GRAND RAPIDS, Mich. (WOOD) — Higher interest rates are leading to slimmer staffing at some banks in West Michigan.

Last week, Grand Rapids-based Northpointe Bank confirmed it recently laid off 43 employees. Northpointe Bank President and CEO Charles Williams said severance packages were given to all affected workers.

“As a national lender, we have been impacted by the large rise in interest rates coupled with the lower mortgage volume, among other factors,” Williams stated.

Northpointe Bank is not alone in cutting jobs. Huntington National Bank trimmed approximately 140 jobs from its mortgage division last month because of “market trends,” according to the bank’s communications manager for Michigan, Samantha Myers. She said the company worked to move “many” of the affected mortgage department employees into other roles within the company.

In April, Troy, Michigan-based Flagstar Bank announced it had cut 420 jobs from its mortgage department, about 20% of that department’s total workforce. Lee Smith, president of mortgage at Flagstar Bank, said the company used layoffs and attrition to trim his department in the face of “unprecedented increases in interest rates and a significantly smaller mortgage market than what we experienced in 2020 and 2021.”

In a first quarter summary released the same month as the job cuts, Flagstar said mortgage rates rose at the fastest rate this century.

“The cyclicality of today’s market is not new to us. We’ve been navigating successfully through challenging mortgage markets for many years, and while we don’t yet know how this cycle will unfold, we’re going into it in a stronger position than in past cycles,” Flagstar Bancorp President and CEP Alessandro DiNello stated in a report to investors.

The largest job cut is underway at the biggest bank in the country: JP Morgan Chase Bank. It announced last month that it had begun laying off employees in its mortgage sector because of “cyclical changes in the mortgage mortgage market,” a company spokesman told Reuters. More than 1,000 employees will be affected, about half of which will move to departments within the bank, Bloomberg News first reported.

HOW WE GOT HERE

Grand Valley State University economics professor Paul Isely said a dramatic decline in mortgage refinancing is to blame.

“Anybody who is going to do a refi isn’t going to do a refi to a higher interest rate,” he said.

He said the U.S. market was prime for mortgage refinancing from mid-2020 to the beginning of 2022, when 30-year mortgage rates basically averaged 3% — about 1% lower than the previous time frame. Now in 2022, mortgage interest rates are basically at 5.5%, Isely said.

Isely explained that it all starts with the federal funds rate, which is essentially the market banks use to borrow money for lending if they don’t have enough on hand from deposits. Since banks borrow the money short-term, it’s a lower interest rate. But in an effort to slow down the housing market, the Federal Open Market Committee of the Federal Reserve increased the federal funds rate this year from 0.25% to 1.75%, costing banks more. The trickle-down effect: higher mortgage rates for potential homebuyers and people looking to refinance.

According to CNBC, refinancing demand last month was 75% lower than it was at the same time in 2021.

Higher mortgage rates and a limited supply of homes leave more would-be first-time homebuyers less financially capable of purchasing their own place.

According to the Grand Rapids Association of Realtors’ June report, Kent County only had a .6-month supply of homes on the market, meaning if current conditions persisted and no new homes entered the market, every home available to buy now would be gone within weeks.

“What we’re seeing now really is the power of Grand Rapids… there’s still a residual demand in Kent County,” Isely said.

But demand is starting to ease elsewhere where fewer people are looking for homes, houses are staying on the market longer and each house is getting fewer bids.

“All of those things are taking a little bit of the heat off that market,” Isely said.

ARE WE IN A RECESSION?

Isely expects the mortgage volume to start to trend up as we get into next year and people seek a new mortgage term or want a home equity loan. When interest rates drop, Isely said you can expect demand for mortgage refinancing to rise, especially among the people who are buying at the higher interest rate we have now.

Isely calls the housing market an economic bellweather.

“The housing market has been the first to slow down in almost every normal recession,” he said.

Asked if we are in a recession, Isely said it’s one of those things you won’t know until you’re in it because there’s no clear-cut definition of a recession and there are a lot of economic factors. But he said because of the wealth Americans accrued during the pandemic, he doesn’t expect any recession now would get as bad as the Great Recession of 2008.

Isely explained that extra wealth has helped buffer higher inflation, but prices are going up faster than the average person’s income, so they’re burning through savings. Isely said economists will be keeping an eye on consumers’ spending habits to determine when we are in a recession.

One silver lining to the current economic situation: Americans may be able to save some money while back-to-school shopping this fall. Isely said that’s because some larger businesses will be liquidating some of their inventory, which has started piling up when delayed orders finally arrived.