As Western countries start the slow return to business as usual, lenders and retailers will need to establish lending programs that can cope with the demand from consumers who are ready to begin spending again but are likely to have faced a period of financial uncertainty.
The US declared a state of national emergency on Friday 13th March, with each state deciding their own degree of lockdown due to COVID-19. The retail landscape has transformed ever since self-isolation measures began and continues to evolve with each day that social-distancing stays in place. With a considerable initial shift towards online purchasing following the closure of stores and a substantial amount of job losses, now is an essential time for lending institutions and retailers to consider what consumers are likely to need after self-isolation ends and the brick and mortar shops reopen. It was in reaction to the financial crisis in 2008, that fintech installment loan companies gained popularity with millennials keen to avoid credit card debt. While it is uncertain whether COVID-19 will trigger a full recession similar to the one that occurred in 2008, enough economic uncertainty has been created to assume that the financing space must grow to accommodate consumer needs.
Reduced incomes during COVID-19
US unemployment figures have risen by 22 million in just 4 weeks, others may have seen their salary reduced, with self-employed citizens and small business owners on decreased incomes. Towards the end of March, more than 80% of freelancers surveyed said they’ve already lost thousands of dollars in wages to COVID-19, a number that will have risen as people continue to cut back on goods and services. Consumers may have utilized their savings to be able to keep up with mortgage repayments and rent. While the hope remains that most jobs will be able to return to normal once restrictions are lifted and the economy slowly recovers, financing options will be a critical aspect when consumers are able to shop freely again.
Ecommerce sales surged up
Following the closure of brick and mortar stores, there was an immediate shift towards online commerce. Ecommerce sales shot up by 40% in the US after a state of emergency was declared, boosting verticals such as toys, sporting goods, and camping. Even the baby boomers, who were previously averse to shopping online, have been left with no other choice.
While certain retailers have benefited from self-isolation measures, others are struggling. Online sales for apparel and accessories showed an overall decrease of 50.5% from February to March. The sales of big-ticket items, in particular, have reduced as consumers remain insecure about their financial situation.
People will want to upgrade furniture and technology
During this extended period of time in their homes, consumers will have thought a lot about an idealized vision of their environment. They will have used their furniture more extensively than before, sofas that were only being used on the weekends and dining tables suddenly needed for family meals. They will be looking to replace furniture and outdated technology that might have frustrated them whilst being at home all day. Additionally, people may be looking to book a holiday or event for the summer of 2021, when it might be safer to do so. Consumers have delayed these purchases whilst still in a state of crisis, including flights, home appliances, and technology devices. When asked whether they plan to buy the items they have put on hold, 36% of US internet users said they’re waiting for the outbreak to subside either locally or internationally.
What can be expected after COVID-19
We can only speculate as to how consumer behavior will adapt once lockdown measures lift, but imagine that consumers will enjoy the freedom of being able to go to malls and shop for leisure again. It is likely that there will be a significant increase in sales of big-ticket items to compensate for the decline during a state of crisis. Research already suggests that many consumers will want to either get back to spending normally or spend even more extravagantly than previously. Banks and retailers will need to walk a fine line to ensure that consumers are not burdened with loans that they cannot repay whilst being able to provide financial assistance to those who just need purchasing to be more manageable at this time.
Lenders must ensure that appropriate financing is available to retailers
Lenders must work with retailers to ensure that consumers have enough choice for financing instore as well as online, without relying on co-branded credit cards. Without a clear repayment plan and potentially high-interest rates, such cards could be detrimental to consumers exiting a financial crisis. If lenders and retailers are already offering installment loans, they should look at adding a ‘line of credit’ option, which would allow customers to complete individual purchases over time, and pay-back only the amount that is spent in monthly payments.
Bottom line – What to expect
As the economy slowly starts to return to normal, consumers will be spending more, making up for high-ticket and non-essential items that were not purchased during the uncertainty of the lockdown situation. Financing programs will be critical for consumers exiting this crisis, leading merchants to look frantically for solutions instore and online. The winners of this business will be lenders who are offering competitive loan programs that can be implemented quickly and easily to meet this demand.
Nov 1 2019, 4:14PM
Mortgage rates held steady today after moving sharply lower yesterday. “Sharply,” in this context, means that many lenders saw rates move lower by as much as an eighth of a percentage point versus the previous morning. Changes of that magnitude are rarely seen in the space of 24-48 hours. In fact, more often than not, entire weeks go by with a 0.125% change in average 30yr fixed rates.
The size and speed of the move is interesting in and of itself, but it’s made more interesting by the fact that this week’s most prevalent mortgage rate headlines claimed that rates were actually HIGHER. Rest assured, that’s not the case. So what’s with the misleading headlines?
This is actually a fairly common occurrence. It stems from the fact that the industry’s longest-standing and most widely-cited mortgage rate barometer–Freddie Mac’s weekly rate survey–is only updated once per week. Moreover, Freddie’s weekly rate is announced on Thursday morning whereas the data is primarily collected on Monday and Tuesday. The last 2 days of the week aren’t even counted.
All of the above means that any significant movement in rates in the 2nd half of any given week can create a big discrepancy between Freddie’s numbers and reality. The differences are only more pronounced if rates were moving in the opposite direction heading into the first part of the week, which is exactly what happened this time around.
In other words, Monday–the day that gets the most weight in Freddie’s survey–saw the highest rates of the current week. They didn’t fall much on Tuesday or Wednesday, which is the last possible opportunity for rate quotes to make it into the survey. As such, the survey logically conveyed “higher mortgage rates this week” just in time for lenders’ actual rate sheets to improve at their fastest pace since March 22nd, 2019.
Loan Originator Perspective
Today’s jobs report surpassed expectations, but bonds retained most of yesterday’s gains. The drama over US/China tariffs MAY be easing, which won’t help rates. I am locking loans closing within 45 days for most clients. –Ted Rood, Senior Originator
Today’s Most Prevalent Rates
- 30YR FIXED -3.625-3.75%
- FHA/VA – 3.375%
- 15 YEAR FIXED – 3.375%
- 5 YEAR ARMS – 3.25-3.75% depending on the lender
Ongoing Lock/Float Considerations
- 2019 has been the best year for mortgage rates since 2011. Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections
- Fed policy and the US/China trade war have been key players. Major updates on either front could cause a volatile reaction in rates
- The Fed and the bond market (which dictates rates) will be watching economic data closely, both at home and abroad, as well as trade war updates. The stronger the data and trade relations, the more rates could rise, while weaker data and trade wars will lead to new long-term lows.
- Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders. The rates generally assume little-to-no origination or discount except as noted when applicable. Rates appearing on this page are “effective rates” that take day-to-day changes in upfront costs into consideration.
Chief Operating Officer, Mortgage News Daily / MBS Live