Loan officer: I’m seeing more homebuyers with $8K to $10K mortgage payments

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During the pandemic housing boom, demand for homes skyrocketed, fueled by ultralow mortgage rates, government stimulus, and the rise of remote work. According to Federal Reserve researchers, meeting this unprecedented surge in demand would have required a 300% increase in new construction—an unattainable target given the constraints of the housing market. Unlike demand, housing supply is less elastic and unable to scale quickly, leading to a rapid depletion of active inventory and significant price appreciation. By September 2024, U.S. home prices had soared 53.4% compared to January 2020.

This dramatic increase in home prices, paired with a sharp rise in mortgage rates in 2022—from an average of 3% to over 7%—triggered the fastest decline in housing affordability on record.

Fast-forward to 2025, and housing affordability remains strained and mortgage rates haven’t come down.

To better understand how homebuyers are adapting in this current housing market environment, ResiClub’s Lance Lambert conducted a Q&A with Washington, D.C. mortgage planner John Downs, a senior vice president at Vellum Mortgage.

ResiClub: In theory, a homebuyer can assume a seller’s mortgage rate—potentially in the 2.5% to 4% range—if the seller has an assumable mortgage. Most loans insured by the Federal Housing Administration (FHA), as well as loans backed by the Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA), are eligible for assumption if specific requirements are met. However, very few mortgages are actually assumed. Why is that?

Downs: With rates remaining elevated, offering lower interest rates to sell a house can be very powerful. Just look at how builders navigated the market the past few years. [Mortgage] rate buydowns were often the key to their success. There are several reasons why assumptions have not been working.

The primary reason is that the new buyer often needs to bring the difference between the sale price and the seller’s loan amount in cash. As an example, if the home was selling for $600,000 and the seller’s VA mortgage balance was $400,000, the new buyer would need $200,000 for the down payment on the home. Occasionally, second mortgages are used to fill that gap, but I’ve heard of limited success using this approach as many servicers do not allow second liens to be used for the assumption.

This leads to the biggest issue, which is lack of underwriters to facilitate the process. A loan assumption is not a guarantee for the new buyer. The new buyer must qualify for the mortgage, which means an analysis of credit, income, debts, and assets. Most loan servicers are not staffed to accommodate the demands and as a result, lead to extended timelines. I’ve been in the mortgage business since 2000, and it wasn’t until late 2022 that assumptions became a thing. If you are a loan servicer, it’s safe to say you never focused on a streamlined assumption process because they just never happened. Will this change with the “higher forever” mindset that seems to be trading in markets today? Or, will this continue as it has been with limited success for buyers?

The last thing I will say about this issue is that we should consider the financial incentives for loan servicers. For revenue, a servicer receives 0.25% to 0.50% of the loan balance annually, any late fees generated from the borrower, and earns interest on the escrow account. For a $300,000 mortgage, that would be $750 to $1,500 per year. The incentive to keep that loan is so tiny that it may be easier for them to let it go, especially given the pull-through rate that is likely much lower than a normal purchase from an underwriting standpoint.

Despite numerous forecasts predicting that the average 30-year fixed mortgage rate would fall back under 6%, mortgage rates have for the most part remained in the 6% to 7% range. How are buyers in your market reacting to these high borrowing costs?

There is a saying I heard long ago which was, “Time solves a lot of problems when it comes to real estate.” I think that rings true to what we have experienced this past year. We are now almost three full years into the 6% to 7% rate environment, and as each month passes, buyers have become more used to the realities of today. When I speak to someone for the first time, the payment goals they give me are almost double what I was told before 2021. Why is that?

There are many reasons for this, but mostly, it is a product of rising wages and increased wealth for those who have the means to buy a home. Almost every asset class has nearly doubled over the past few years, and parents and grandparents have been more willing to gift money downstream to assist younger buyers. We can’t underestimate the power of the wealth created in markets and how that continues to juice the economy.

I will say that with each rate shock that comes our way, like the one we have experienced since the Fed began its rate-cutting cycle in September, we see a pause in activity. This is only natural when someone is forced to rework their housing search parameters due to rising rates. This latest increase is coming during the slowest selling season, so we won’t likely know the real impacts on buyer activity until the spring selling season kicks off in March and April.

Among the homebuyers you’re working with, given home price and mortgage rate levels, how high are monthly payments getting? And how do they react when you give them the number?

I recall answering this question back in 2023 and it was a shock and awe response when I would quote payments. Buyers today seem to come to me with a full understanding of where payments are. Most online housing calculators do a decent job estimating the payment. Some come in too high—they poorly quote [Private Mortgage Insurance]—often much higher than actual [rates]), while others come in low as they underestimate property taxes and/or home insurance.

My average first-time homebuyer now says $3,500 is comfortable, compared to the $2,000 to $2,500 range previously. Those looking for a family house now say $6,500 to $7,500; previously, $4,500 was the primary target. I’m also seeing more people more comfortable with $8,000 to $10,000 mortgage payments than ever. Honestly, for the first 20 years of my career, I don’t believe I ever had a mortgage payment offered over $10,000, and now I have a few of those each quarter.

Keep in mind, in my region, incomes have exploded higher. I can’t seem to meet anyone who makes less than $130k per year. Those who used to be considered high-income ($250k to $300k) now make $450k. It’s just a different world now.

Do most borrowers think they’ll be able to quickly refinance? How do they react when you tell them the direction of rates might be less certain than they might assume?

The refinance conversation comes up but not like it used to. Throughout 2022 and 2023, everyone would say, “I’m not too worried about this payment because I know I will refinance it within a year.” There was great confidence online and in the real estate community discussing this narrative. I think the past few years of realizing rates can stay elevated for much longer than we can all think has virtually squashed that sales pitch.

Today, the conversation is centered around how it works and how much it costs. Buyers mostly say, “I know it may take a few years, but can you explain to me how refinancing works and what this payment would look like at lower rates.” I am not seeing buyers extend themselves today with the idea that they will be refinancing quickly.

Of course, one could argue now that everyone thinks rates will stay higher much longer, even buyers, that we are topping out here and will see much lower rates in 2025 than anyone expects.

There’s a lock-in effect at play across the U.S. housing market, as some homeowners who’d otherwise like to sell and buy something else are deciding to stay put. That has suppressed existing home sales to multi-decade lows. Based on your on the ground conversations, what mortgage rate level would it take to unlock the housing market?

The lock-in effect is real. I have so many clients who are truly stuck in their house. Now, they are not that upset about it as they are living out the best inflation hedge known. Their incomes have gone up substantially yet their mortgage payment has only increased slightly due to property taxes and home insurance.

It’s hard to say the new rate [that would cause] these sellers to move. I continue to have conversations with sellers who are leaving their 2% something rate to move into a more desirable location at 6%+. To them, family, lifestyle, schools, etc., are more important, and their income and wealth have increased over the past few years, allowing them to do so. The idea of this economy being K-Shaped is very real. The haves have a lot, and that includes mobility despite high rates.

Early last year, I surveyed past clients, and a rate of 5 to 5.5% seemed to be the one that had most sellers show interest. This could also increase with personal incomes and wealth gains as time passes.

In order to entice homebuyers, many of the nation’s largest publicly traded homebuilders are offering mortgage rate buydowns. This month, giant homebuilder Lennar is advertising a 3.99% fixed mortgage rate in Colorado. When homebuyers see offers like this, what questions should they be asking or considering?

I’ve always said if you want to know how to sell a house in any market, just look at what the builders are doing. Over the years, they have focused on paying closing costs, buying down rates, giving away free features that were desirable at that time. Today, it’s all about affordability and low mortgage rates seem to be the key.

While I believe the low rates offered by builders are fantastic, I will say there can be risks. In the resale market, I find prices to be more stable as the sale that takes place is truly driven by the market. Builders influence the price through selling lower payments which keeps prices higher than they actually would be.

Earlier in my career, I focused exclusively on builder business consisting of track home communities and condominium projects. When the builder was involved in sales, they were using every trick in the book to offload houses and condos, similar to today. Once the builder was out, prices fell in many of those communities. In fact, I have a few condo projects where prices are still lower than the final builder sales from 2010 to 2012.

I don’t believe there are questions to ask the builder as much as there are asking the realtor representing you to do a deep analysis of the local market. If a builder’s community sells for a significant premium over the resale market, I would be cautious. It could be setting buyers up for a similar trap I experienced in the Great Financial Crisis.

Based on what you’re seeing now, do you have any predictions on what the 2025 housing market will be like, and how the spring will look?

I find 2025 very difficult to predict. There are two paths to discuss: one of transaction volume and another of valuation. Speaking specifically of my region, DC Metro, I think we need a few months of testing the new administration before making any bold calls. We have chatter about drastically reducing government spending and waste, and I think that will cause some paralysis [in Washington D.C.] with homebuyers until we have more clarity on D.O.G.E. execution.

Earlier, I also talked about the power of the wealth created in markets these past few years while the U.S. government has been running a several trillion dollar deficit consecutively over the past two years. If we see a reversal of these two powerful forces, equity markets under stress and fiscal spending decreasing, we could see a reversal of what has kept things in housing so stable.

Let’s make a few assumptions, such as the equity markets remain stable, rates trade within the same range as the past couple of years and work-from-home continues unwinding. I can see a scenario where cities come back to life while the suburbs plateau and lose some energy.

Pandemic lifestyles crushed cities, specifically parts of Washington, DC. As employees were given freedom, most moved to the neighboring suburbs in Virginia and Maryland, pushing prices up tremendously. The lack of economic activity in the city led to business closures, and crime began increasing, further exaggerating the flight to the burbs. Many parts of the city are now selling at prices ranging from 2014-2020 as a result.

I’m beginning to witness a lot of that reversing. Work-from-home has been unwinding, commerce is coming back to downtown, crime is getting a voice and starting to improve, and DC has a few revitalization projects, which will certainly spur demand. DC is now quite affordable compared to suburban commuting markets and I believe will catch solid bids moving forward as a result.

To summarize 2025, I’m waiting until March and April to measure the impacts of policy driven by the new administration before making any forecasts. My gut says 2025 will be exactly the same as 2024 with likely fewer sales in the upper quartile ($1.5 million plus) and more energy in the traditional first-time homebuyer space.