Optimize Your Pricing Strategy in a Competitive Market

In this low rate environment, the Mortgage Bankers Association (MBA) observed that 2020 has been the best year for the mortgage industry since 2003 and that new purchase originations are expected to grow by 8.5% to a record $1.54 trillion in 2021.  

It’s no question that lenders across the country are busier than ever. With this flood of activity, it is also important to take a disciplined and strategic approach on how prices are set on every mortgage and how price differentiation between states can be a key contributor to success. 

Though the average mortgage rate hovers at around 3.00% at the national level, buyers in different states can be offered different pricing depending on their regional market, even when all loan and borrower variables remain constant. This has implications for lenders on their pricing strategy and profitability, and how they manage their margins for the secondary market, especially for those who currently apply a one-size-fits-all approach to setting their rates. 

Let's take a look at three homebuyers with the same borrower profile and loan details. 

Homebuyer Profile  Age: 35  Income: $80,000/year  Credit Score: 740

Loan Details  Loan Amount: $300,000  Loan-to-Value: 80%  Term: 30-year Fixed

We know that the mortgage markets do not look the same across the country. With different levels of competition and demand in the real estate markets, the level of price sensitivity differs by geography. Using our pricing data derived from over 300 lenders, we calculated the median price on every scenario in real-time and aggregated them to the level of details desired to perform in-depth and granular analysis for margin management – in this case, by states where property price averages at around $300,000.  

Using this methodology, we can see how points can vary by states due to competition in those specific markets, and how it ultimately impacts a lender’s margins. Let’s look at how a lender can use price sensitivity data to set pricing to win deals and position themselves optimally in each state: 

In contrast, if a lender prices the same product across different states with national averages, the lender would make less in margin by underpricing, and even lose deals by not being competitive enough in the market. 

Comparing both scenarios, a more granular pricing strategy offers a modest to significant lift in margin and profitability when lenders incorporate state-level pricing in their overall strategy. Pricing more in-line with the regional market can also result in winning more deals. 

At Nomis, we work with mortgage lenders across the country, so we know that the challenges, goals, and strategies are unique to each organization. Depending on capacity, lenders can decide on whether they want to chase after every deal or focus their efforts on ones where margins are wider. With the increased activity in the mortgage market, it is prudent to continue assessing your pricing strategy and making data-driven decisions that produce optimal profitability from every deal that comes in.   

We know it’s difficult to find time to analyze large datasets and turn dense analytics into actionable steps, especially with the influx of applications. Your capacity for processing incoming applications is finite, but make sure you’re still setting aside time to analyze the markets you’re in, so you are maximizing your returns. 

*National and state-level pricing information were derived from Nomis’s robust pricing dataset representing more than 300 lenders as of Oct. 12, 2020. Nomis calculates the median price on every scenario in real-time and aggregates scenarios to the level of detail desired to perform in-depth and granular analysis for margin management.