The mortgage market should improve in 2024 due to a combination of competitive pressures easing and mortgage demand picking up from historical lows last year, according to a note from Piper Sandler, a leading investment bank.

But don’t expect profitability to be significant compared to long-term historical averages as home prices still remain high.

Mortgage rates have softened in the past couple of months, leading to a slight decline in the median mortgage payment and a pickup in mortgage demand.

But even if mortgage rates dropped to 4%, the median monthly payment would still be 44% above pre-pandemic levels, noted Kevin Barker, managing director of Piper Sandler. 

“We need to see a more meaningful decline in home prices or affordability will continue to be a headwind to home sales even if we see further softening in rates,” said Barker. 

Median home prices trended lower for the fifth consecutive month on an absolute basis in November, down 5% from near-term highs in June. 

However, on a year-over-year basis in November, median home prices increased 5% in the Northeast, the West, the Midwest, respectively, and 3% in the South.

A variable that could lead to a softening in home prices is unemployment.

“We continue to expect home prices to come under pressure despite the near-term resilience and supply shortage. Home prices and rates remain too high for new home buyers, particularly with income growth slowing. If we were to see the labor market soften, we expect a more pronounced decline in home prices.” said Barker. 

Mortgage prepayment speeds continuing its lower trend will prop up servicing fee revenue streams.

Prepay speeds on 30-year fixed rate pools of agency mortgages in the month of November dropped by 40-55 basis points (bps) month over month to 4.3% for Fannie Mae and Freddie Mac pools. Ginnie Mae pools remained relatively steady at 5.7%. The low prepay speeds indicate mortgage servicing rights (MSR) amortization expense should continue to decline. 

“We expect these tailwinds to continue despite the near-term drop in mortgage rates given very few borrowers have a mortgage rate above the current market rate. We would need to see a more persistent decline in 30-year fixed rates to up to 6% for a more meaningful pickup in prepay speeds,” said Piper Sandler.