The ‘rate wait’ and spring housing market

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Will rates drop? That’s the wild card question. But Neighbourhood Holdings is prepared with a lot of liquid funding and advice for brokers to seize the opportunity of the current market

NO MATTER what the year, there will always be challenging market trends, and each year seems to have a theme. The theme of 2020 was, of course, lockdowns. The year 2021 was marked by market euphoria and “transitory” inflation. In 2022, activity peaked and interest rates began their ascent. And 2023 – well, according to Taylor Little, CEO of Neighbourhood Holdings, was “kind of a sideways-to-down year.” So now we come to still-fresh 2024. “If I were to pick a challenging market trend for 2024, I think it would be just picking a direction and timing on the rate environment,” he said. “That’s going to be tricky.” The consensus appears to be that, at some time this year, rates will go down.

Neighbourhood Holdings is an alternative mortgage lender based in Vancouver, British Columbia. Neighbourhood offers competitively priced alternative residential mortgages across British Columbia, Alberta, Ontario, Quebec, and Nova Scotia. As a proud CMP 5-Star Mortgage Product winner in 2023, Neighbourhood aims to elevate the alternative lending industry by bridging the gap in prime and private lending, maximizing industry potential, and empowering people to reach their financial goals. The company specializes in granting mortgage financing to individuals temporarily sidelined from traditional bank lending, including those who are self-employed, working through a life event such as divorce, or bridging the gap between real estate transactions.

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“If I were to pick challenging market trends for 2024, I think it would be just picking a direction on the rate environment”

Taylor Little, Neighbourhood Holdings

This ties in with the spring housing market, when people are most likely to put their houses up for sale, which Little sees as another data point that everyone in the industry is watching keenly. Last year, there was a robust spring market, when the Bank of Canada “paused” rates, but what happens this year remains to be seen. Like many others, Little has been analyzing the Bank of Canada's publications looking for clues, and he has been drawn to the wording used by the bank of late – the latest update removed the phrase that the Bank of Canada “remains prepared to raise the policy rate further if needed.” This means that, in the short term at least, raising rates appears to be off the table.

“(While) everyone’s expecting rate cuts, they’re not going back to zero this year,” he said. For borrowers and homeowners, buyers and sellers, rates “are going to be higher for longer, we’re going to have to adapt to that. That’s going to be challenging.” He cautions those in the mortgage industry to be wary because “we’ve had consensus before,” which did not always pan out. If interest rates do not get cut until June or even July, the spring housing market could be impacted, which means a

While rates are in the hands of financial bureaucrats in Ottawa, there are still opportunities to be had in the mortgage market. “I think mortgage brokers are going to have plenty of opportunities,” Little said. It is a time to build up trust with your clients and build up muscle with your skills and managing your clients.

Many people, when in need of a mortgage, just walk to the bank where they have their chequing account and ask for one. The bank then lays out what it has to offer. But a mortgage broker is better able to see the big picture – what all of the big banks, and other financial institutions, can offer. They can offer advice, tell a client where they think that rates will go, and tell their client, “Here’s why I think you should have an X product for a Y period of time,” Little said. The broker can then have another mortgage product waiting, if need be, when the first product matures. “You’re still going to have a big opportunity to prove your worth and build your business,” he said, of 2024. It’s a good time to understand your client’s needs, risk tolerance, and time horizon, which can help underline your value as a mortgage broker. Knowing their risks, you can know if your client is risk averse or open to it. Knowing their time horizon, you can see if they are interested in a shorter-term loan or they seek the certainty of a longer, five-year fixed rate.

“We really like markets like these,” Little said. “We view there to be less downside house-price risk than there was at the peak. That’s objectively true.” While volumes are down, the risk profile in the collateral has changed, and the case for stronger originations is a good one. Looking back, in 2022, his firm actually pulled back from the market. Those “frothy” markets, he said, are difficult for lenders, especially as prices increase. But now, Neighbourhood Holdings has pushed hard back into the market in the last six months.

After watching price decreases, as a lender, Little has started to gain more comfort in doing so. “As a lender, you’re looking for less downside risk,” Little said. “Your loans are only as good as your collateral and your borrower’s ability to pay. And while volumes are down, we think with the risk profile and the collateral change and strong opportunity, there’s definitely a case for strong origination.”

Opportunities abound for brokers, borrowers, and lenders

Published February 19, 2024

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“(While) everyone’s expecting rate cuts, they’re not going back to zero this year”

Taylor Little, Neighbourhood Holdings

possible pickup in the fall, or even a flat year. There is also the possibility that, for example, a 4.99 percent five-year fixed mortgage might not be enough to lift the market.

Even for homebuyers, it could also be a chance to take advantage of a slow market, with lower house prices than we saw recently. He stressed that he is not necessarily saying that the time to buy is now – there is still risk in the market. And what about himself as a lender? This may be the best of times.

Neighbourhood Holdings finds itself in a good position heading into 2024, with a strong liquidity profile and an attractive risk-adjusted return. If rates were to fall this year, their fund would actually benefit, given how it is structured, Little explained. If rates go up, returns improve. If rates go down, rates also improve. The reason for this is that Neighbourhood Holdings’ fund is built on a syndicate of six banks that have provided them with a credit facility. So, if the rates drop, that gets passed on to their investors. “We’re excited for the year ahead because we can navigate it well,” he said. “Our team is ready to tackle whatever challenges come to us. From the fund perspective, we like where we sit today. We have a lot of liquidity, and the way our fund is structured means we ought to benefit from whatever changes come to the rate environment.”

Neighbourhood Holdings’ strong fund liquidity

Neighbourhood Holdings has developed a free Broker Toolkit to empower mortgage brokers to get the resources they need to make informed decisions, streamline tasks, and achieve their goals. This comprehensive suite of tools includes:

Neighbourhood Holdings’ Broker Toolkit

https://go.neighbourhoodholdings.com/l/940273/2024-02-07/pxlqvs

CALCULATORS easily forecast revenue, compare mortgage terms, and make informed decisions about interest-only payments

TEMPLATES & CHECKLISTS streamline your operations that help achieve your business goals

MARKETING TIPS FOR BROKERS elevate your marketing game with tips on prioritizing, budgeting, and maximizing your impact as a mortgage professional

National home sales jumped 8.7 percent month over month in December 2023 Actual (not seasonally adjusted) monthly activity came in at 3.7 percent above December 2022 The number of newly listed properties dropped 5.1 percent month over month The MLS Home Price Index (HPI) fell by 0.8 percent month over month but was still up 0.7 percent year over year The actual (not seasonally adjusted) national average sale price posted a 5.1 percent year-over-year increase in December Home-sales activity recorded over Canadian MLS systems rose 8.7 percent between November and December 2023, putting it on par with some of last year’s relatively stronger months recorded over the spring and summer

Source: Canadian Real Estate Association

In mid-January 2024, the Canadian Real Estate Association released its latest findings looking at the national home-sale picture.

Canadian home sales: A snapshot