Mortgage Rates Are Stabilizing and the Future Looks Promising for Real Estate Tech Founders
- Mortgage rates are set to stabilize over next 12-24 months
- New opportunities for real estate and proptech founders in the mortgage origination sector
- When to consider M&A deals for your real estate tech business
Over the last month, mortgage rates have been trending downward, the average 30-year fixed-rate mortgage reaching 6.28% on April 6. But will this downward trend continue or will mortgage rates go up again this year? It all depends on whether the Fed continues to hike its Federal Funds rate, which serves as the benchmark for all other interest rates, including mortgage rates.
Mortgage rates stabilizing for the foreseeable future
At its last FOMC meeting on March 21-22, the Fed raised the Fed Funds rate by 0.25% to a range of 4.75-5.00%. It also released its predictions on future rate hikes, with the median official expecting rates to adjust to a midpoint of 5.1% by the end of this year. That said, the Fed also indicated that it won’t continue raising rates if inflation stabilizes. This means future mortgage rates depend heavily on inflation, which as of now, looks to be slowly cooling—a good sign that interest rates will begin to stabilize.
Furthermore, given historical averages, the 3-4% mortgage rates seen over the last few years were exceptionally low. So mortgage rates that stabilize around 6-7% would, more than anything, be a return to normal. According to Lawrence Yun, chief economist at NAR, "Returning to mortgage rates of 3% or 4% is not going to happen." With inflation slowly coming under control, this means you can expect mortgage rates to stabilize over the next 12-24 months to about where they are now.
Real estate and proptech markets picking back up
Up until recently, nobody knew whether mortgage rates would continue their rapid rise, and consequently, the real estate market slowed down. However, now that rates appear to be stabilizing, uncertainty should begin to die down and business pick back up. Buyers and sellers are more likely to transact when they think the market today is about what it will look like in one to two years.
For founders in real estate tech, this should be encouraging news. As housing market activity picks up, the demand for software that streamlines real estate transactions will rise. In other words, steady mortgage rates will help fuel not just the real estate market but the market for real estate tech.
Proptech founders should focus on mortgage origination over refinancing
Over the next few years, proptech founders would do well to focus on serving the mortgage origination sector instead of the refinancing space. Why? Most homeowners interested in refinancing already refinanced in 2021 when rates were at their lowest. Now that rates have risen, there’s no incentive to refinance, and the refi market is effectively dead.
Moving forward, the better business strategy is to help agents, mortgage underwriters, or brokerages effect new home sales (or new business from home sales). This includes anything that streamlines the mortgage application process, such as software that can verify applicants’ income or employment. Alternatively, it could be anything that helps homebuyers feel more informed and comfortable about their home purchase, such as software that generates market comps or detects potential property concerns. These are the types of solutions positioned to offer the most value in the next 12-24 months.
That said, as with all business cycles, mortgage rates will come down eventually. That’s when the refi market will return to serve those now getting mortgages at 6-7%. Once rates sink to 5%, for example, these homeowners will want to lock in lower rates. So while proptech founders should focus on the new home sales industry for now, it doesn’t hurt to build solutions for the refi market if you can gain long-term exposure to it.
When to sell or raise capital for a real estate or property tech business
In terms of M&A, recent interest rate volatility has led to a slowdown in proptech investment. According to the Center for Real Estate Technology & Innovation (CRETI), global capital allocation in proptech companies dropped by 38% last year, from $32 billion in 2021 to 19.8 billion in 2022. The refinancing sector is virtually stagnant for the foreseeable future, and tech founders with a focus in this space should hold off until interest rates drop again. However, now that interest rates are set to stabilize, there’s more confidence in the market at large, which means now could be a good time for real estate tech founders to raise capital or sell if they want to.
Another reason to be optimistic about proptech funding is that millennials, America’s largest generation, are in their prime homebuying years. They’re at an age when many want to settle and can afford to buy, and so many are—despite higher mortgage rates and inflation. The result is boosted mortgage activity, which will inject further stability into the market and, by extension, further confidence in real estate tech.
Of course, anything could happen, including a recession. But if you’re waiting for the real estate market to calm … it has. We’re at a new equilibrium. So whether you sell this year or next, it won’t make much of a difference in terms of end market dynamics. Now is as good a time to explore M&A deals as any.