in order to get into a home that works for you.

DAVE BRIGGS: Mike, is now the time then for prospective buyers to feel empowered and to shop around and have a little control over the type of loan they can get right now?

MIKE FRATANTONI: Well, you know, I think in terms of the home selection out there, that's really the challenge, right, just not enough properties to look at. And I think some folks might get the impression with this overall picture that, you know, home prices are dropping, but, honestly, we're not seeing it in the national data at this point. Certainly West Coast, mountain states are seeing some declines.

So I think you wouldn't want to give a buyer a false impression that this is a weak market where they're going to have a huge amount of leverage. But compared to where they were last year or the year prior, I think that buyer does have more leverage in the homebuying process.

And then as I mentioned, in the lending process, absolutely. You've got thousands of lenders out there who are very eager to work with you given the challenges they're facing in terms of drumming up new business.

DAVE BRIGGS: All things relative in real estate. Mike Fratantoni, Danielle Hale, thank you both. Appreciate that.